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Sustainability thoughts 126: Are environmental externality management based production and consumption bundles inconsistent with green pareto efficiency and with pareto efficiency principles at the same time? If yes, why?

Authors:
  • Independent QLC researcher

Abstract and Figures

Pareto optimality in perfect traditional markets can be affected by cost internalization and by government intervention. For example, environmental cost internalization shifts pareto optimality in perfect traditional markets towards green pareto optimality in perfect green markets while government intervention in environmental markets transforms pareto optimality in traditional markets into environmental externality management markets, which are not perfect markets. Pareto optimality and green pareto optimality are linked by an environmental sustainability gap, which can be seen as an environmental externality management market zone as government intervention can create an environmental externality market at any point within that gap. If we analyze an environmental externality management point in that gap, we can see that it falls outside the green production frontier and it falls below the pareto optimal consumption and production point; therefore, it is a less preferred bundle, but production and consumption takes place there anyway. Hence, there is a link between green pareto optimality, pareto optimality, and environmental externality management markets and its structure through the environmental sustainability gap, but to my knowledge nothing is written about how the environmental sustainability gap is linked to optimal and non-optimal markets such as pareto optimal markets, green pareto optimal markets and environmental externality management based markets. Therefore, there is a need to understand the nature of this environmental externality link so as to be able to address questions such as Are environmental externality management based production and consumption bundles inconsistent with green pareto efficiency and with pareto efficiency principles at the same time? If yes, why? What is the structure of the environmental externality management market? Among the goals of this paper is to provide answers to these questions. Resúmen La optimalidad de Pareto en los mercados tradicionales perfectos puede verse afectada por la internalización de costos y por la intervención del gobierno. Por ejemplo, la internalización del costo ambiental cambia la optimalidad de pareto en mercados tradicionales perfectos hacia la optimalidad de pareto verde en mercados verdes perfectos, mientras que la intervención del gobierno en los mercados ambientales transforma la optimalidad de pareto en los mercados tradicionales en mercados de manejo de externalidades ambientales, los cuales no son mercados perfectos. El óptimo de Pareto tradicional y el óptimo de pareto verde están vinculados por una brecha de sostenibilidad ambiental, que puede verse como una zona de mercado de gestión de externalidades ambientales, ya que la intervención del gobierno puede crear un mercado de externalidades ambientales en cualquier punto dentro de esa zona. Si analizamos un punto de manejo de externalidades ambientales en esa zona, podemos ver que cae fuera de la frontera de producción verde y cae por debajo del punto óptimo de consumo y producción del Pareto tradicional; por lo tanto, es un paquete menos preferido, pero la producción y el consumo tienen lugar allí de todos modos. Por lo tanto, existe un vínculo entre la optimalidad de pareto verde, la optimalidad de pareto tradicional, los mercados de gestión ambiental y su estructura a través de la brecha de sostenibilidad ambiental, pero que yo sepa, no hay nada escrito sobre cómo la brecha de sostenibilidad ambiental está vinculada a mercados óptimos y mercados no óptimos, como los mercados óptimos de pareto tradicional, los mercados óptimos de pareto verde y los mercados basados en la gestión de las externalidades ambientales. Por lo tanto, es necesario comprender la naturaleza de este vínculo de externalidad ambiental para poder abordar preguntas como: ¿Son los paquetes de producción y consumo basados en la gestión de las externalidades ambientales inconsistentes con la eficiencia de pareto verde y con los principios de eficiencia de pareto tradicional al mismo tiempo? ¿Si es así, por qué? ¿Cuál es la estructura del mercado de gestión de externalidades ambientales? Entre los objetivos de este documento esta proporcionar respuestas a estas preguntas.
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Citation:
Muñoz, Lucio, 2021. Sustainability thoughts 126: Are e nvironmental externality
management based production and consumption bundles inconsistent with green pareto
efficiency and with pareto efficiency principles at the same time ? If yes, why?, In: CEBEM-
REDESMA Boletin, o 15 Nº 2, February, La Paz, Bolivia.
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Sustainability thoughts 126: Are environmental externality management based production
and consumption bundle s inconsistent with green pareto efficiency and with pareto
efficiency principles at the same time? If yes, why?
By
Lucio Moz*
* Inde pendent qualitative comparative researcher/consultant, Vancouver, BC, Canada. Emai l: munoz@interchange.ubc.ca
Abstract
Pareto optimality in perfect traditional markets can be affected by cost internalization and
by government intervention. For example, environmental cost internalization shifts pareto
optimality in perfect traditional markets towards green pareto optimality in perfect green markets
while government intervention in environmental markets transforms pareto optimality in
traditional markets into environmental externality management markets, which are not perfect
markets. Pareto optimality and green pareto optimality are linked by an environmental
sustainability gap, which can be seen as an environmental externality management market zone
as government intervention can create an environmental externality market at any point within
that gap. If we analyze an environmental externality management point in that gap, we can see
that it falls outside the green production frontier and it falls below the pareto optimal
consumptio n and production point; therefore, it is a less preferred bundle, but production and
consumption takes place there anyway. Hence, there is a link between green pareto optimality,
pareto optimality, and environmental externality management markets and its structure through
the environmental sustainability gap, but to my knowledge nothing is written about how the
environmental sustainability gap is linked to optimal and non-optimal markets such as pareto
optimal markets, green pareto optimal markets and environmental externality management based
markets. Therefore, there is a need to understand the nature of this environmental externality
link so as to be able to address questions such as Are environmental externality management
based production and consumption bundles inconsistent with green pareto effic iency and with
pareto efficiency principles at the same time? If yes, why? What is the structure of the
environmental externality management market? Among the goals of this paper is to provide
answers to these questions.
Key words
Pareto optimality, green pareto optimality, environmental externality based markets,
pareto ineffic ient, green pareto inefficient, pareto improvement, green pareto improvement, free
market, non-free markets, environmental sustainability gap
Introduction
a) The structure of green pareto efficiency and of pareto efficiency
Pareto optimality in perfect traditional markets can be affected by cost internalization and
by government intervention. For example, environmental cost internalization shifts pareto
optimality in perfect traditional markets towards green pareto optimality in perfect green markets
while government intervention in environmental markets transforms pareto optimality in
traditional markets into environmental externality management markets, which are not perfect
markets. The impact of imple menting environmental cost internalization in the traditional
market and its pareto optimality point is to shift them to green markets and its green pareto
optimality point as it has been recently highlighted(Mo z 2020), leading to the situation shared
as in Figure 1 below.
Figure 1 above shows two optimal points; 1) the traditional pareto optimality point at
point e; and 2) the green pareto optimality point at point i. The traditional pareto optimality
point e is where the traditional production frontier(PF), the optimal social indifference
curve(SIC*), and the market price line(MPL) meet and have the same slope. It is also at this
point e that optimal production and consumption of product Q* and product R* is found. On
the other hand, the green pareto optimality point i is where the green production frontier(GPF),
the optimal green social indifference curve(GSIC*), and the green market price line(GMPL)
meet and have the same slope. It is also at this point i that optimal green production and green
consumptio n of green product Q* and green product R* is found. We can see in Figure 1 above
that if environme ntal costs are fully externalized because of the environmental externality
neutrality assumption then traditional pareto optimality at point e holds, which means
economic efficiency holds, but if environmental costs are fully internalized because
environmental costs are real and relevant; and therefore, there is no externality neutrality
assumption, then green pareto optimality at point i holds, and this means that eco-economic
efficiency holds. When we fully internalize the environmental cost of production in the pricing
mechanism of the traditional market we shift it to green markets(Muñoz 2016; Muñoz 2019), and
when doing this pareto optimality at point e in Figure 1 above shift to green pareto optimality
at point i
b) The sustainability gap between green pareto efficiency and pareto efficiency
The discussio n above suggest that pareto optimality and green pareto optimality are
linked by an environmental sustainability gap(ESG) as shown in Figure 2 below:
We can see in Figure 2 above that pareto optimality and green pareto optimality are
linked by an environmental sustainability gap(ESG) that goes from point e to point i and it is
between the two production frontiers. This environme ntal sustainability gap can be seen as an
environmental externality management market zone as government interve ntion seeking to
manage environmental externalities instead of setting up green markets can create an
environmental externality management market at any point within that gap. For example, an
environmental externality management market point can be set up between point e and point
i or anywhere within those two production frontiers GPF and PF, and such point would look or
looks like an outlier that does not fit green pareto thinking and traditional pareto thinking at the
same time. In other words, if we analyze an environmental externality management point in that
gap between the two production frontiers, we can see that it falls outside the green production
frontier and it falls below the pareto optimal consumption and production point e; therefore, it
is a less preferred bundle than point e, but production and consumption takes place or would
take place there at the outlier point anyway as it is or it would be an externally set bundle under
environmental externality management market forces. The existence of this environmental
sustainability gap affecting the sustainability of the traditional market and the need to fix
it(Muñoz 2020b), not to patch it(Muñoz 2020c) has been pointed out recently.
c) The need to understand how the environmental sustainability gaps are linked to optimal
and non-optimal markets
Hence, there is a link between green pareto optimality, pareto optimality, and
environmental externality management markets and its structure through the environmental
sustainability gap(ESG), but to my knowledge nothing is written yet about how the
environmental sustainability gap is linked to optimal and non-optimal markets, such as pareto
optimal markets, green pareto optimal markets and environmental externality management based
markets. The Brundtland Commission(WCED 1987) focused on sustainable development ways
to address the environmental sustainability gap while the 2012 Rio + 20 conference(UNCSD
2012a; UNCSD 2012b) placed its attention on green market, green economy and green growth
thinking in general, not on the need to find pareto optimal ways of dealing with the
environmental issue. And therefore, there is a need to understand the nature of this
environmental externality or environmental sustainability link so as to be able to address
questions such as Are environmental externality management based production and consumption
bundles inconsistent with green pareto efficiency and with pareto efficiency principles at the
same time? If yes, why? What is the structure of the environmental externality management
market? Among the goals of this paper is to provide answers to these questions.
Goals of this pape r
1) To link the environmental sustainability gap to environmental cost internalization and
the shift from traditional pareto optimality to green pareto optimality; 2) To link the
environmental sustainability gap to environmenta l cost externalization and the impossib ility of
green market thinking under those conditions and the normal life in traditional markets and
traditional pareto optimality; 3) To link the environmental sustainability gap to the idea of
environmental externality management market zones; 4) To place an externality management
market point inside the environmental externality management market zone to highlight its
inconsistency with optimality; and 5) To introduce the structure of the environmental externality
management market.
Methodology
1) The terminology used in this paper is given; 2) Operational concepts are shared; 3)
How environmental sustainability gaps are linked to the shift to green pareto optimality is
highlighted; 4) How environmental sustainability gaps are linked to traditional pareto optimality
is stressed; 5) How environmental sustainability gaps are linked to environmental externality
management market zones is pointed out; 6) Why environmental externality management
bundles do not fit green pareto thinking and traditional pareto thinking is indicated; 7) How the
structure of environmental externality management markets looks like is shown; and 8) Some
food for thoughts and relevant conclusions are provided.
Terminology
-----------------------------------------------------------------------------------------------
RT = Total production of product R R* = Optimal production and consumptio n of product R
QT = Total production of product Q R = Product R
Q* = Optimal production and consumption of product Q Q = Product Q
GR = Green product R GRT = Total production of green product R
GQ = Green product Q GQT = Total production of green product Q
MPL = Traditional market price line GMPL = Green market price line
SIC = Social indifference curve GSIC = Green social indifference curve
SIC* = Optimal social indifference curve PF = Production frontier
GSIC* = Optimal green social indifference curve GPF = Green production frontier
e = Pareto optimal point i = Green pareto optimal point
GR* = Optimal green production and green consumption of green product R
GQ* = Optimal green production and green consumption of green product Q
DPF = The dwarf production frontier DSIC = The dwarf social indifference curve
DMPL = The dwarf market price line DQ = The dwarf quantity Q
DR = The dwarf quantify R DP = Dwarf market price
Tc = The environmental tax RESG = Remaining environmental sustainability gap
DQT = Total dwarf quantity Q DRT = Total dwarf quantity R
J = The environmental externality management bundle
--------------------------------------------------------------------------------------
Ope rational concepts
1) Traditional market, the economy only market
2) Green market, the environmentally friendly market
3) Traditional market price, the general market economic only price or the price that covers
the
cost of production at profit(TMP = ECM + i = P) or zero profit(TMP = ECM = P).
4) Green market price, the price that reflects both the economic and the environmental cost of
production or the price that covers the cost of environmentally friendly production.
5) Cost externalization, the leaving out of the pricing mechanism of the market relevant costs
associated with production.
6) Social cost externalization, the leaving out of the pricing mechanism of the market the social
costs associated with production.
7) Environmental cost e xternalization, the leaving out of the pricing mechanism of the market
the environmental costs associated with production.
8) Cost externalization assumption neutrality, the assumption that production has minimal or
no cost impact on external factors to a market model.
9) Full costing, the reflecting in the pricing mechanism of the market all cost associated with
production; there are no market distortions.
10) Partial costing, not reflecting in the pricing mechanism of the market all cost associated
with production; there are partial market distortions.
11) No costing, not reflecting in the pricing mechanism of the market any costs associated with
production; there is full market distortion.
12) Fully independent development choices, when we have individual development choices
unrelated to each other or pure choices such as society only(A), economy only(B), and
environment only(C). In this world only fully independent development choices exist so the set =
{A, B, C}. This is the world of the Arrow Impossibility theory and theorem.
13) Partially codependent development choices, when we have mixed/paired development
choices such as socio-economy(AB), socio-environment(AC), and eco-economy(BC). In this
universe only codependent development choices exist so the set = {AB, AC, BC}. This is outside
the normal world of the Arrow Impossibility theory and theorem.
14) Full cost externalization, all costs associated with production are not reflected in the
pricing mechanism of the market.
15) Partial cost externalization, some costs associated with production are not reflected in the
pricing mechanism of the market.
16) No cost externalization, all costs associated with production are reflected in the pricing
mechanism of the market.
17) Full cost internalization, all costs associated with production are reflected in the pricing
mechanism of the market.
18) Partial cost internalization, some costs associated with production are reflected in the
pricing mechanism of the market.
19) No cost internalization, all costs associated with production are not reflected in the pricing
mechanism of the market.
20) Externalities, factors assumed exogenous to a model
21) Full externality assumption, only one component is the endogenous factor in the model; the
others are exogenous factors.
22) Partial externality assumption, not all factors are endogenous factors at the same time in
the model.
23) No externality assumption, all factors are endogenous factors at the same time in the
model.
24) Economic externality, the economic costs associated with production not reflected in the
pricing mechanism of the market.
25) Social externality, the social cost associated with production not reflected in the pricing
mechanism of the market.
26) Environmental externality, the environmental cost associated with production not reflected
in the pricing mechanism of the market.
27) Green or environme ntal margin, to cover the extra cost of making the business
environmentally friendly.
28) Social margin, to cover the extra cost of mak ing the business socially friendly.
29) Economic margin, to cover only the economic cost of production
30) Profit, the incentive to encourage economic activity
31) Full cost price, a price that reflects all costs associated with production.
32) Some cost price, a price that reflects only some costs associated with production.
33) No cost price, a price that does not reflect any cost associated with production.
34) Circular market illusion, the idea that production activity can take place without producing
relevant externalities.
35) Circular traditional economy illusion, the idea that production activity can take place
without producing relevant social and/or environmental externalities.
36) Circular dwarf green economy, the idea that market prices can be manipulated externally
to generate revenue to cover the cost of dealing with the externality they create to close the non-
free market cycle production-consumption-environmental externality.
37) Circular gre en economy, the idea that market prices reflect the cost of making business
environmentally friendly in order to cover the cost of dealing with the environmental
externalities they create to close the free market cycle production-consumption-environmental
externality.
38) Circular environmental externality manageme nt based market illusion, the idea that you
can solve an environmental externality problem by dealing with the consequences of that
problem, not the cause.
39) Circular gre en economy illusion, the idea that green production and green consumption
can take place without having social impacts(E(A) = 0).
40) Pareto optimal, the levels of production and consumption determined by the traditional
market price.
41) Green pareto optimal, the levels of green production and green consumption determined by
the green market price.
42)Dwarf market, it looks like a known market but it is not
43) Dwarf market price, the traditional market price plus the dwarf margin
44) Dwarf margin, the tax in externality management markets
45) Dwarf green market, the environmental externality management market
46) Dwarf green market price, the traditional price plus the dwarf green margin
47) Dwarf green margin, the environmental tax in environmental externality management
markets.
Environmental cost internalization and paradigm shift from pareto optimality conditions
to green Pareto optimality conditions
Environmental cost internalization is nothing more than the closing of the environmental
sustainability gap affecting the sustainability of the traditional market shown in Figure 2 above to
shift it to green markets, shifting pareto optimality to green pareto optimality as shown in Figure
3 below:
Figure 3 above shows that environmenta l cost internalization in traditional markets to
make them environmentally friendly shift traditional pareto optimality at point e to green
pareto optimality at point i as indicated by the green arrow from point e to point i. Notice
that at point e, economic efficiency matters, but at point i eco-economic efficiency matters.
In other words, environmental cost internaliza tion fixes economic efficiency transforming it into
eco-economic efficiency.
Environmental cost externalization and paradigm shift from green pareto optimality
conditions to pareto optimality conditions
Environmental cost externalization is nothing more than the opening of the
environmental sustainability gap affecting the sustainability of the traditional market shown in
Figure 2 above to maintain the status quo in traditional markets, keeping pareto optimality as we
know it as indicated in Figure 4 below:
Figure 4 above indicates that environmental cost externalization in traditional markets to
make them environmentally unfriendly leads to traditional pareto optimality at point e leaving
the idea of green markets behind as indicated by the arrow from point i to point e. Notice
that at point i, eco-economic efficiency is the rule, but at point e economic efficiency
matters. In other words, environmental cost externalization distorts the pricing mechanism in
favor of economic efficiency as pareto optimality bundles like e have lower price than green
pareto optimality bundles like i simply because it assumes that environmental costs do not
matter. Hence, prices in green markets and its green pareto optimality point are higher than in
traditional markets because of environmental cost internalization; and prices in traditional
markets and its pareto optimality point are lower because of environmental cost externalization.
So if environmental cost does not matter, then all bundles within green markets would be pareto
inefficient as environmental cost can be externalized, and then pareto improvement forces would
drive them towards point e as environmental costs do not matter. But if environmental cost do
matter, then all bundles within traditional markets would not be available in green markets as
they are not eco-economic effic ient bundles.
The environmental externality management market zone
The environmental sustainability gap(ESG) pointed out in Figure 2 above can be seen as
an environmental externality management market production and consumption (EEMMPC) zone
as the environmental sustainability gap(ESG) is an environmental externality gap, a situation
summarized in Figure 5 below:
Figure 5 above helps us see that external actors such as the government can set up
environmental externality management markets(EEMM) at any point between the green
production frontier(GPF) at point i and the traditional production frontier(PF) at point e that
makes up the environmental externality management market production and consumption
zone(EEMMPC Zone) if the government, due to green market paradigm shifts knowledge gaps
or willful academic blindness decide to manage the environmental externality during the
paradigm shift instead of internalizing the environmental costs in the pricing mechanism of the
traditional market.
For example, the government could decide to set up an environmental externality
management market at point j in Figure 5 above to manage that level of externality, so that
production and consumptio n at point j is less than pareto optimal production and consumption
at point e and more that green pareto optimal consumptio n and production at point i, and
reduce some production and consumption related pollution that way. But notice that bundle j
falls outside the green production frontier so it is not a green bundle and therefore, it would not
be available in green markets; and it also falls below the pareto optimal point e making it a
pareto ineffic ient point from the pareto optimality point of view, but production and consumption
takes place at point j anyway as it is an externally set market. See that both the green market
and the traditional market are perfect, free markets while environmental externality based
markets are non-perfect, non-free markets as perfect free markets do not need government
intervention unless there is market failure while environmental externality markets cannot exist
without permanent ongoing government intervention. Therefore, environmental externality
management based production and consumption bundles are inconsistent with green pareto
efficiency and with pareto efficiency principles at the same time because they are non-free, non-
perfect markets set up by external actors to manage the environmental sustainability gap
affecting the traditional market up to levels such as point j.
The non-optimal nature of environme ntal externality management market based
consumption and production bundles
The non-optimal nature of these productions and consumption bundles can be extracted
from the placing a production bundle j between the green pareto optimality point and the
traditional pareto optimality representing an environmental externality management bundle that
is brought by an environmental tax Tc imposed by the government on goods being produced and
consumed to reduce that way pollution from production and consumption; and manage that way
a portion of the environmental sustainability gap(ESG) shown in Figure 2 and being closed in
Figure 3 above, a situation summarized in Figure 6 below:
We can see in Figure 6 above the following: 1) The environmental tax Tc on goods
consumed and produced shift production and consumption from point e to point j as
indicated by the arrow from point e to point j, where this environmental externality
management market(EEMM) is placed; and 2) the environmental externality market at point j
operates under a remaining environmental sustainability gap(RESG = ESG - Tc) as pollution still
is taking place as indicated by the broken arrow from point j to point i as only a portion of
the environmental sustainability gap(ESG) affecting the traditional market shown in Figure 2
above is being accounted for by the tax. And ongoing government intervention is needed to keep
production and consumptio n at point j, which makes this point j a clearly non-optimal, non-
free, non-perfect production and consumptio n bundle. Notice that in order to increase pollution
reduction under environmental externality management based markets(EEMM) to the left of
point j the environmental tax TC needs to increase so pollution reduction from less production
and less consumption takes place; and therefore, in environmental externality base markets
pollution reduction is not a driver of profit making as long as producers can pass the tax to
consumers or as long as consumers can pay the dwarf green price to consume there they are fine
producing and consuming at point j while the remaining environmental sustainability
gap(RESG) is still active as pollution continues.
Notice that in traditional markets the more cost externalization the lower the price so you
can produce and consume at a lower price; and traditio nal producers aim at producing at the
lowest price possible so pollution behavior and lower prices are linked as more production and
consumptio n means more pollution; and at point e we have the lowest market price and the
highest polluting point in Figure 6 above. See that in green markets the lowest the
environmental cost of production the lowest the green price so more can be produced and
consumed as the green price decreases because the environmental cost decreases; and hence in
green markets at point i, pollution reduction is linked to green profit making. In other words,
in perfect markets like traditional markets and green markets, producers and consumers when the
production frontier expands as prices decrease, produce and consume more, more traditional
goods in traditional markets and more green products in green markets, but in environmental
externality management markets price increases due to environmental tax increases drive the
market towards lower pollution by inducing less production and less consumption. And this is
the reason why a market at point j requires on going for ever government intervention to exist
while markets like traditional markets at point e or green markets at point i require no
government intervention unless there is market failure.
Finally, we can see in Figure 6 above that economic activity in both the traditional market
and in green markets moves from left to right driven by decreasing prices so they expand to the
right while in environmenta l externality management based markets economic activity contracts
from right to left as prices increase due to increasing environmental taxes. This is because
consumers and producers in traditional markets and in green markets are price setters as prices
are determined by supply and demand; and producers and consumers in environmental
externality based markers are price takers as prices are not determined by supply and demand,
but by external intervention. Because prices in environmental externality management
markets(EEMM) are not determined by supply and demand, they are non-free markets which the
author calls dwarf green markets.
The structure of the environmental externality management market
The structure of the environmental externality management market(EEMM) is made up
by a dwarf production frontier(DPF), a dwarf social indiffe rence curve(DSIC), and a dwarf
market price line(DMPL), as indicated in Figure 7 below:
We can see in Figure 7 above that that the production frontier(DPF), the social
indifference curve(DSIC), and the market price line(DMPL) associated with the environmental
externality management market point j are broken because environmental externality
management markets(EEMM) are not cleared by supply and demand, and hence they are dwarf
markets as they are not free markets since producers and consumers in this market are price
takers. In environmental externality management markets the dwarf price(DP = P + Tc) clears
the market making production and consumption of DQ and DR not an optimal production and
consumptio n bundle. In other words, a broken production frontier means there are no free choice
production bundles, a broken social indifference curve means there are no free choice
consumptio n bundles, and a broken market price line means there is no market price
determination as the price is externally set through environmental taxes.
We can see the following in Figure 7 above about environmental externality management
markets(EEMM): 1) Producers and consumers have no choice but to produce and consume at
point j where the externally set price line or dwarf market price line(DMPL) meets the only
production and consumptio n bundle possible at point j given the environmental tax leading to
producing and consuming DQ and DR; 2) Producers and consumers could produce and consume
at point m if they had a choice with the same environmental tax and reduce pollution even
more than in traditional markets, but by producing at point j producers can make more money
and by consuming there consumers can save some money so rational expectations tells us they
will choose to make more money if producing and to same money if consuming; 3) Producers
and consumers would prefer an environmental externality management based market at point p
instead of at point j, yet they have no choice but to stay at point j. Hence, production at
point x and consumptio n at point y are not possible given the environmental tax, only the
bundle at point j is possible as; and 4) at the non-optimal point j we have that the absolute
value of the ratios of dwarf marginal costs, of the dwarf marginal utilities and of the dwarf
market prices are equal(DMCQ/DMCR = DMUQ/DMUR = DPQ/DPR so that DMCQ = DMUQ =
DPQ and DMCR = DMUR = DPR). Hence, consumers take whatever utility bundle J gives
them at that dwarf price; and producers will pass the tax to consumers by producing bundle j
where the dwarf marginal costs meet the dwarf market price.
Hence, consistent with Figure 7 above, an environmental tax increase could shift
production and consumptio n from point j to point m reducing pollutio n that way, and
producers would produce and sell less at a higher price and make less money, and consumers
would be consuming non-green products at higher prices. On the other hand, an environmental
tax decrease would shift production and consumption from point j to point p helping
producers to produce more and make more money at lower prices, and help consumers to
consume more and save more money at lower prices, behavior that would increase pollution
from production and consumptio n as compared to point j as pollution is expected to increase as
production and consumptio n increases.
Food for thoughts
1) Is cost externalization directly related to model unsustainability? I think yes, what do
you think?; 2) Is cost internalization directly related to increasing model responsibility? I think,
yes what do you think?; 3) Does cost externalization creates pareto improvement situations that
lead to development races towards pareto efficient bottoms? I think yes, what do you think?; and
4) Does cost internalization eliminates pareto improvements situations that lead to development
races away from pareto efficient bottoms? I think yes, what do you think?
Conclusions
1) It was pointed out that environmental externality management based markets can be
set up by the government anywhere within the environmental externality management market
production and consumptio n zone; 2) It was stressed that any environmental externality
management bundle is found between green pareto optimality and traditional pareto optimality
points and since they are not free markets production and consumption in those markets are not
optimal; 3) It was highlighted that as prices in environmenta l externality management based
markets are not determined by supply and demand, they are called by the author dwarf green
markets; 4) It was indicated that as a dwarf market, the environmental externality management
market has broken dwarf production frontier, broken social indifference curves and broken
market price lines reflecting its market structure; 5) It was exalted that production and
consumptio n in perfect markets such as the green market or the traditional market expands from
left to right as prices decrease while production and consumption in environmental externality
management markets contracts from right to left as environmental taxes increase; and 6) it was
shown graphically and analytically that environmental externality management based production
and consumptio n bundles are inconsistent with green pareto efficiency and with pareto efficiency
principles at the same time because i) they are not perfect green bundles nor they are perfect
traditional economic bundles as they are not determined by supply and demand and driven by
perfect market prices; and hence ii) they are not optimal, not free, and not-perfect market bundles
that require ongoing government intervention to exist as market prices in these markets are set
externally.
References
Muñoz, Lucio, 2016. Beyond Traditiona l M arket Thinking: What is the Structure of the
Perfect Green market?, In: International Journal of Science Social Studies Humanities and
Management (IJSSSHM), Vol. 2, No. 5., May, Ed. Dr. Maya Pant, India.
Muñoz, Lucio, 2019. From Traditional Markets to Gre en Markets: A Look at M arkets
Under Perfect Green M arket Competition, Weber Economics & Finance (ISSN:2449-
1662), Vol. 7 (1) 2019, Article ID wef_253, 1147-1156
Muñoz, Lucio, 2020a. Sustainability thoughts 125: Why is pareto efficient in traditional
markets outside gre en pareto efficiency in green markets? What is the structure of green
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to green markets would have looked like had the 1987 Brundtland Commission
recommended the n an environmental sustainability fix?, Boletin CEBEM-
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not?, Boletin CEBEM-REDESMA, Año 14, No.5, May, La Paz, Bolivia.
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Citation:
Muñoz, Lucio, 2021. Sustainability thoughts 126: Are e nvironmental externality
management based production and consumption bundles inconsistent with green pareto
efficiency and with pareto efficiency principles at the same time ? If yes, why?, In: CEBEM-
REDESMA Boletin, o 15 Nº 2, February, La Paz, Bolivia.
... For example, we can see in Figure 3 above that since prices are lower in traditional markets(P < SP) we produce and consume more(Q 2 > Q 1 and R 2 > R 1 ) in traditional markets at point "2" than in sustainability markets at point "1", which means that point "1" is a point of higher level pareto optimality than point "2". It has been recently stressed that cost externalization goes one to one with model structure and price structure(Muñoz 2020b) inducing optimality trends from higher level optimality points to lower level optimality point; and it has also recently been shown that any market, perfect market or dwarf market and their consumption and production bundles, that are located to the right of any optimality point such as the green market optimality point for example falls outside the production frontier, in this case outside the green market production frontier (Muñoz 2021b ) so those bundles are not available in that market. Another thing that can be highlighted based on Figure 3 above is that at point "1", the pareto optimal sustainability point, there are no sustainability gaps while at point "2", the traditional pareto optimality point, there is a sustainability gap, the distance from point "1" to point "2". ...
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