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Economic instruments in environmental policy



Due to market failures often is necessity for government to regulate environmental pollution by employing command-and-control regulations and/or economic instruments. Despite its cost inefficiency and inflexibility command-and-control policies are still dominant regulation approach to pollution control. Most important factors that are lying behind this inconsistency are lack of understanding of how economic instruments work to protect the environment, and the major influence of rent-seeking and interest group politics on the design of actual environmental policy. Opportunities for much greater environmental and economic benefits are, therefore, lost.
Economic instruments in environmental policy
Bojan Vračarević
University of Belgrade – Faculty of Geography, Belgrade, Serbia
Corresponding author: Bojan Vračarević, University of Belgrade – Faculty of Geography, Belgrade, Serbia, e-mail:
Abstract Due to market failures often is necessity for government to regulate environmental pollution by employing command-and-control
regulations and/or economic instruments. Despite its cost inefficiency and inflexibility command-and-control policies are still dominant
regulation approach to pollution control. Most important factors that are lying behind this inconsistency are lack of understanding of how
economic instruments work to protect the environment, and the major influence of rent-seeking and interest group politics on the design of
actual environmental policy. Opportunities for much greater environmental and economic benefits are, therefore, lost.
Key words: economic instruments, command-and-control regulations, environmental policy, political economy
Existence of market failures, such as external
effects, common goods, public goods and imperfect
information, lead to over-exploitation of the natural
resources and environmental degradation. In most
cases, government intervention is necessary in order
to correct negative effects of these failures. Once
objectives are agreed and targets adopted, policy-
makers can use command-and-control regulation or
economic instruments (
incentive-based instruments).
Command and control instruments operate by
imposing mandatory obligations or restrictions on the
behaviour of firms and individuals. Incentive-based
instruments work by creating incentives for
individuals or firms to voluntarily change their
behaviour [11]. Rather than governments stipulating
the technologies that must be used to curb pollution
or the maximum allowable emissions, (command and
control approach), economic instruments can provide
the financial incentive to act in a more
environmentally responsible manner through the use
of such mechanisms as taxes, subsidies, marketable
permits, changes to property rights, negotiated
agreements, emissions or access charges, and other
financial approaches to modifying behaviour [15].
In all cases, to design good rules, the
government regulators need to know the details about
specific industries and about the alternative
technologies that those industries could adopt. This
information is often difficult for government regulators
to obtain.
Despite the goals of environmentalists, it would
be impossible to prohibit all activity that leads to
environmental degradation. Thus, instead of trying to
eradicate pollution entirely, society has to weigh the
costs and benefits to decide the kinds and quantities of
pollution it will allow [9].
Both approaches also attempt to shift the costs
and responsibilities associated with pollution back
onto the polluter (‘polluter pays principle’). However,
differences between the policy types are extremely
important in terms of how successful they are in
achieving their environmental targets and at what cost
The literature on using incentive-based
instruments to internalize externalities dates back to
1960s and has increased markedly since the 1970s.
Economic instruments are also used for natural
resource management. Common applications are in
the management of water quantity, fisheries, forestry
and wetlands. Economic instruments are also used to
preserve soil and land quality, and to preserve species
and wildlife [11].
The common rule of regulation is that
intervention is justified if there are serious market
UDK: 502.14:338.246.2
failures, and if those failures are expected to have a
greater efficiency cost than the cost of the
intervention—government failure [5]. In other words,
there is a plausible justification for some kind of
regulatory or legal action if individuals do not
otherwise take into account the full social costs of
their actions.
Several policy criteria should be considered
when evaluating the success of policy approach. These
include environmental effectiveness; economic
efficiency; reduction in administrative, monitoring and
enforcement costs; environmental awareness and
attitudinal changes and inducement of innovation. [2].
Economists are particularly interested in the
relative effectiveness and efficiency of various polices:
that is, whether a specific policy meets its intended
goals, and whether that policy is likely to do more good
than harm when important impacts, such as those
related to the environment, health, safety, or energy
security, are taken into account [1].
The key to the promise of economic instruments
is their ability to harness the power of the market and
self interest and to turn these former adversaries of
sustainable development into powerful allies [10, 14].
Also, Helm [6] argues that ”economic instruments do
not discriminate between the supply and demand side
of markets…by contrast with planning, this approach
does not ‘pick winners’.”
Economic instruments work by internalizing
environmental costs and externalities through
increasing the prices that individuals and industries
must pay to use resources or to emit pollutants. As
resources or emissions become more expensive,
consumers have strong monetary incentives to reduce
resource use, either through conservation, substituting
materials with a more favourable environmental
profile or rationalizing consumption. Not only does
this encourage reduced emissions, but the use of
economic instruments can also be more conducive to
sustainable development by reducing pressure on
natural resources [15].
First of all,
economic instruments
firms more
flexibility than command-and- control
regulations and capitalize on the heterogeneity
costs across
polluters to reduce
efficiently. They create
an incentive for the
pollution abatement into
production or consumption decisions and to innovate
in such a way as to continually search for the least
costly method of abatement, and, in that way,
encourage research to develop new, less expensive,
and potentially superior technologies [2, 15]. This
flexibility achieves environmental goals at lower cost,
which, in turn, makes the goals easier to achieve and
easier to establish [14].
The benchmark used to evaluate a market-
based approach is typically a command-and- control
regime that often involves technological requirements
that the regulator might impose to achieve a similar
environmental objective. Not surprisingly, economists
find most market-based approaches have the
potential to produce cost savings [1].
Economic instruments are, in general,
administratively and bureaucratically light, in that the
burden falls on setting and revising the economic
instrument, whereas command-and-control requires
administrators for each aspect of the policy, with
inspection, compliance and enforcement procedures,
based upon information requirements.
A number of empirical studies have sought to
compare the costs of obtaining a given reduction in
pollution using an incentive-based versus command
and-control approach. The particular results depend
on the type of pollution being considered and the site
of the pollution. A vast majority of the relevant
empirical studies have found the control costs to be
substantially higher with the regulatory command-
and-control system than the least cost means of
allocating the control responsibility. One summary of
11 studies reviewed [14] shows that command-and
control ranges from 1.07 to 22 times (average of 6.13)
more expensive than the cost-effective approach.
Also, empirical studies in the United States show
that the efficiency gains associated with using
economic instruments rather than command-and-
control regulation have been substantial. The authors
estimate that in 1992, existing incentive-based
programs saved $11 billion over command-and-
control approaches, and that they will save over $16
billion by the year 2000 [3, 15]. Other studies
analysed potential cost savings from
permit systems [1].They suggest that the range of
potential cost savings is large. Most of
predict cost savings above 40 per cent by moving to
marketable permits from
approach, and some predict cost savings
above 90 per
Also, economic instruments have been argued
to provide a double dividend [6]. Many of them have
the benefit that they generate revenues for the public
Revenues that can potentially help to enforce,
improve, and expand environmental and resource
protection programmes [15], or can be used to reduce
distortionary taxes such as income taxes, which
reduce the incentive for work, or sale taxes which
distort consumption decisions [10]. For example,
environmentally related
constituted about
7% of total OECD
a figure that is
steadily and
at the end of the
There are many advantages of economic
incentives as instruments of environmental
management in
developing countries
command-and-control regulations. First, they can
achieve the desired effect at the least possible cost—
this is vital to developing countries with limited
resources and a dire need to maintain their
competitiveness in world markets. Second, economic
instruments can serve to provide a decentralized, non-
governmental enforcement mechanism to ensure
environmental responsibilities are upheld, a great help
in countries with severely limited enforcement
budgets [15]. Third, economic incentives present
fewer opportunities for rent-seeking behavior than do
regulations and therefore they are likely to both be
more effective and more equitable. Finally, unlike
regulations that require bloated bureaucracies and
large budgets, economic incentives generate revenues
which should be welcomed by countries facing tight
budgets and budgetary deficits [10].
To summarize, main benefits of economic
instruments include:
Reduction in overall cost of achieving
emission reductions by providing flexibility,
Encouraged use of innovative abatement
technologies, and
Allocation of natural resources to parties
who value them most [15].
Because of this, economic instruments are
ideally situated for reconciling environmental concerns
with development needs and integrating
environmental and economic policy [10].
Finally, there is a wider learning effect: the
economic instrument itself carries information. The
process of introducing the instrument educates the
affected parties. It attracts the affected parties’
attention, and is often accompanied by media
information on ways of substituting to mitigate the
impact [6].
Nevertheless, incentive-based approaches are
far from replacing command-and-control regulation
for dealing with environmental issues. As the costs of
traditional environmental programs continue to
increase-it is estimated they already amount to more
than 2 percent of GDP-the efficiency of incentive-
based approaches may make them more attractive to
policymakers [12].
With regards to above-mentioned analysis, it is
important not only to establish which instrument
works best in particular contexts, but also why the
optimal instruments are so rarely chosen [5].
Interestingly, country analysts have noted that often
there is no formal process of evaluation at all prior to
recommending a particular policy approach [15].
Several scholars have argued that the actual
design of economic instruments typically departs
dramatically for political reasons from the "efficient"
design of such instruments Frequently, taxes have
been used to raise revenues rather than to reflect
optimal damages [3].
The starting point in trying to understand this
reluctance is the positive theory of government,
regulation and bureaucracy. Rather than simply
assume that public bodies pursue the public interest,
these bodies are better understood as rent-seeking
agents [6].
A government failure can arise if the
government selects a policy which leads to an
inefficient outcome. In certain cases, this outcome
may actually reduce overall economic efficiency
compared with the status quo. Government failures
may arise for a number of reasons. For example,
politicians or regulators may simply not have an
incentive to pursue
icient policies. In addition,
regulators may lack adequate information. Both
market failures and government failures can
contribute to the inefficient if they are not rectified
One study [16] provides a comprehensive
analysis of the empirical evidence on the economic
impact of government policies to correct market
failures in the United States. Main findings are that
the government interventions frequently occur when
no significant market failure exists. In addition, many
policies aimed at addressing market failures could have
corrected them at significantly lower cost.
Still, despite all advantages and potential
benefits of economic instruments command-and-
control environmental regulations are prevalent in the
world [2,7,11,15]. These approaches are often viewed
as more "secure" in terms of addressing a particular
environmental concern because they are proscriptive,
although the causes of this dominance are, as we will
see, more diverse. Rosen and Gayer [12] argue that
“...perhaps legislators like to immediate sense of doing
something that enacting regulations gives them, even
though more passive measures like creating a market
would probably do the job efficiently. A cynic would
argue that the regulatory solution is the result of
politicians’ desire to have it both ways: Pass noble
sounding legislation to please environmentalists, but
make it unworkable to keep business happy.“ As a
matter of fact, this is not far from truth.
A combination of factors seems to explain
the current dominance of command-and-control
approaches throughout the world despite the benefits
of economic instruments. These include: a lack of
understanding of how economic instruments work to
protect the environment and how to choose the
appropriate instrument; political interests that seek to
minimize control costs via regulation; and a preference
for keeping the status quo. Opportunities for much
greater environmental and economic gains are,
therefore, lost [15]. Hepburn [7] states that political
factors are more important than economic
considerations in explaining why particular instruments
are employed for particular problems.
Actually, many environmental policies are not
economically efficient, though some improve on
efficiency relative to the status quo. This is not
terribly surprising, given that politics plays a large role
in policy choice and economic efficiency is not widely
accepted as an overarching objective for particular
policies [1]. Indeed, one of the primary lessons of the
political economy of regulation is that economic
efficiency is not likely to be a key objective in the
design of policy [3]. Economics can illustrate the costs
and benefits of intervention, but not the desirability [5].
In fact, countries are often reluctant to set taxes and
charges high enough to act as economic incentives
because of political reasons, resistance by industry or
concerns about competitiveness [10].
For example, from an efficiency perspective, the
world as a whole is doing too little to reduce net CO2
emissions. Most of the world’s countries are doing
little or nothing to limit CO2 emissions, yet almost all
economic studies find significant marginal damages
from emitting CO2 into the atmosphere. One study
finds a social cost of carbon of $27/tC, and other
meta study of social cost of carbon estimates finds a
social cost of carbon of
Finally, observation made by Helm [6] reveals
interesting aspect of the matter in question: ”…there is
typically an asymmetry between the response to
greater efficiency through the use of economic
instruments and the exposure should policy fail. The
losses tend to have greater influence than the gains.
This asymmetry is reflected in the way politicians
respond to ‘events’. When a negative case arises in the
media, there is a demand to ‘do something’, with
command-and-control regulation the typical response
to ensure ’it never happens again.’“
Economic instruments are, without doubt,
uniquely suited for the integration of environmental
and economic policy, and can be designed to advance
sustainable development.
Yet, despite their many advantages, such as
potential to achieve environmental targets at a lower
cost than traditional regulation, and to generate
technological innovation in the areas of pollution
control and prevention, role of economic instruments
has been limited, and politicians and their officials
show a reluctance to move away from traditional
command-and-control approach in environmental
It is sure that as the focus on efficiency
sharpens, the use of economic instruments will
become more appealing. Also, as citizens’ legitimate
demands for better public outcomes increase, so the
social argument for using economic theory to improve
instrument choice will become more powerful.
Although the role of economics is becoming
more prominent, it does not follow that environmental
policy will become more efficient. This apparent
inconsistency, and even paradox that economic
instruments remain the exception rather than the rule,
can be explained by the political economy of
environmental policy. In short, rent-seeking and
interest group politics have been shown to have a very
important impact on the design of actual policy.
This work was supported by the Ministry of Science
and Technological Development of the Republic of
Serbia under Grant No 176017.
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... Despite the advantages of IB strategies the world of policy making is somewhat locked into the path of traditional approaches such as CAC and pose inertia to move forward in environmental policy making. An ethical shift is inevitable anywhere where there is a market failure and increased social costs and inefficiencies in government interventions to regulate the market [6]. ...
Incentive Based (IB) and Command and Control (CAC) instruments are identified in various legislative Acts and Policy documents based on the criteria of environmental economics. Despite the advantages of IB strategies the world of policy making is somewhat locked into the path of traditional approaches such as CAC and pose inertia to move forward in environmental policy making. An ethical shift is inevitable anywhere where there is a market failure and increased social costs and inefficiencies in government interventions to regulate the market. Regulations are discrete steps to address feedbacks in a complex system. Policy evaluation and testing criteria is used to evaluate and test the policies regulating marble extraction and processing in Pakistan. A set of policy and regulatory instruments are selected to be critiqued. The coexisting policy approaches found in the study shall be tested on system dynamics model for developing insights and long-term implications.
... La comparación cuantitativa nos muestra que la tendencia de una mayor presencia de instrumentos económicos que pueden llamarse de base estatal se mantiene con algún nivel de diversificación hoy día. Esta tendencia que se mantiene a pesar de los costos de mantener estos esquemas verticales (Vracarevic, 2014). Conforme lo muestra la Tabla 3, de los 596 instrumentos registrados en los países seleccionados, el 51% son impuestos o cánones. ...
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En julio del 2015, el Consejo de la OCDE aprobó una hoja de ruta para la adhesión del Estado de Costa Rica a esta organización. El Ministerio de Comercio Exterior, es quien coordina el programa de trabajo del proceso de adhesión que incluye a más de 25 ministerios e instituciones. El proceso de revisión es realizado por 22 comités temáticos, donde se evalúa la voluntad y capacidad del país para implementar la normativa jurídica y las recomendaciones de la OCDE. Esta evaluación tiene como fin identificar las áreas específicas en las que Costa Rica debe llevar a cabo reformas con el fin de cumplir con los estándares establecidos por la OCDE. Dentro de este proceso, el PSF de la UE ha apoyado a Costa Rica, dentro del marco de la iniciativa “Costa Rica y la UE: Una Alianza Hacia la Incorporación a la OCDE” con recursos para lograr reformas en esas áreas clave requeridas para una evaluación positiva que permita la adhesión del país. Dentro de las áreas de énfasis se identifica la de políticas ambientales y una de las sub-áreas que se busca dentro de ésta es la creación de capacidades en economía ambiental. Se espera que el proyecto genere productos con metas concretas y cambios en el marco legal, institucional y de políticas públicas. Dentro de este marco, esta consultoría tiene dos objetivos que se expresan en dos productos: 1) Un reporte técnico que incluya los siguientes elementos; a) Caracterización y diagnóstico de la situación actual del país en el uso de instrumentos económicos en materia de política ambiental; b) Apoyo al MINAE en la implementación de los planes de acción de flujo de materiales y productividad de los recursos; c) Apoyo al grupo técnico encargado del plan de acción de control y prevención integral de la contaminación en temas de uso de instrumentos de economía ambiental; d) Recomendaciones sobre el uso de instrumentos económicos en la gestión del agua; e) Proponer acciones para mejorar la Unidad de Economía Ambiental de MINAE; 2) Diseño e implementación de un programa de desarrollo de capacidades para 30 personas con vista del diagnóstico y recomendaciones realizadas. Este reporte recopila los hallazgos del primer mediante la caracterización, diagnóstico y recomendaciones específicas en las áreas enumeradas. Estos hallazgos se han determinado de conformidad con la metodología que a continuación se desarrolla. De los objetivos y términos de referencia se deriva que el público meta más inmediato del reporte está compuesto por la institucionalidad técnica costarricense que se encuentra en el proceso de implementar esta normativa y lidera el proceso de cumplimiento con los planes de acción recomendados por la OCDE para los años venideros. También incluye a los tomadores e implementadores de políticas ambientales, de alguna forma más ajenos a los detalles del proceso de incorporación a la OCDE, que deben tomar decisiones que permitan la implementación de los planes de acción y de los compromisos de cumplimiento normativo que Costa Rica asume con su incorporación a esta organización internacional.
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An Additional Action Reserve (AAR) is proposed as a mechanism to allow for initiatives by government and voluntary private interests to make additional emissions reductions beyond a nationally set cap. The key idea of the AAR is to annually set aside a proportion of the Australian Emission Units (AEUs) which can then be retired if state or local government, businesses or individuals take specific emission reduction measures which go beyond those expected to be driven by the CPRS. AEUs allocated to the reserve that are not retired through additional activities would then be made available to CPRS participants. By providing an upper bound to such actions, the scheme would limit the uncertainty as to the quantity of available permits for emitters and provide a limit to the potential losses of auctioning revenue from AEU retirements. Compared to some other options to allow for additional action (such as buying-and-retiring of permits or future reductions of the national cap) the scheme combines the favorable features of accounting for tangible, psychologically-satisfying actions (such as installing a home solar PV system) with a transparent process that assures the participant that such actions are having an immediate effect in reducing national emissions. Elements of this approach have already been seen in the Regional Greenhouse Gas Initiative (RGGI), an inter-state emissions trading scheme which began in the United States in 2009.
China's iron and steel sector is faced with increasing pressure to control both local air pollutants and CO2 simultaneously. Additional policy instruments are needed to co-control these emissions in this sector. This study quantitatively evaluates and compares two categories of emission reduction instruments, namely the economic-incentive (EI) instrument of a carbon tax, and the command-and-control (CAC) instrument of mandatory application of end-of-pipe emission control measures for CO2, SO2 and NOx. The comparative evaluation tool is an integrated assessment model, which combines a top-down computable general equilibrium sub-model and a bottom-up technology-based sub-model through a soft-linkage. The simulation results indicate that the carbon tax can co-control multiple pollutants, but the emission reduction rates are limited under the tax rates examined in this study. In comparison, the CAC instruments are found to have excellent effects on controlling different pollutants separately, but not jointly. Such results indicate that no single EI or CAC instrument is overwhelmingly superior. The environmental and economic effectiveness of an instrument highly depends on its specific attributes, and cannot be predicted by the general policy category. These findings highlight the necessity of clearer identification of policy target priorities, and detail-oriented and integrated policy-making among different governmental departments.
The aim of this article is to explain cross-national differences in perceptions regarding the effectiveness of economic pro-environmental policy instruments (EIs). Using data for the European Union, it is found that people in the Nordic and the Benelux countries are more likely to perceive EIs as effective instruments while people in southern and eastern Europe are less inclined to do so. Two hypotheses are put forth to explain these differences. First, it is hypothesized that people are less likely to perceive EIs to be effective pro-environmental policy instruments in relatively corrupt countries. Corrupt public institutions waste economic resources and are less efficient. Furthermore, corrupt societies tend to have lower levels of trust, in general, and low compliance with public policy, which also affects the perceived effectiveness of EIs. The second hypothesis is that people are less likely to perceive EIs as an effective policy option in relatively unequal societies because some income groups will not be as affected by such instruments. Furthermore, EIs have been argued to have unfair distributional effects, and unfairness is argued to trigger free-riding tendencies, thus, making instruments ineffective. From a logistic multilevel regression analysis, the results show support for both hypotheses. In relatively more corrupt and economically unequal countries, EIs are considered less effective, possibly affecting the potential for EIs in certain contexts.
Road transport imposes negative externalities on society. These externalities include environmental and road damage, accidents, congestion, and oil dependence. The cost of these externalities to society is in general not reflected in the current market prices in the road transport sector.An efficient mobility model for the future must take into account the true costs of transport and its regulatory framework will need to create incentives for people to make sustainable transport choices. This paper discusses the use of economic instruments to correct road transport externalities, but gives relatively more weight to the problem of carbon emissions from road transport, as this is particularly challenging, given its global and long-term nature.Economics offers two types of instruments for addressing the problem of transport externalities: command-and-control and incentive-based policies.Command-and-control policies are government regulations which force consumers and producers to change their behaviour. They are the most widely used policy instruments. Examples include vehicle emission and fuel standards in the US as well as driving or parking restrictions in Singapore. The implementation cost of these instruments to the government is small. Although from an economic perspective these policies often fail to achieve an efficient market outcome, the presence of political constraints often make them the preferred option, in terms of feasibility and effectiveness.Economic theory shows how policies, which affect consumption and production incentives, can be used to achieve the optimal outcome in the presence of externalities. Incentive-based policies function within a new or an altered market. We first examine incentive-based policies, which cap the aggregate amount of the externality, such as carbon emissions, by allocating permits or rights to the emitters. The emitters are then free to trade their permits amongst them. The permit allocation mechanism is important–although market efficiency would be satisfied by an auction, political influences usually favour a proportional allocation based on historic emissions. We discuss EU ETS as an example of a cap-and-trade system, however, no such policy for CO2 emissions in road transport has been implemented anywhere in the world to date.Fiscal instruments are, like command-and-control, widely used in road transport, because they are relatively cheap and simple to implement. They include the use of taxes and charges in order to bridge the gap between private and the social costs and, in principle, can lead to an efficient market solution. Registration, ownership, fuel, emissions, usage taxes, and parking and congestion charges have been implemented in many countries around the world. On the other side of the spectrum, subsidies can be given to those scrapping old cars and buying fuel-efficient vehicles. Some cities, such as London, have implemented congestion charges and many states in the United States have introduced high occupancy lanes. Other interesting possibilities include pay-as-you-drive insurance and other usage charges. However, the size and scope of taxes and subsidies are determined by governments, and because of their imperfect knowledge of the market the outcome is still likely to be inefficient.Governments have many effective economic instruments to create a sustainable road transport model. These instruments can be used separately or together, but their implementation will be necessary in the nearest future.
Environmental economists have seen their ideas translated into the rough-and-tumble policy world for over two decades. They have witnessed the application of economic instruments to several environmental issues, including preserving wetlands, lowering lead levels, and curbing acid rain. This essay examines the impact of the rise of economics in the policy world on the making of environmental policy. I focus on two related, but distinct phenomena—the increasing interest in the use of incentive-based mechanisms, such as tradable permits, to achieve environmental goals; and the increasing interest in the use of analytical tools such as benefit–cost analysis in regulatory decision making.I argue that economists and economic instruments have had a modest impact on shaping environmental, health, and safety regulation, but that economists will play an increasingly important role in the future. Although the role of economics is becoming more prominent, it does not follow that environmental policy will become more efficient. This apparent inconsistency can be explained by the political economy of environmental policy.
In this essay, we describe some important themes in energy and environmental policy. There are two main reasons for our interest in these policies. First, such policies will likely be important in the coming decades as issues related to climate change and energy security come to the fore. Second, there are important lessons to be learned from a careful review of the actual performance of energy and environmental policies. We undertake a selective survey of the literature to highlight what is known about the efficiency of particular kinds of policies, laws and regulations in these areas.
Our knowledge about economic incentive approaches to pollution control has grown rapidly in the two decades in which they have received serious analytical attention. Not only have the theoretical models become more focused and the empirical work more detailed, but we have now had over a decade of experience with emissions trading in the U.S. and emission charges in Europe. As the world community becomes increasingly conscious of both the need to tighten environmental controls and the local economic perils associated with tighter controls in a highly competitive global marketplace, it seems a propitious time to stand back and to organize what we have learned about this practical and promising approach to pollution control that may be especially relevant to current circumstances. This paper draws upon economic theory, empirical studies, and actual experience with implementation to provide a brief overview of some of the major lessons we have learned about two economic incentive approaches--emissions tradi Copyright 1990 by Oxford University Press.
This paper provides a critique of broad aggregate proposals to reduce the regulatory burden. It argues that the public debate about regulatory reform and red tape is loose and general, with little regard for the complex ways in which regulation imposes costs and benefits on the economy. Although there are theoretical reasons to expect regulation to be in excess supply, there is little empirical analysis to link aggregate regulation with productivity and economic growth. Regulation is itself a public good, and many aspects of economic efficiency require regulation to address market failures. The main efficiency issues are better addressed through a disaggregated approach, focusing on when, where, and how to regulate, rather than on crude aggregate estimates of the total burden. The design of regulation needs to take account of regulatory capture, and it is argued that market-based instruments and independent regulatory bodies tend to reduce the scope for capture. The incentives and employment rules governing regulatory institutions are also discussed. In ignoring these disaggregated regulatory design problems, crude aggregate targets for the reduction of regulation, and rules such as ‘one in, one out’ may be counter-productive.