Negative externalities and welfare improving preference changes

Dennis Kaufman

Environmental & Resource Economics, 1995, vol. 6, issue 1, 53-71

Abstract: When the over-consumption of open access resources and congestible public goods generate negative externalities and social welfare losses, many individuals and environmental advocacy organizations offer as an alternative nongovernmental solution the adoption of new “ecology sustaining” preferences. This paper shows that exogenously inducing a change in preferences and the adoption of new “externality internalizing” preferences, which increase an individual's marginal rate of substitution between a private good and a good whose consumption imposes external costs on others, not only reduces the aggregate output of the negative externality but also produces an economic state that is “socially superior” to the initial state. Because it is based on both the initial and new preferences, the social superiority welfare criterion makes possible meaningful welfare comparisons of economic states generated by preference changes. A computational general equilibrium model is then used to simulate preference changes and to calculate the resulting allocative and welfare effects. The computer simulations reveal that important factors in the attainment of a socially superior state include (i) the particular characteristics of an individual's negative externality reaction function, (ii) the magnitude of the preference change, and (iii) the number of individuals changing preferences. Copyright Kluwer Academic Publishers 1995

Keywords: Negative externalities; open access resources; congestible public goods; preference changes (search for similar items in EconPapers)
Date: 1995
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DOI: 10.1007/BF00691411

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