Will Markets Always Do Best? An Application of the Concepts of Price Elasticity and Consumer Surplus to Environmental Policies

The paper explores the question whether social benefit is always maximized when consumers are charged marginal cost prices for their environmental harmful activities. The issue is investigated in a simple model using the concepts of price elasticity of demand and consumer surplus. The subject is presented in a very simple graphic manner comparing areas of triangles and rectangles, then some more geometry, the tangent, is added and in the end some simple calculus, the first derivative of a linear function, is used. So the subject can be taught in classes with a rather low level of technical skills as well as in classes acquainted with the calculus. In the appendix a numerical example is given which can be used for classroom exercise