Working Paper

A Tale of Two Market Failures: Technology and Environmental Policy

Oct 22, 2004 | Adam B. Jaffe, Richard G. Newell, Robert N. Stavins


Market failures associated with environmental pollution interact with market failures associatedwith the innovation and diffusion of new technologies. These combined market failures provide astrong rationale for a portfolio of public policies that foster emissions reduction as well as thedevelopment and adoption of environmentally beneficial technology. Both theory and empiricalevidence suggest that the rate and direction of technological advance is influenced by market andregulatory incentives, and can be cost-effectively harnessed through the use of economicincentivebased policy. In the presence of weak or nonexistent environmental policies,investments in the development and diffusion of new environmentally beneficial technologiesare very likely to be less than would be socially desirable. Positive knowledge and adoptionspillovers and information problems can further weaken innovation incentives. Whileenvironmental technology policy is fraught with difficulties, a long-term view suggests a strategyof experimenting with policy approaches and systematically evaluating their success.