ABSTRACT
The relationship between environmental quality and income is at the very foundation of the environmental sustainability versus economic growth divide. An inverted “U” finding linking pollution and economic growth seems to offer evidence that the net benefits of environmental regulation increase at higher income levels, implying that they are progressively distributed. In fact such a pattern is consistent with different theories linking economic growth and environmental quality and each of them has different implications for the pattern of people’s Marginal Willingness to Pay (MWTP) for improvements in environmental quality. Moreover, the empirical relationship between income and MWTP may differ in different countries and may not conform to the predictions of the theory (Israel and Levinson, 2004). In particular, it is not clear whether in low-income countries MWTP is initially low and then increases until a switch point is reached. This is crucial because the MWTP for improvements in environmental quality identifies the reservation value people attach to environmental improvements, i.e. it is a money measure of the benefits people experience from environmental policies. What these different theories seem to have in common is the idea that the poor and the wealthy assign different priority to environmental protection: the proposed construction of new buildings on the Sardinian coasts could produce cries from middle- and upper-income inhabitants, who might perceive the associated loss of natural resources as a welfare loss, and yet it could be welcomed as a source of new jobs at a time of high unemployment rates by individuals in lower-income brackets. This is a controversial and important issue which calls for further investigation and suggests that any Cost-Benefit Analysis (CBA) should carefully consider not only the absolute level of the costs and benefits of environmental protection, but also the distribution of both the costs and the benefits of environmental policies (Johansson-Stenman, 2005). While the distributional impact of costs is fairly straightforward to assess using standard economic analysis, because market policies often translate into higher prices for households and firms, assessing the distributional impact of benefits poses additional challenges, as they are usually not traded in markets. This is probably the reason why the literature on benefits distribution is much less developed than that on the distribution of costs (Kristrom, 2006). Yet, any sound CBA of environmental policies should take both aspects into account.
