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Negative externalities and welfare improving preference changes

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  • Dennis Kaufman

Abstract

When the over-consumption of open access resources and congestible public goods generate negative externalities and social welfare losses, many individuals and environmental advocacy organizations offer as an alternative nongovernmental solution the adoption of new “ecology sustaining” preferences. This paper shows that exogenously inducing a change in preferences and the adoption of new “externality internalizing” preferences, which increase an individual's marginal rate of substitution between a private good and a good whose consumption imposes external costs on others, not only reduces the aggregate output of the negative externality but also produces an economic state that is “socially superior” to the initial state. Because it is based on both the initial and new preferences, the social superiority welfare criterion makes possible meaningful welfare comparisons of economic states generated by preference changes. A computational general equilibrium model is then used to simulate preference changes and to calculate the resulting allocative and welfare effects. The computer simulations reveal that important factors in the attainment of a socially superior state include (i) the particular characteristics of an individual's negative externality reaction function, (ii) the magnitude of the preference change, and (iii) the number of individuals changing preferences. Copyright Kluwer Academic Publishers 1995

Suggested Citation

  • Dennis Kaufman, 1995. "Negative externalities and welfare improving preference changes," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 6(1), pages 53-71, July.
    • Handle: RePEc:kap:enreec:v:6:y:1995:i:1:p:53-71
    DOI: 10.1007/BF00691411
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    Cited by:

    1. Udo Ebert & Oskar von dem Hagen, 2000. "original papers : Altruism, redistribution and social insurance," Review of Economic Design, Springer;Society for Economic Design, vol. 5(4), pages 365-385.
    2. Ebert Udo & Hagen Oskar von dem, 2002. "Exogenous Preferences, and Endogenous Tastes / Exogene Präferenzen und endogener Geschmack," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 222(5), pages 513-530, October.

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