Handbook of Environmental and Resource Economics
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Handbook of Environmental and Resource Economics

Edited by Jeroen C.J.M. van den Bergh

This major reference book comprises specially commissioned surveys in environmental and resource economics written by an international team of experts. Authoritative yet accessible, each entry provides a state-of-the-art summary of key areas that will be invaluable to researchers, practitioners and advanced students.
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Chapter 17: Environmental Policy and Transaction Costs

K. Krutilla


17 Environmental policy and transactions costs Kerry Kru t illa 1. Introduction This chapter assesses the normative implications of transactions costs for the assessment of environmental policy. The topic is relatively unexplored in the environmental economics literature, notwithstanding the theoretical significance of transactions costs and their empirical relevance in many situations. Transactions costs differ fundamentally from the conventional costs of neoclassical economics. At the proximate level, neoclassical costs arise from production activity or foregone consumption; they attach to different activity levels carried out in the context of well-specified rights. In contrast, transactions costs arise from the exchange and/or maintenance of the rights themselves (Eggertsson, 1995, p. 14); they are incurred to transfer the ownership andlor use status of the rights, and to monitor, enforce, or defend the rights. Both neoclassical costs and transactions costs ultimately derive from tastes, technology and resource endowments - the demand for transaction services, for example, is a derived demand based on the underlying preference structure of the economy - and both are measured with reference to a pre-existing resource utilization baseline. A key difference, however, lies in the role of information. Neoclassical costs are incurred whatever the status of agents’ information sets whereas many, if not all, transactions costs arise from informational imperfections and asymmetries (Eggertsson, 1995, p. 15). Hence imperfect information plays a crucial role in the transactions sector of the economy. In the traditional literature, transactions costs are typically associated with a variety of activities connected with market exchange - search and information...

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