Economic Theory of Environmental Policy

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Economic Theory of Environmental Policy

• David Letson
• University of Miami

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Main Points

• Pollution as an externality.
• Hayeks coordination problem.
• Coases bargaining solution.
• Implications for policy design.

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Pollution as an Externality

• Externality a loss not compensated.
• Pollution
• a physical effect on the environment and,
• second, a human response.

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Market failure raises questions

• How should we allocate resources?
• What is property?
• Non-excludability implies overuse.

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Hayeks coordination problem

• Interdependence of decisions.
• Whether to intervene and how.
• Stringency.
• Centralized versus decentralized approaches.

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Decentralized Approaches

• Have we exhausted useful regulatory strategies?
• Easy, obvious offenders have been addressed.
• Technological limits.
• Hostility results in costly litigation.
• Who knows best?

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When is decentralized not best?

• If decisions are inter-dependent.
• If people do not cooperate.

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Ronald Coase

• Efficient solution as a bargain.
• Symmetric result.
• A patch for the missing market.
• Negotiation
• As alternative to intervention.
• As means of intervention.

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Criticisms

• Bargaining is not free
• Extent of market
• Strategic behavior
• Imperfect competition
• Wealth effects
• Nonconvexity

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Effluent Taxes

• Arthur Pigou.
• Equalizes MC of abatement across sources.
• Comparison to subsidies.
• Revenue recycling.

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Tradable permits

• Comparison to command and control.
• Better than effluent taxes?
• Example of Title IV in 1990 Clean Air Act

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How to interpret Coase?

• Strictly? Implies no public intervention.
• Coases original intent, in a 1988 article.
• Less strict interpretation High transactions
  costs may justify intervention.

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Coases Contribution (I)

• Delegate decisions, even within regulations
• Project XL,
• Toxics Release Inventory,
• Brownfields,
• Common Sense Initiative,
• Community-based Environmental Protection,
• Pollution Prevention.

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Coases Contribution (II)

• USEPA Administrator Carol Browner Providing the
  public with basic environmental information
• allows businesses to eliminate inefficiencies
  that create pollution and reduce profits, and
• allows citizens to participate effectively in
  decisions that affect their families and
  communities.

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Conclusions

• How best to protect environment?
• Decentralized approach attractive.
• Delegate decisions to those who know more.