Market-based environmental policies

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Resources for the Future


Some eighty years ago, economists first proposed the use of corrective taxes to internalize environmental and other externalities. Fifty years later, the portfolio of potential economic-incentive instruments was expanded to include quantity-based mechanisms tradable permits. Thus, economic-incentive approaches to environmental protection are clearly not a new policy idea, and over the past two decades, they have held varying degrees of prominence in environmental policy discussions. This paper summarizes U.S. experiences with such market-based policy instruments, including: pollution charges; deposit-refund systems; tradable permits; market barrier reductions; and government subsidy reductions. No particular form of government intervention, no individual policy instrument whether market-based or conventional is appropriate for all environmental problems. Which instrument is best in any given situation depends upon a variety of characteristics of the environmental problem, and the social, political, and economic context in which it is being regulated. There is no policy panacea. Indeed, the real challenge for bureaucrats, elected officials, and other participants in the environmental policy process comes in analyzing and then selecting the best instrument for each situation that arises. [JEL, Q28].


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Tariffs, Economic policy, Environmental impacts, Common markets, Environmental services, Trade regulations, Pollution control, Environmental law, Market-based instruments, Pigovian taxes, Tradable permits, Deposit-refund systems., Governance


Resources for the Future, Discussion Paper 98-26