POLLUTION AND RESOURCE ALLOCATION*

Abstract

Our economic perspective of the pollution problem characterizes that problem as involving a conflict between the consumption of two broad classes of goods–physical (or produced) commodities and the direct consumption of 'clean environment'. After considering the relative merits of market and political decision‐making processes used to achieve appropriate social choices between the consumption of physical goods and 'clean environment', we focus on the alternative policy options for pollution control. The main conclusion we reach is that, in general, fiscal instruments (taxes and subsidies) are a more efficient means of controlling pollution than the widespread use of regulations or other legal instruments.