Instrument Choice: Interaction among Different Economic Instruments

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Policy mixing refers to deliberate or incidental contact between different policy instruments. Sometimes instruments have beneficial, synergistic effects on one another, while at other times effects are redundant or even contradictory. When deliberate, the combination of different economic instruments – taxes with subsidies, or taxes with tradable permits – can help policymakers to calibrate policy more precisely. In designing policy, policymakers are generally careful to guard against unexpected contact between instruments that might bring about unintended consequences.

Increasingly, when policies are mixed together, design considerations are organized by five sets of concerns: static concerns, dynamic concerns, institutional demands, political dimensions and risk (Johannsen, 2002). The unanticipated interaction of different economic instruments is considered a dynamic concern.

The literature in the sections that follow suggests, and compares the merits of, different economic instruments and their combination. It includes both case studies and theoretical analyses.