Environmental Protection: A Social Choice

Theoretically, an economic instrument to control pollution is used to change the producer’s strategy. The socially optimal level of control is where marginal benefits (MSB) equals the marginal social cost(MSC)  of control. But practically it is very difficult to estimate MSB and MSC of pollution control (as pointed out by Coase 1964). In this paper attempt has been made to estimate MSB and MSC by estimating shadow prices from the Cost and Production Functions of Indian Paper Industry. Estimated results make a strong case for economic incentives for environmental protection.