Working Paper

Environmental Law and Public Policy

Jun 8, 2004 | Richard L. Revesz, Robert N. Stavins


This chapter provides an economic perspective of environmental law and policy with regardto both normative and positive dimensions. It begins with an examination of the central problemin environmental regulation: the tendency of pollution generators in an unconstrained marketeconomy to externalize some of the costs of their production, leading to an inefficiently largeamount of pollution. We examine the ends of environmental policy, that is, the setting of goals andtargets, beginning with normative issues, notably the Kaldor-Hicks criterion and the related methodof assessment known as benefit-cost analysis. We examine this analytical method in detail,including its theoretical foundations and empirical methods of estimation of compliance costs andenvironmental benefits. We include a review of critiques of benefit-cost analysis, briefly examinealternative approaches to analyzing the goals of environmental policies, and survey the efforts ofthe Federal governmental to employ these analytical methods.<p><p>The chapter also examines in detail the means of environmental policy, that is, the choiceof specific policy instruments, beginning with an examination of potential criteria for assessingalternative instruments, with particular focus on cost-effectiveness. The theoretical foundations andexperiential highlights of individual instruments are reviewed, including conventional, commandand-control mechanisms, economic incentive or market-based instruments, and liability rules. Inthe economic-incentive category, we consider pollution charges, tradeable permit systems, marketfriction reductions, and government subsidy reductions. Three cross-cutting issues receive attention:implications of uncertainty for instrument choice; effects of instrument choice on technologicalchange; and distributional considerations. We identify a set of normative lessons in regard to design,implementation, and the identification of new applications, and we examine positive issues,including three phenomena: the historical dominance of command-and-control; the prevalence innew proposals of tradeable permits allocated without charge; and the relatively recent increase inattention given to market-based instruments.<p><p>Finally, the chapter turns to the question of how environmental responsibility is and shouldbe allocated among the various levels of government. We provide a positive review of theresponsibilities of Federal, state, and local levels of government in the environmental realm, plusa normative assessment of this allocation of regulatory responsibility. We focus on three argumentsthat have been made for Federal environmental regulation: competition among political jurisdictionsand the race to the bottom; transboundary environmental problems; and public choice and systematicbias.