Ethics, Welfare, and Markets: An Economic Analysis

Lence, Sergio H.; Hayes, Dermot J.

Southern Economic Journal Vol. 76 no. 4 (April 2010): 1107-1130.

 The present article examines society's welfare when goods with identical physical attributes can be produced using two alternative technologies, one of them less ethically desirable but less expensive for at least some producers. For the scenario where identification costs must be borne by producers and consumers of the high-quality good, the outcome under unregulated markets is identical to the optimal solution of a central planner constrained to neither ban the undesirable technology nor segregate the low-quality good. However, under certain circumstances the unregulated market equilibrium may be improved upon by government intervention that shifts the burden of identification costs to the producers of the low-quality good, or which bans the production of the low-quality good. The optimal intervention needs to be determined case-by-case and depends on consumer preferences, relative production costs, and relative costs of identification and fraud prevention