Question

Comment critically: It is said that ‘no purely-incentive based environmental policy would be fully affective in resolving environmental resource-use issues unless they are a combination of command-and-control and incentive-based policies.’

Answer 1

Command and control regulation have been traditionally used by developed countries as instruments that can be relied upon for the implementation of environmental policies, these include prohibitions, standards, effluent charges and permit programs. Effluent charges have been a tool levied on pollution discharge by countries like France and Germany. Effluent charges and Germany's transferable permits are examples of "old" economic tools of environmental policy, however, because they are either pure financing instruments or operate primarily as a dependent element of command and control regulation.

These policies do not make full use of the incentive based market forces that can be used in the environmental framework policy. The ‘traditional’ tools do not use modern economic and fiscal instruments and have majorly served as the precursors of the incentive based environmental system that is yet to come. The experience of the old developed countries with just the command and control policies has been mixed and these policies have somewhat been less effective in comparison to what was forecasted by some optimistic environment economists and policy makers. Command and control policies have been found to be fairly rigid and tend to set statutory limits on the pollution levels and also have structures like transferable pollution permits in place. But it has been often found that industries under this regime are allowed to pollute recklessly within a certain limit without trying to be environmentally conscious.

There has been a growing understanding that market based incentives can play an important role in bringing down the pollution levels and can be the new way forward in framing the environmental economic policy. For example, taxes are indirect instruments which not only require less monitoring but also can be used as a tool for revenue generation. A charge system is similar; both these instruments try to financially de-incentivize polluting. It’s been empirically proven that command control policies can be difficult to enforce but at the same market based incentivizing policies need government regulation as well as good policies and enforcement

Regulatory Tool	Direct Instruments	Indirect Instruments
Economic Incentives	Emission fees Marketable permits	Taxes Subsidies
Command and Control	Emissions Standards	Technology Standards

If we consider an ideal world, market based incentives without government interference will give us the maximum benefit with the most optimum level of pollution.

Let’s consider a case of perfect property right along with perfect information. In this idealized setting al the environmental goods are allotted to specific individuals separately and they can enforce using the legal systems the typical property rights to use, trade and exclude. In this world, the social welfare function is completely specified, because of which the governments will be able to always maximize the net value of the social welfare. In this scenario, since the information costs are always very low, the level of pollution as well as the cost and benefits distribution is always known.

In this case scenario, level of pollution abatement is at which the marginal benefit will be equal to marginal cost. So if we consider the case of perfect markets, information and perfectly specified property rights, government intervention and hence command and control policies will not be needed to enhance efficiency and protect the environment. Because of perfect markets, there are no market failures that need correction. If the government does mandate pollution reduction it would produce more costs than benefits.

But we do not live in an ideal world where perfect markets with perfect information exist. With asymmetrical information and imperfect property rights, market failures are bound to happen and that is why government regulation is required to correct these market failures. Command and control measures have been seen to work in areas where pollution is at large and can be easily monitored. It has also been seen that there will certain industrial influence over the governments from industries to go forward with command and control policies. However, market based incentives are good at controlling even smaller levels of pollutions while trying to de-incentivize pollution and sensitizing society against it. But a mixture of both is what will work the best as a way to go forward. Without government regulation, free market based incentive schemes will fail and no market corrections will happen. So, a combination of both is what the future environmental policy framework needs.