ABSTRACT
In Chapter 3, we saw that introducing a pollution charge, PR, set equal to marginal external damages generated by households and firms would result in an optimal level of residuals, R*, and hence an optimal environmental quality, E*. How are policy makers able to know what PR should be? There are three quite distinct and very important information difficulties that face environmental policy makers. First, do households have any meaningful sense of what marginal utility they receive from an increment to an environmental good? That is, it is fairly plausible to argue that since most of the goods we purchase have been purchased before, we should be able rationally to compare dollar-denominated marginal utilities to prices of goods, buying additional quantities when the former exceeds the latter.* But, is this plausible for increments to environmental goods? Is it reasonable to presume that a household would accurately gauge the dollar-denominated utility value of a never previously experienced 5% improvement in some dimension of air or water quality, enabling comparison to a marginal provision cost?
