Corner solutions in the allocation of environmental water: an application of inframarginal economics
Inframarginal economics is a combination of marginal and total cost-benefit analysis (across corner solutions). It has been applied extensively in analysing trade issues, however, there have been few environmental applications. While there is debate over the contribution of inframarginal economics to the analysis of aggregate economic phenomena, inframarginal economics is central to understanding agent-level decisions. This paper applies inframarginal methods to investigate the efficient allocation of water among ecosystems. The Australian Government is acquiring billions of dollars of water for environmental uses through a number of programs. Allocating this water efficiently will require information on preferences and environmental production functions, as well as the development of analytical frameworks capable of examining corner solutions. Within a general inframarginal framework, this paper investigates the conditions under which corner solutions are likely to be efficient. In particular, corner solutions may arise when environmental production functions are convex but are also possible under ‘well behaved’ functions.
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