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Greening the Budget

Budgetary Policies for Environmental Improvement

Edited by J. Peter Clinch, Kai Schlegelmilch, Rolf-Ulrich Sprenger and Ursula Triebswetter

Greening the Budget regards the fundamental cause of environmental degradation as government and market failure and proposes the use of budgets as an instrument of environmental policy to rectify this problem. The book focuses on the elements of the public budget which currently affect the environment and explores the scope for greening both revenue and expenditure through specific measures.
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Chapter 10: The provision of public goods – sending the right price signals

Budgetary Policies for Environmental Improvement

Eirik Romstad


Eirik Romstad INTRODUCTION The polluter pays principle is frequently used as one justification for environmental taxes in the correction of public bads. Similarly, the provider gets principle (PGP) may be used to justify subsidies to create incentives for the provision of public goods. The standard economist’s prescription for correcting for negative externalities is to tax the externality (Baumol and Oates, 1988). What about the production of public goods – or more interestingly – the provision of positive externalities? In this chapter I argue briefly that there is a distinct difference between the two in terms of the choice of provision mechanisms. Subsidies come in many different forms – as price supports, part-payments for investments and lump-sum transfers. The various shapes and forms of subsidies may influence how economic agents act, and, hence, have implications for how much of the public goods are produced and at what social costs. In brief, the classical economic question of efficiency surfaces once again. The chapter begins by presenting a framework for public goods, outlining why the market is not able to allocate goods with public attributes efficiently. Next, the production of public goods is discussed in various settings. Finally, the main topics of this chapter are addressed: getting prices right and appropriate provision mechanisms. PUBLIC GOODS Generally, any good that is non-rival, that is, its use by one person does not reduce its value to other persons, and non-exclusive, that is, it is virtually impossible for any person or organization to prevent others from using the goods,...

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