Pangloss on pollution

Abstract

On being interviewed, Dr Pangloss asserted that optimality is uniquely determined irrespective of legal or distributional considerations; moreover, that pollution above a theoretical optimum could be justified economically in so far as the heavy transactions costs of correcting the existing suboptimal position are real costs and exceed the optimality gains. A change to anti pollution laws, however, not only alters the optimal position but reverses the role of the transactions cost barrier, the result being 'too little' pollution. Since transactions costs are inevitable in any change to optimum, which laws should society choose? The case for a change to anti pollution laws rests on equity and allocative merit, with particular attention being paid to the external diseconomies of increasing risk.