Employment and environmental protection - The trade-offs in an economy in transition

One of the most pressing problems in an economy in transition is that of unemployment. Hitherto the 'costs' of this unemployment have either focused on the value of the lost production, or on the costs to the government of supporting the unemployed. From a social viewpoint this is inappropriate. In this paper, we discuss the costs of unemployment in terms of their impacts on human welfare, particularly the health effects. On the positive side, as inefficient industries are shut down and as production responds to market pressures, wasteful government subsidies are reduced, as is the level of environmental pollution. Clearly, therefore, there is a trade-off between the environmental and economic benefits on the one hand and the welfare costs of unemployment on the other. In this paper, a simple model is developed to analyze this trade-off. A single firm has a short-run production function in which output is dependent on the level of employment. The present position is characterized by 'inefficiency' in that the firm is making a loss and overproduction is taking place. Environmental damage is a function of the level of output. The efficient production point is known, as are the efficiency prices. The problem to be solved is to minimize the costs of moving to the efficient point. The paper characterizes the efficient dynamic path and gives some illustrations of such a path for the coal sector in Russia, for given values of the efficiency losses, the environmental costs of using coal and the costs of unemployment.