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Abstract
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.