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Macroeconomic policies, second-best theory and the environment

Published online by Cambridge University Press:  31 July 2008

Karl-Göran Mäler  and
Mohan Munasinghe
Karl-Göran Mäler
Affiliation:
Beijer International Institute of Ecological Economics, Royal Swedish Academy of Sciences, Box 50005, S-104 05, Stockholm, Sweden
Mohan Munasinghe
Affiliation:
Colombo University, Colombo, Sri Lanka
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Abstract

This paper seeks to develop a basic analytical framework that can be used to trace the environmental impacts of macroeconomic policies, and especially to identify where unforeseen negative environmental effects may occur and design remedial measures. The framework is based on a formal mathematical model which shows the second-best nature of macroeconomic policies in the presence of environmental externalities. The model confirms the empirically observed and intuitively appealing conclusion that it is the combination of macroeconomic policies and subsidiary imperfections (policy, market or institutional), rather than macroeconomic policies alone, that leads to environmental degradation. Several illustrative examples are presented from case studies in selected developing countries.

Type
Theory and Applications
Information
Environment and Development Economics , Volume 1 , Issue 2 , May 1996 , pp. 149 - 163
Copyright
Copyright © 1996, Cambridge University Press

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