ABSTRACT
Chapters 2 and 3 considered the implications of negative externalities as one type of situation in which a “missing market” results in nonoptimal levels of private goods production and consumption and hence nonoptimal levels of both residuals and environmental quality-all outcomes being corrected by a properly set marginal damage tax. In the taxonomy of Chapter 1, the previous two chapters dealt with the “tragedy of the commons case,” the case of a nonexcludable good (the environment) that became rivalrous over time with excessive usage at a zero price (nonoptimally large residual discharge) resulting in environmental deterioration inevitably experienced by all households. Charging the pollution tax, PR, set equal to marginal damages was seen to restore the “missing market” and allow both the economic and environmental systems to return to optimal levels, given tastes and technology.
