The choice of regulatory instruments in environmental policy

TitleThe choice of regulatory instruments in environmental policy
Publication TypeJournal Article
Year of Publication1998
AuthorsKeohane, NO, Revesz RL, Stavins RN
JournalHarvard Environmental Law Review
ISBN Number0147-8257

This paper tries to evaluate the role of the market mechanism in environmental management and warns against reductionist views on the causes and remedies of environmental damages. According to some of these views, proper pricing of the environment and extensive use of market mechanisms in environmental management would solve environmental problems. But various conditions tell against such simplifications, namely: the complex causality behind environmental damages; the complexity of the functions and values of nature; as well as limitations of the market mechanism in coping with the functions and services of nature. Several of those limitations—the difficulties of defining and enforcing property rights to nature's functions and services; the pervasiveness of externalities conditioned by the public goods characteristics of many environmental functions and values; the difficulties in enticing, processing and using information about environmental goods; and the high transaction costs caused by all these circumstances—often rule out contracts and trading of environmental services. It is less known that the basic cause of market existence and extension, namely specialization and division of labour, have negative environmental effects. With respect to environmental policy, conceptual problems are analyzed. While all kinds of environmental management mechanisms have a regulatory function, only quantity mechanisms, as a subset of incentive mechanisms, are market mechanisms. The choice of relevant environmental policy instrument is conditioned by many considerations. The issue of the superior efficiency properties of market mechanisms in environmental management is not yet settled satisfactorily; extensive empirical tests are still lacking.