Welfare Measurement in Imperfect Markets

Welfare Measurement in Imperfect Markets

A Growth Theoretical Approach

New Horizons in Environmental Economics series

Thomas Aronsson, Karl-Gustaf Löfgren and Kenneth Backlund

This book cleverly integrates the research on welfare measurement and social accounting in imperfect market economies. In their previously acclaimed volume, Welfare Measurement, Sustainability and Green National Accounting, the authors focused on the external effects associated with environmental damage and analysed their role in the context of social accounting. This book adopts a much broader perspective by analysing a wide spectrum of resource allocation problems of real-world market economies.

Chapter 6: Green Accounting and Green Taxes in the Global Economy

Thomas Aronsson, Karl-Gustaf Löfgren and Kenneth Backlund

Subjects: economics and finance, environmental economics, valuation, environment, environmental economics, valuation


The analysis of green accounting may be extended to a global economy where pollution caused by production in one country affects the wellbeing of society in other countries. In particular it is worthwhile to explore the relationship between the circumstances under which the appropriate national and global welfare measures are related to national and/or global policies used to improve the allocation of resources. We also provide a framework for dynamic cost–benefit analysis of environmental tax reform in a global economy, where the pre-reform situation is generated by an imperfect market economy. In so doing, we also introduce sufficient conditions for a tax reform to improve global welfare. The background is somewhat dichotomous. It is typically argued that the overall – or global – welfare level will increase if countries cooperate instead of forming their environmental policies in isolation. This is trivially true if a tax reform takes the economy to the first best cooperative equilibrium. In practice, however, ‘cooperation’ does not necessarily mean implementation of the first best; rather, countries agree to make slight changes in their environmental policies. As we intend to show, under these conditions the result is less clear. The analytical framework for studying global external effects is familiar from research on international pollution control. A well-known example is Mäler (1989). Global external effects are routinely analysed in terms of Nashnon-cooperative differential games in open-loop or feedback-loop form.1 Work on oligopoly equilibria has provided guidance for solving the implementation problem; see Loury (1986), Polansky (1992)...

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