Externalities, Efficiency and Equity


Kverndokk, Snorre and Adam Rose




Forthcoming in Jeroen C. J. M. van den Bergh (ed.) Environmental Economics, Encyclopedia of Life Support Systems (EOLSS), United Nations Educational, Scientific and Cultural Organization (UNESCO)

Sammendrag (engelsk)

This paper provides a review of issues related to efficiency, externalities and equity, with a particular emphasis on environmental problems. First, we explain the concept of Pareto Optimality, which is an accepted efficiency principle in economic theory. However, imperfections in the economy such as externalities and public goods will reduce the efficiency of a market economy, and governmental involvement may be necessary to strengthen, supplement or supplant the market. Second, while economists agree on Pareto Optimality as an efficiency principle, there is not a consensus on a "best" equity principle. Therefore, we survey different theories of equity. Third, we explain the question of the effects on welfare of material growth, and finally, we offer some perspectives on future material growth and the effects on distribution.


Externalities, efficiency, equity, social justice, material growth, distribution, environmental problems

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