Will Markets Always Do Best? An Application of the Concepts of Price Elasticity and Consumer Surplus to Environmental Policies
10 Pages Posted: 23 Dec 2003
The paper explores the question whether social benefit is always maximized when consumers are charged marginal cost prices for their environmental harmful activities. The issue is investigated in a simple model using the concepts of price elasticity of demand and consumer surplus. The subject is presented in a very simple graphic manner comparing areas of triangles and rectangles, then some more geometry, the tangent, is added and in the end some simple calculus, the first derivative of a linear function, is used. So the subject can be taught in classes with a rather low level of technical skills as well as in classes acquainted with the calculus. In the appendix a numerical example is given which can be used for classroom exercise.
JEL Classification: A22, D60, Q00
Suggested Citation: Suggested Citation