Economics and the Environment, 8th Edition

CHAPTER 4The Efficiency Standard

4.0 Introduction

Economists sometimes point out that achieving a goal of zero pollution not only would be prohibitively expensive but also, indeed, might well be counterproductive. The view is that we should balance the costs and benefits of pollution reduction and seek, in general, to achieve an efficient level of pollution. The idea that any level of pollution is “efficient” strikes many people as a bit odd. This chapter thus begins by defining the efficient pollution level; then illustrates how marginal analysis can be used, both in principle and in practice, to identify the efficient pollution level; discusses the utilitarian ethical defense of the efficiency standard; and finally, reviews the challenges to real-world application of benefit–cost analysis.

4.1 Efficiency Defined

To understand what is meant by an efficient level of pollution, we need to look closer at the concept of efficiency. The term efficient in everyday parlance means a situation in which no resources are wasted. Economists use the term in a related but more specific way. The economic definition of efficiency was introduced by the Italian economist Vilfredo Pareto in 1909 and is named in his honor.

Pareto-efficient situation: A situation in which it is impossible to make one person better off without making anyone else worse off.

When economists say an outcome is efficient, they almost always mean “Pareto efficient.” We’ll drop the Pareto most of the time as well, adding ...