10.2190/GUMQ-GDKJ-P16J-3V5P GUMQGDKJP16J3V5P 5 On the Theory of an Optimal Environmental Policy 349 360 20020509 20020509 20020509 20020509 GUMQGDKJP16J3V5P.pdf http://baywood.metapress.com/link.asp?target=contribution&id=GUMQGDKJP16J3V5P 4 Jerrold M. Peterson Dave A. Vose Department of Economics, University of Minnesota, Duluth Many economists have been using economic analysis to advocate their use of either standard or effluent charges as strategies for protecting the environment. Recently a number of economists have begun to question the ability of these economic tools to accomplish the job. These economists argue that, at best, economic analysis will achieve an environmental policy which is no better than the one an ecologist could set. At worst, the economic analysis might abuse the environment and cause costly economic as well as ecological damage. This paper reexamines the theoretical approach in setting an optimal environmental policy. In this paper we find that society ought to use economic analysis in dveloping any environmental policy. Society must know the net marginal benefits of production and the marginal damage of an effluent before embarking on any environmental strategy. Such knowledge would allow society either to choose an optimal effluent standard or optimal effluent charge. J. M. Buchanan and G. Tullock, Pollutor's Profits and Political Response: Direct Controls Versus Taxes, <i>Amer. Econ. Rev., 65</i>, pp. 139-147, March, 1975. F. G. Müller, Benefit Cost Analysis: A Questionable Part of Environmental Decisioning, <i>J. Environmental Systems, 4</i>:4, pp. 299-305, Winter, 1974. D. Pearce, The Limits of Cost Benefit Analysis as a Guide to Environmental Policy, <i>Kyklos, 29</i>, Fac. 1, pp. 97-112, 1976. M. Walker and D. J. Storey, The "Standards and Price" Approach to Pollution Control: Problems of Iteration, <i>Scand. J. of Economics</i>, pp. 99-197, 1977. R. H. Coase, The Problem of Social Cost, <i>Journal of Law and Economics, 3</i>, pp. 1-44, October, 1960. A. C. Fisher and F. M. Peterson, The Environment in Economics: A Survey, <i>J. of Econ. Lit., 14</i>:1, pp. 1-33, March, 1976. E. J. Mishan, What is Producer's Surplus?, <i>Amer. Econ. Rev., 58</i>, pp. 1269-1282, December, 1968. E. J. Mishan, The Post War Literature on Externalities an Interpretative Essay, <i>J. of Econ Lit., 9</i>:1, pp. 1-28, March, 1971. J. M. Peterson, Benefit Cost Analysis—A Necessary Part of Environmental Decisioning, <i>J. Environmental Systems, 5</i>:4, pp. 291-297, 1975. J. M. Peterson, Estimating an Effluent Charge—The Reserve Mining Case, <i>Land Economics, 53</i>:3, pp. 328-341, August, 1977. J. M. Peterson, Global and Regional Implications of the Social Costs of Environmental Pollution, <i>Regional Science Perspectives, 8</i>:1, pp. 68-79, 1978. J. M. Peterson and R. Lichty, Taxes, Quotas and Environmental Policies: A Comment on Economic Efficiency, <i>American Economist, 23</i>:2, pp. 19-23, 1979. W. J. Baumol and W. Oates, The Use of Standards and Prices for Protection of the Environment, <i>Swedish Journal of Economics, 73</i>, pp. 42-54, 1971. W. J. Baumol and W. Oates, <i>The Theory of Environmental Policy</i>, Prentice Hall, New Jersey, 1975.