ABSTRACT
Welfare economics has at its heart a concept that an individual actor will behave rationally so as to maximise utility. Indeed, utility might be seen as the product of the expression of those individual preferences. In this framework, the consumer is sovereign and best placed to determine what is in his or her own welfare. We might expect, logically, that people are behaving so as to make themselves better off. Economists then argue that a working and efficient market should emerge out of this individualism, constructed from the sum of its parts. However, this hypothesis rests on a number of assumptions, including that these actors respond competitively to maximise their utility on the basis of full information. Even if they do so, there may be other external costs or benefits (externalities) that may disrupt the allocative efficiency hoped for by the economists. These externalities are of great interest to those concerned with environmental regulation because the environment itself may provide benefits or create costs not fully accounted for by those making use of it. But, before exploring externalities, a word about ethics…
The idea of individuals competing to advance their own wealth is not necessarily attractive on the face of it. However, the economist might reply that consumer sovereignty allows a range of choices to the individual and it is open to that person to express a true preference rather than one that seems to be the manifestly advantageous choice. Another way of putting this is that utility might be derived from the freedom to act in a manner which would not seem, on the face of it, to be to the selfish advantage of the individual. Thus, the utility derived by the individual consists not only of the outcome of market choice, but also of the process by which that outcome was achieved. This is important to remember when dealing with environmental regulation, especially where we may hope that consumers may act in a manner which might incur costs (such as the opportunity cost attaching to a slower and less flexible journey by public transport). We can influence choice by so called market instruments (changing the relative costs of pursuing certain options) but, ultimately, it assists greatly to have people buy into the notion of protecting the environment.
