CHOICE AMONG POLICY INSTRUMENTS FOR POLLUTION CONTROL
Giandomenico Majone
February 1976
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POLICY ANALYSIS. f o r t h c o m i r l e
Choice Among P o l i c y I n s t r u m e n t s For P o l l u t i o n C o n t r o l
Giandomenico Majone
I n t e r n a t i o n a l I n s t i t u t e f o r Applied Systems A n a l y s i s , Laxenburg, A u s t r i a
A b s t r a c t
T h i s paper d i s c u s s e s a l t e r n a t i v e approaches t o t h e problem of p o l l u t i o n c o n t r o l , from t h e p o i n t of view of a c l o s e d model i n whic.h r e g u l a t o r s , r e g u l a t e d , and o t h e r i n t e r e s t groups i n t e r a c t i n a s i n g l e d e c i s i o n s t r u c t u r e . I t i s argued t h a t p o l i c y i n s t r u m e n t s cannot b e s e l e c t e d o n l y , o r even p r i m a r i l y , on t h e b a s i s of t h e i r f o r m a l p r o p e r t i e s , f o r t h e s e a l l o w a number of d i f f e r e n t , o f t e n con- f l i c t i n g i n s t i t u t i o n a l r e a l i z a t i o n s . The c r u c i a l c h o i c e s i n v o l v e n o t t h e i n s t r u - ments t h e m s e l v e s , b u t i n s t i t u t i o n a l l y determined ways of o p e r a t i n g them. But t o d i s c u s s i n s t i t u t i o n a l c h o i c e a d e q u a t e l y , t h e u s u a l model i n which p e o p l e p u r s u e t h e i r s e l f - i n t e r e s t w i t h i n exogenously determined r u l e s must b e e x t e n d e d t o cover t h e d e t e r m i n a t i o n of t h e r u l e s t h e m s e l v e s . The comparison between, s a y , an un- c o r r u p t e d system of e f f l u e n t c h a r g e s , and r e g u l a t o r y machinery c a p t u r e d by s p e c i a l i n t e r e s t s i s t h e n s e e n t o b e a s p e c i o u s one. Where e f f l u e n t c h a r g e s have been used, t h e y have proved t o b e a s s u b j e c t t o b a r g a i n i n g and a s c o n d i t i o n e d by
c o n s i d e r a t i o n s of p o l i t i c a l and a d m i n i s t r a t i v e expediency a s s t a n d a r d s , l i c e n s e s , and o t h e r r e g u l a t o r y measures.
1. THE INSTITUTIONAL CHOICE APPROACH
C a r e f u l a n a l y s i s of r e c e n t e n v i r o n m e n t a l p o l i c i e s i n t h e United S t a t e s and i n Europe r a i s e s i s s u e s t h a t r e q u i r e a c r i t i c a l r e e x a m i n a t i o n of t h e com- monly a c c e p t e d model of ~ u b l i c d e c i s i o n making. Although t h e box of p o l i c y t o o l s h a s been s i g n i f i c a n t l y e n r i c h e d by a number of c l e v e r t e c h n i q u e s pro- posed by economists and o t h e r p o l i c y a n a l y s t s o v e r t h e l a s t t e n o r f i f t e e n y e a r s , l e g i s l a t o r s and a d m i n i s t r a t o r s show l i t t l e i n t e r e s t i n t h e new i n s t r u - ments, and c o n t i n u e t o r e l y l a r g e l y on methods ( ~ r i m a r i l y of t h e r e g u l a t i o n l e n - forcement v a r i e t y ) whose shortcomings have been r e p e a t e d l y p o i n t e d o u t .
I n t h e few i n s t a n c e s where more s o p h i s t i c a t e d t o o l s have been used ( l i k e e f f l u e n t c h a r g e s i n France and t h e N e t h e r l a n d s ) , t h e y have supplemented, r a t h e r t h a n r e p l a c e d , t h e t r a d i t i o n a l a p p r o a c h e s . Moreover, t h e new i n s t r u - ments have n o t produced, s o f a r , t h e r e s u l t s t h a t had been e x p e c t e d on t h e b a s i s of t h e i r t e c h n i c a l p r o p e r t i e s . Nor have t h e y brought about t h e pro- found changes i n p o l i c y making t h a t t h e i r a d v o c a t e s had p r e d i c t e d ; t h e i n - j e c t i o n of new wine i n o l d i n s t i t u t i o n a l b o t t l e s has n o t s i m p l i f i e d , b u t a c t u a l l y f u r t h e r complicated a n a l r e a d y confused r e g u l a t o r y framework.
The d i s a p p o i n t m e n t of t h e tool-makers i s u n d e r s t a n d a b l e ; l e s s s o i s t h e i r f a i l u r e t o r e c o g n i z e t h e inadequacy of t h e model of t h e policy-making p r o c e s s t h a t u n d e r l i e s t h e i r p r o p o s a l s . A s Buchanan h a s p o i n t e d o u t 1
,
i nt h e t r a d i t i o n a l economic approach t h e p u b l i c c h o i c e s t h a t d e f i n e t h e con-
- -
1. James M. Buchanan, "Toward A n a l y s i s of Closed ~ e h a v i o r a l systems", i n Buchanan, J . M. and T o l l i s o n , R. D. e d i t o r s , Theory Of P u b l i c c h o i c e , Ann Arbor, Mich.: U n i v e r s i t y of Michigan P r e s s , 1972, pp. 11-26.
s t r a i n t s w i t h i n which m a r k e t b e h a v i o r i s a l l o w e d t o t a k e p l a c e , a r e assumed t o b e made e x o g e n o u s l y , by o t h e r s t h a n t h o s e whose b e h a v i o r i s b e i n g s t u d i e d . I n s p i t e o f t h e b e l a t e d d i s c o v e r y by e c o n o m i s t s of t h e " p o l i t i c s of r e g u l a t i o n " , t h i s a s s u m p t i o n u n d e r l i e s most economic a n a l y s e s o f e n v i r o n m e n t a l p o l i c i e s , a t l e a s t i n t h e i r more f o r m a l a s p e c t s . The a r t i f i c i a l s e p a r a t i o n o f t h e b e h a v i o r of i n d i v i d u a l a c t o r s i n t h e m a r k e t p l a c e , where t h e i n s t i t u t i o n a l c o n s t r a i n t s a r e g i v e n , from t h e i r b e h a v i o r i n t h e p o l i t i c a l a r e n a , where t h o s e c o n s t r a i n t s a r e e s t a b l i s h e d , impedes s e r i o u s d i s c u s s i o n of e n v i r o n m e n t a l p o l i c i e s , a t t h e d e s c r i p t i v e and a t t h e n o r m a t i v e l e v e l . D e s c r i p t i v e l y , a c o n s i d e r a b l e amount.
of e m p i r i c a l e v i d e n c e , some of which w i l l b e reviewed h e r e , c l e a r l y shows t h a t p e o p l e p u r s u e t h e i r s e l f - i n t e r e s t n o t o n l y w i t h i n g i v e n r u l e s , b u t a l s o by i n - v e s t i n g r e s o u r c e s t o c h a n g e t h e r u l e s t o t h e i r own b e n e f i t . And once t h i s f a c t i s r e c o g n i z e d , " n o r m a t i v e economics e n t e r s a n Alice-in-Wonderland world i n which p o l i c i e s t h a t a r e d e s i r a b l e i n t h e t r u n c a t e d model l o s e much o f t h e i r a p p e a l . 112
I n t h i s p a p e r I examine a l t e r n a t i v e a p p r o a c h e s t o t h e p r o b l e m s of p o l l u - t i o n c o n t r o l from t h e v i e w p o i n t o f a " c l o s e d " model i n which r e g u l a t o r s , re- g u l a t e d , and o t h e r i n t e r e s t g r o u p s i n t e r a c t i n a s i n g l e d e c i s i o n s t r u c t u r e . The model i s d e r i v e d from t h e " p u b l i c c h o i c e " o r " i n s t i t u t i o n a l c h o i c e " t h e o r i e s d e v e l o p e d r e c e n t l y a s n e c e s s a r y complements o f t h e t r a d i t i o n a l t h e o r y o f m a r k e t
transaction^.^
The main o b j e c t i v e of a t h e o r y of i n s t i t u t i o n a l c h o i c e i s " t o- - - - -- -. . . .. --
2. V i c t o r P . Goldberg, " I n s t i t u t i o n a l Change And The Q u a s i - I n v i s i b l e Hand", The J o u r n a l Of Law And Economics, XVII(2), O c t o b e r 1974, pp. 461-492.
3 . See i n p a r t i c u l a r , Buchanan and T o l l i s o n , op. c i t . and Goldberg, op.
c i t . I n t r e a t i n g t o g e t h e r t h e s e two a p p r o a c h e s , I am n o t o v e r l o o k i n g t h e s i g n i f i c a n t d i f f e r e n c e s t h a t e x i s t between them, e s p e c i a l l y w i t h r e s p e c t t o t h e a s s e s s m e n t o f p o l i c i e s f o r c o n t r o l l i n g "market f a i l u r e s . " But f o r t h e
d e t e r m i n e how e x t e n d i n g t h e domain of s e l f - i n t e r e s t t o t h e d e t e r m i n a t i o n of t h e r u l e s themselves changes t h e r e l a t i v e d e s i r a b i l i t y of c e r t a i n i n s t i t u t i o n a l arrangements. l v 4 For i n s t a n c e , t h e amount of r e s o u r c e s t h a t a group w i l l have t o i n f l u e n c e r u l e changes depends on i t s a b i l i t y t o induce p o t e n t i a l f r e e r i d e r s t o c o n t r i b u t e t o t h e group, and upon t h e a b i l i t y of opposing groups t o c o n s t r a i n t h e i r £re,? r i d e r s . Hence, i n t e r e s t groups have a n i n c e n t i v e t o i n v e s t r e s o u r c e s t o r e s t r u c t u r e t h e r u l e s c o n c e r n i n g c o a l i t i o n s ; i n Goldberg's a p t e x p r e s s i o n , t h e r u l e s "both d e f i n e t h e e x i s t i n g environment f o r c h o i c e and p r o v i d e an a r e n a f o r c o n f l i c t . " C i t i z e n groups, f o r example, w i l l p r e s s f o r t h e p o s s i b i l i t y of c l a s s a c t i o n i n c o u r t , by which an i n d i v i d u a l o r o r g a n i z a - t i o n c a n s u e on b e h a l f of l a r g e numbers of s i m i l a r l y a f f e c t e d c i t i z e n s , i n - s t e a d of t h e s o - c a l l e d n u i s a n c e d o c t r i n e , whereby a n i n d i v i d u a l c a n s u e a p o l l u t e r o n l y i f he can show t h a t he i s u n i q u e l y a f f e c t e d by h i s a c t i v i t i e s .
S i m i l a r l y , d i f f e r e n t i a l l y d i s t r i b u t e d r e s o u r c e s (money, v o t e s , t e c h n i c a l e x p e r t i s e , s o c i a l p r e s t i g e ) a r e v a l u e d d i f f e r e n t l y under a l t e r n a t i v e i n s t i t u - t i o n a l arrangements. Thus, groups w i l l a t t e m p t t o b r i n g a b o u t r u l e changes t h a t reward t h e r e s o u r c e s i n which t h e y have a comparative a d v a n t a g e . Even j u r i s d i c t i o n a l b o u n d a r i e s a r e s u b j e c t t o m a n i p u l a t i o n by people t r y i n g t o change them i n t h e i r own s e l f - i n t e r e s t . Gerrymandering i s an obvious example, b u t s i m i l a r forms of j u r i s d i c t i o n - c h a n g i n g b e h a v i o r can be found i n t h e en- v i r o n m e n t a l f i e l d , s e e s e c t i o n 4.
- - -- -
p u r p o s e of t h e p r e s e n t d i s c u s s i o n , i t i s t h e commonality of t h e b a s i c i n s i g h t s t h a t i s i m p o r t a n t . Lindblom's work on d e c i s i o n making through mutual a d j u s t - ment should a l s o be mentioned i n t h i s c o n n e c t i o n .
4. V. P . Goldberg, op. c i t . , p. 464.
The a t t i t u d e s of most e c o n o n ~ i s t s toward such m a n i p u l a t i o n s of t h e in- s t i t u t i o n a l framework have been of two k i n d s : t h e y have e i t h e r n e g l e c t e d t h e phenomenon, b e i n g c o n t e n t , a s Knut Wicksell remarked many y e a r s ago, w i t h assuming t h e p r e s e n c e of a b e n e v o l e n t d i c t a t o r c a p a b l e of d e f e n d i n g t h e p u b l i c i n t e r e s t more e f f e c t i v e l y t h a n a n i m p e r f e c t democratic system; o r a t t r i b u t i n g t h e c a u s e of t h e e v i l t o t h e c o r r u p t i b i l i t y of t h e i n s t r u m e n t s used by t h e p o l i c y maker, t h e y have proposed mechanisms t h a t a r e supposedly f a i l - s a f e w i t h r e s p e c t t o t h e p o s s i b i l i t y o f p o l i t i c a l i n t e r f e r e n c e . 5 A c t u a l l y , b o t h a t t i t u d e s o f t e n c o e x i s t i n t h e same w r i t e r .
The c a p t u r e of t h e r e g u l a t o r y commissions by t h e very i n t e r e s t s they a r e supposed t o c o n t r o l , and t h e u l t i m a t e f u t i l i t y of economic r e g u l a t i o n , have been r e p e a t e d l y d i s c u s s e d , and t o some e x t e n t documented.6 These f a c t s have been i n t e r -
5. A t h i r d approach h a s been s u g g e s t e d by Goldberg: e x h o r t a t i o n o r pro- p a g a n d i z i n g
--
t r y i n g t o induce people t o a c t o t h e r t h a n i n t h e i r immediate s e l f - i n t e r e s t o r simply f o o l i n g them i n t o a c t i n g o t h e r w i s e . R e g u l a t i o n s , l i c e n s e s , s u b s i d i e s , a c c e l e r a t e d d e p r e c i a t i o n a r e n o t good f o r s o c i e t y , and t h e r e f o r e b e n e f i c i a r i e s should n o t u s e t h e i r r e s o u r c e s t o buy them.6. For a sample of t h e r e l e v a n t l i t e r a t u r e , s e e George J . S t i g l e r and C l a i r e F r i e d l a n d , "What Can R e g u l a t o r s R e g u l a t e ? The Case Of E l e c t r i c i t y " , The J o u r n a l Of Law And Economics,,V, October 1962, pp. 1-16; P a u l W. Mac Avoy, e d . The C r i s i s Of The R e g u l a t o r y commissions, New York: W. W . Norton, I n c . , 1970; George J . S t i g l e r , " The Theory Of Economic ~ e ~ u l a t i o n " , The B e l l J o u r n a l Of Economics And Management S c i e n c e , v o l . 2, no. 1, S p r i n g 1971, pp. 3-21;
Richard A. P o s n e r , "Theories Of Economic Regulation", The B e l l J o u r n a l Of Economics And Management S c i e n c e , v o l . 5 , no. 2, Autumn 1974, p p = 335-358-
preted as providing additional confirmation of the virtues of the market, and of the need to reduce governmental intervention. This critical literature has its counterpart in many analyses of environmental problems, where the administra- tive approach to pollution control (prohibitions, standards, incentives, and so on) has been severely criticized for its lack of effectiveness, and for its tendency to become "a political process entailing bargaining between parties of unequal power ."7 Effluent charges and related market-oriented techniques have been proposed as alternative approaches that, by their automatism and in conjunc- tion with the integrated management of river basins and airsheds, "would reduce the scope for administrative discretion and bargaining. It8
But these normative conclusions overlook one important point: the same forces that influence and distort the regulatory framework, will also affect other approaches, by the same or by different methods. The comparison between, say, an uncorrupted system of effluent charges, and a regulatory machinery captured by special interests, is a specious one.' Where effluent charges have been used, for instance, in France, they have proved to be as subject to bargaining and as conditioned by considerations of political and administrative expediency, as standards, licenses, and other regulatory measures. Thus, the search for a system that "would resolve most of the political conflict over the environment
-.
7. A. Myrick Freeman 111, Robert H. Haveman, Allen V. Kneese, The -
Economics Of Environmental Policy, New York: John ~ i l e y and Sons, Inc., 1973, p. 105.
8. Ibid. p. 170.
9. Goldberg makes the same point in connection with recent theories
of economic regulations.
i n a h i g h l y v i s i b l e way", i n t h e same s e n s e i n which PPBS was supposed t o l i f t t h e b u d g e t a r y p r o c e s s o u t of t h e morass of p o l i t i c a l compromise, i s bound t o l e a d t o d i s a p p o i n t m e n t s and, i n t h e f i n a l a n a l y s i s , t o d o u b t s " a s t o t h e a b i l i t y of a p l u r a l i s t p o l i t i c a l system t o make w i s e c h o i c e s i n i s s u e s of t h i s s o r t . 1110
I f b a r g a i n i n g i s i n e v i t a b l e because of t h e d i s a g r e e m e n t o v e r v a l u e s , in- s u f f i c i e n t e c o l o g i c a l knowledge, c o m p e t i t i o n w i t h o t h e r p u b l i c programs, and s e r i o u s d i s t r i b u t i o n a l consequences, t h a t c h a r a c t e r i z e e n v i r o n m e n t a l p o l i c i e s , t h e n f o c u s i n g a t t e n t i o n on t h e p o s s i b i l i t i e s of improving t h e b a r g a i n i n g pro- c e s s , and t h e i n s t i t u t i o n a l framework w i t h i n which t h e p r o c e s s o p e r a t e s , seems a more c o n s t r u c t i v e and h o p e f u l approach. The a b i l i t y of t h e p o l i c y maker t o nudge t h e p r o c e s s toward d e s i r e d outcomes depends on h i s r e a l i s t i c a p p r e c i a - t i o n of i t s dynamics, and on t h e s o b e r assessmen.t of t h e d e g r e e s of freedom of t h e system. The a c t u a l outcomes of e n v i r o n m e n t a l p o l i c i e s a r e more s i g n i f i - c a n t l y a f f e c t e d by t h e i n s t i t u t i o n a l arrangements emerging from t h e p o l i t i c a l p r o c e s s t h e n by t h e t e c h n i c a l c h a r a c t e r i s t i c s of t h e i n s t r u m e n t s used. To u s e a s t a t i s t i c a l image, t h e " w i t h i n group" e f f e c t s (meaning t h e d i f f e r e n t i a l r e s u l t s o b t a i n e d when t h e same t o o l o p e r a t e s under d i f f e r e n t i n s t i t u t i o n a l c i r c u m s t a n c e s ) dominate t h e "between groups" e f f e c t s ( t h e r e s u l t s of d i f f e r e n t t o o l s used under a p p r o x i m a t e l y e q u a l c o n d i t i o n s ) . I n o t h e r words, t h e s i g n i f i c a n t c h o i c e i s n o t among a b s t r a c t l y c o n s i d e r e d p o l i c y i n s t r u m e n t s , b u t among i n s t i t u t i o n a l l y de- . t e r m i n e d ways of o p e r a t i n g them. Such a c h o i c e c a n n o t be made by f i a t : i t
r e s u l t s from t h e r e l a t i v e d i s t r i b u t i o n of power, t h e p o l i t i c a l c o n s t r a i n t s , and t h e s k i l l of t h e p o l i c y maker t o e x p l o i t whatever s l a c k r e m a i n s i n t h e
system. T h i s c o n c l u s i o n throws new l i g h t on t h e s y s t e m i c r a t i o n a l i t y of p o l i c i e s
-
10. Freeman, Haveman and Kneese, op. c i t . , p. 104.
t h a t would be r e j e c t e d on t h e b a s i s of some narrow c r i t e r i o n , such a s economic e f f i c i e n c y .
2. APPROACHES TO POLLUTION CONTROL
I n t h i s s e c t i o n I s h a l l review t h e major t o o l s of p o l l u t i o n c o n t r o l p o l i c y , under t h e headings: a ) r e g u l a t i o n , d i r e c t p u b l i c a c t i o n and sub- s i d i e s ; b) e f f l u e n t charges; c ) c o n t r a c t and r e d e f i n i t i o n of p r o p e r t y r i g h t s ; d ) o r g a n i z a t i o n .
Regulation may e i t h e r c o n s i s t of g e n e r a l r u l e s , o r of s p e c i f i c d e c i s i o n s on i n d i v i d u a l c a s e s ( d i r e c t i v e s ) . Some examples a r e e f f l u e n t s t a n d a r d s , l i c e n s e s , d e s i g n and p r o d u c t i o n norms, and p r o h i b i t i o n s . The p u b l i c a u t h o r i t i e s may a l s o d e c i d e t o i n t e r v e n e d i r e c t l y t o r e l i e v e t h e consequences of a p a r t i c u l a r l y s e r i o u s environmental c o n d i t i o n , o r t o augment environmental r e s o u r c e s through investment.
S u b s i d i e s and o t h e r forms of economic i n c e n t i v e s , such a s a c c e l e r a t e d d e p r e c i a - t i o n f o r t a x purposes, occupy an i n t e r m e d i a t e p o s i t i o n between r e g u l a t i o n and d i r e c t i n t e r v e n t i o n .
Among t h e r e g u l a t o r y t o o l s , e f f l u e n t o r emission s t a n d a r d s a r e probably t h e best-known and most f r e q u e n t l y used. l1 I n theory, e f f l u e n t s t a n d a r d s should . b e e s t a b l i s h e d on t h e b a s i s of t h e optimum l e v e l of environmental q u a l i t y (where m a r g i n a l t r e a t m e n t c o s t s e q u a l marginal damages, o r t o t a l c o s t of r e s i d u a l d i s - p o s a l i s a t a minimum) o r , a t l e a s t , on an e x p l i c i t ambient q u a l i t y s t a n d a r d .
-
---.- .--11. See my paper, "On The Logic Of Standard S e t t i n g I n H e a l t h And Re- l a t e d F i e l d s , " i n N.T.J. B a i l e y and M. Thompson, e d i t o r s , Systems A n a l y s i s of H e a l t h Planning, Amsterdam: North Holland P u b l i s h i n g Co., 1975, pp. 279-290.
i
I n p r a c t i c e , e f f l u e n t s t a n d a r d s a r e o f t e n a r b i t r a r y , i n t h e s e n s e t h a t t h e y a r e n o t r e l a t e d t o t h e achievement of s p e c i f i c g o a l s of e n v i r o n m e n t a l q u a l i t y , b u t a r e based on some r u l e of "good p r a c t i c e . " Whatever t h e b a s i s f o r d e c i d i n g on a t o t a l a l l o w a b l e q u a n t i t y of r e s i d u a l s d i s c h a r g e , d i f f i c u l t problems of im- p l e m e n t a t i o n a r i s e when t h e p u b l i c a u t h o r i t i e s have t o a l l o c a t e t h i s t o t a l among
t h e d i f f e r e n t d i s c h a r g e r s . For a g i v e n l e v e l of allowed d i s c h a r g e , t o t a l c o s t i s minimized when t h e m a r g i n a l t r e a t m e n t c o s t s of a l l d i s c h a r g e r s a r e e q u a l . But i n t h e absence of s u c h d e t a i l e d c o s t i n f o r m a t i o n , t h e a u t h o r i t i e s w i l l have t o r e l y on some r u l e of thumb ( e . g . e q u a l s t a n d a r d s f o r a l l ) t h a t i s h i g h l y un- l i k e l y t o c o r r e s p o n d t o a minimum-cost a l l o c a t i o n of d i s c h a r g e p e r m i t s .
E f f l u e n t c h a r g e s a r e o f t e n c o n s i d e r e d , p a r t i c u l a r l y by e c o n o m i s t s , t h e b e s t t o o l of e n v i r o n m e n t a l p o l i c y . The u n d e r l y i n g l o g i c i s s i m p l e and compelling.
I f t h e damage caused by d i f f e r e n t c o n c e n t r a t i o n s of r e s i d u a l s were known, t h e p u b l i c a u t h o r i t i e s would simply e s t a b l i s h a c h a r g e o r p r i c e e q u a l t o t h e m a r g i n a l damage f o r e a c h u n i t of r e s i d u a l s . P o l l u t e r s would t h e n d e c r e a s e t h e i r r e s i d u a l s f l o w s a s l o n g a s t h e m a r g i n a l c o s t of d o i n g s o was l e s s t h a n t h e p r i c e f o r d i s - c h a r g i n g , s e t t l i n g a t t h e optimum where m a r g i n a l t r e a t m e n t c o s t s e q u a l t h e c h a r g e . Even when t h e damage f u n c t i o n i s unknown, t h e u s u a l c a s e , t h e system c a n b e used, w i t h a ( p o l i t i c a l l y d e t e r m i n e d ) e n v i r o n m e n t a l q u a l i t y s t a n d a r d r e p l a c i n g t h e un- known damage f u n c t i o n ; however, knowledge of m a r g i n a l t r e a t m e n t c o s t s must b e .assumed. The c o r r e c t c h a r g e e q u a l s t h e m a r g i n a l t r e a t m e n t c o s t a t t h e p o i n t where
t h e m a r g i n a l t r e a t m e n t c o s t c u r v e meets t h e e n v i r o n m e n t a l q u a l i t y s t a n d a r d . I n e i t h e r c a s e , t h e e n v i r o n m e n t a l g o a l would b e r e a c h e d a t minimum s o c i a l c o s t .
With r e s p e c t t o economic e f f i c i e n c y and e n v i r o n m e n t a l e f f e c t i v e n e s s , e f f l u e n t c h a r g e s a r e t h e c o n v e r s e , s o t o s a y , of e f f l u e n t s t a n d a r d s . Given a s e t of ambient s t a n d a r d s and a p p r o p r i a t e enforcement p r o c e d u r e s , e f f l u e n t s t a n d - a r d s can always b e c a l c u l a t e d s o a s t o s a t i s f y t h e e n v i r o n m e n t a l o b j e c t i v e ; b u t
t h e r e i s no
why
of knowing t h a t t h e o b j e c t i v e i s met i n an e c o n o m i c a l l y e f f i c i e n t manner. On t h e o t h e r hand, f o r any given l e v e l o f e f f l u e n t c h a r g e s , t h e r e s u l t - i n g r e d u c t i o n i n p o l l u t i o n i s achieved a t t h e l e a s t c o s t , b u t t h e r e i s no g u a r a n t e e t h a t t h e c h a r g e s a r e s u f f i c i e n t t o meet t h e e n v i r o n m e n t a l s t a n d a r d s . However, any v i o l a t i o n of t h e ambient s t a n d a r d s can b e q u i c k l y d e t e c t e d , and t h e n , s o goes t h e argument, i t would s u f f i c e t o r a i s e t h e c h a r g e s u n t i l t h e s t a n d a r d s a r e s a t i s f i e d . The i n f o r m a t i o n n e c e s s a r y t o s e t c o r r e c t e f f l u e n t c h a r g e s i s n e v e r g r e a t e r t h a n t h a t r e q u i r e d f o r e f f l u e n t s t a n d a r d s , and i n many s i t u a t i o n s i t w i l l b e a c t u a l l y less. T h i s f o l l o w s from t h e f a c t t h a t i n o r d e r t o c a l c u l a t e t h e o p t i m a l c h a r g e s i t i s s u f f i c i e n t t o know t h e a g g r e g a t e volume of w a s t e f l o w s from t h e d i f f e r e n t p o l l u t i o n s o u r c e s , w h i l e t h e t o t a l volume would have t o b e d i s a g g r e g a t e d i n o r d e r t o e s t a b l i s h e f f l u e n t s t a n d a r d s c a p a b l e of a c h i e v i n g t h e same w a s t e r e d u c t i o n a t t h e same c o s t a s e f f l u e n t c h a r g e s . 12The n e x t group of p o l i c y i n s t r u m e n t s i s r e p r e s e n t a t i v e of a t t e m p t s t o i n - t e r n a l i z e e n v i r o n m e n t a l e x t e r n a l i t i e s through u t i l i z a t i o n of t h e e x i s t i n g l e g a l system, o r a b e t t e r d e f i n i t i o n and enforcement of p r o p e r t y r i g h t s . Whenever t h e c o s t of r e d u c i n g t h e damage i n f l i c t e d by a p o l l u t i o n - c r e a t i n g a c t i v i t y (by d e c r e a s i n g t h e s c a l e o r changing t h e t e c h n o l o g y of t h e o p e r a t i o n ) i s l e s s t h a n t h e b e n e f i t s c r e a t e d by t h e abatement, t h e r e a r i s e s t h e p o s s i b i l i t y of a con- t r a c t u a l s o l u t i o n . The p o l l u t e e s can a f f o r d t o pay t h e p o l l u t e r enough t o cover t h e abatement c o s t s , and i n s u c h a way t h a t t h e t r a n s a c t i o n i s advantageous f o r a l l p a r t i e s concerned.
12. See K.G. Maeler, Environmental Economics: A T h e o r e t i c a l I n q u i r y , B a l t i m o r e and London: The J o h n s Hopkins P r e s s , 1974, pp. 204-207, f o r some q u a l i f i c a t i o n s t o t h i s s t a t e m e n t .
It s h o u l d be n o t i c e d t h a t such a system of c o n t r a c t u a l payments ( o r
" b r i b e s " , a s t h e y a r e o f t e n c a l l e d ) could i n ~ r i n c i p l e a c h i e v e t h e same r e s u l t a s a scheme of o p t i m a l e f f l u e n t c h a r g e s . The " i n p r i n c i p l e " c h a r a c t e r of t h i s s t a t e m e n t must b e s t r e s s e d , however. Unless t h e number of p a r t i e s i s q u i t e s m a l l , t h e f a m i l i a r f r e e - r i d e r phenomenon w i l l a p p e a r . S i n c e i t i s t e c h n i c a l l y d i f f i c u l t t o e x c l u d e anyone from t h e b e n e f i t s of t h e p o l l u t i o n - a b a t e m e n t measures,
t h e i n c e n t i v e s t o c o n t r i b u t e t o t h e n e c e s s a r y payments a r e c o r r e s p o n d i n g l y re- duced. T h i s w i l l make t h e c o n t r a c t u a l s o l u t i o n i n f e a s i b l e w i t h o u t some a s s i s t a n c e from t h e s t a t e t o overcome t h e f r e e - r i d e r problem. Nor i s t h i s t h e o n l y d i f f i - c u l t y . How c a n one r u l e o u t t h e p o s s i b i l i t y t h a t t h e c o n t r a c t u a l s o l u t i o n may d e g e n e r a t e i n t o a form of b l a c k m a i l , w i t h one p a r t y c r e a t i n g p o l l u t i o n f o r t h e p u r p o s e of e x t o r t i n g payments from o t h e r s ? The answer i s t h a t p o l l u t e r s and p o l l u t e e s a r e assumed t o a c t w i t h i n a l e g a l framework t h a t d e t e r m i n e s t h e i r r e s p e c t i v e b a r g a i n i n g p o s i t i o n . 13
For i n s t a n c e , t h e e x i s t e n c e of a r i g h t of a p r i v a t e i n d i v i d u a l t o s e e k an i n j u n c t i o n o r t o s u e f o r t h e damage c r e a t e d by a p o l l u t i o n - g e n e r a t i n g a c t i v i t y w i l l s t r e n g t h e n h i s b a r g a i n i n g p o s i t i o n . But i n a s i t u a t i o n where one p o l l u t e r i n f l i c t s r e l a t i v e l y l i g h t damages on a l a r g e number of p e o p l e , t h e b a r g a i n i n g a d v a n t a g e c r e a t e d by t h e r i g h t i s more a p p a r e n t t h a n r e a l , i f n u i s a n c e a c t i o n s a r e p o s s i b l e o n l y on a case-by-case b a s i s ; f o r t h e c o s t s of c o u r t a c t i o n would p r o b a b l y exceed t h e expected b e n e f i t s . Hence ' w e c a n e x p e c t t h a t a good d e a l of e f f o r t w i l l be devoted t o make c l a s s a c t i o n s
p o s s i b l e , o r p e r h a p s t o i n t r o d u c e r e g u l a t i o n s f o r b i d d i n g c e r t a i n t y p e s of a c t i v i t y (e.g., smoke o r d i n a n c e s ) .
13. Ralph Turvey, "Side E f f e c t s Of Resources Use," i n A. C. Enthoven and A. M. Freeman 111, e d i t o r s , P o l l u t i o n , Resources And The ~ n v i r o n m e n t , New York: W. W. Norton, 1971, pp. 59-71.
I t i s now g e n e r a l l y r e c o g n i z e d t h a t t h e main d i f f i c u l t y i n i n t e r n a l i z i n g t h e c o s t s of e n v i r o n m e n t a l p o l l u t i o n i s t h e ambiguos s p e c i f i c a t i o n of e x c h a n g e a b l e p r o p e r t y r i g h t s i n media l i k e w a t e r o r a i r . D a l e s ' p r o p o s a l t o e s t a b l i s h a market i n p o l l u t i o n r i g h t s i s a n i n t e r e s t i n g a t t e m p t t o remove some of t h e a m b i g u i t y . 14 According t o t h i s p r o p o s a l , t h e government s e t s an upper l i m i t x
( i n e q u i v a l e n t t o n s ) t o t h e amounts of d i s c h a r g e i n t o t h e environment of a r e g i o n ( w a t e r b e i n g t h e e n v i r o n m e n t a l medium f o r which t h e p r o p o s a l h a s been o r i g i n a l l y advanced), f o r a g i v e n p e r i o d of t i m e . I t t h e n i s s u e s x p o l l u t i o n r i g h t s , o r l i c e n s e s , and p u t s them up f o r s a l e , r e q u i r i n g a t t h e same t i m e t h a t everyone who d i s c h a r g e s one e q u i v a l e n t t o n of w a s t e d u r i n g , s a y , a y e a r , s h o u l d hold one p o l l u t i o n r i g h t f o r t h e e n t i r e y e a r . I f x i s less t h a n t h e number of e q u i v a l e n t t o n s of w a s t e b e i n g c u r r e n t l y d i s c h a r g e d , t h e r i g h t s w i l l command a p o s i t i v e p r i c e , and a c o n t i n u o u s market w i l l d e v e l o p i n r e s p o n s e t o t h e c o m p e t i t i o n among b u y e r s and s e l l e r s of p o l l u t i o n r i g h t s .
The p r o p o s a l h a s c o n s i d e r a b l e m e r i t s . I t a c h i e v e s an e f f i c i e n t a l l o c a t i o n of r e s o u r c e s , even under q u i t e complex c i r c u m s t a n c e s ; l5 i t p r o v i d e s a p l a n n i n g t o o l t h a t u t i l i z e s , t o t h e maximum e x t e n t p o s s i b l e w i t h i n t h e framework of a n a r t i f i c i a l l y c r e a t e d market, t h e f l e x i b i l i t y p r o v i d e d by t h e p r i c e mechanism;
i t r e d u c e s a d m i n i s t r a t i v e c o s t s by r e l i e v i n g a d m i n i s t r a t o r s o f t h e n e c e s s i t y o f s e t t i n g a c h a r g e f o r p o l l u t i o n r i g h t s , and changing i C p e r i o d i c a l l y t o r e f l e c t ' r e g i o n a l economic growth and d e c l i n e . L a s t b u t n o t l e a s t , w h i l e a r e g u l a t o r y
14. J . H. Dales, P o l l u t i o n , P r o p e r t y , and P r i c e s , Toronto: U n i v e r s i t y of T o r o n t o P r e s s , 1968.
15. W. David Montgomery, "Markets I n L i c e n s e s And E f f i c i e n t P o l l u t i o n C o n t r o l Programs", J o u r n a l Of Economic Theory, 5, 1972, pp. 395-418.
a p p r o a c h i m p l i e s a kind o f s t a t u s - t e n u r e p r o p e r t y r i g h t t h a t c a n o n l y b e
t r a n s f e r r e d when t h e p r o p e r t y t o which i t a p p l i e s i s s o l d , t h e p r o p o s e d scheme s e p a r a t e s t h e p r o p e r t y r i g h t t o e n v i r o n m e n t a l u s e from t h e o t h e r a s s e t s o f t h e d i s c h a r g e r , t h e r e b y making t h e p r o p e r t y r i g h t f u l l y t r a n s f e r a b l e . T h i s i s i n agreement w i t h t h e p r e f e r e n c e f o r c o n t r a c t u a l s o l u t i o n s t h a t c h a r a c t e r i z e s l i b e r a l d e m o c r a c i e s .
D a l e s ' method p r e s e n t s a l s o a number of d i f f i c u l t i e s and d a n g e r s : t h e d e f i n i t i o n o f s u i t a b l e e n v i r o n m e n t a l r e g i o n s ; t h e s e l e c t i o n o f t i m e i n t e r v a l d u r i n g which t h e number of p o l l u t i o n r i g h t s i s f i x e d ; c o n t r o l c o s t s ; t h e p o s s i - b i l i t y t h a t l i c e n s e s may be hoarded i n a n a t t e m p t t o c r e a t e b a r r i e r s t o e n t r y and m o n o p o l i s t i c p o s i t i o n s ; t h e d a n g e r o f a n induced r e d u c t i o n i n i n d u s t r i a l m o b i l i t y . Even more i m p o r t a n t f o r a n a s s e s s m e n t o f t h e p r a c t i c a l s i g n i f i c a n c e of t h e p r o p o s a l , i s t h e f a c t t h a t t h e s y s t e m c a n o n l y work i f t h e government i s adamant i n i t s d e t e r m i n a t i o n n o t t o change t h e r i g h t s i s s u e d u r i n g t h e c h o s e n t i m e i n t e r v a l , r e g a r d l e s s of t h e p o l i t i c a l p r e s s u r e s t o d o s o t h a t c a n b e a n t i c i p a t e d . " P o l l u t i o n r i g h t s " , D a l e s w r i t e s , " a r e f u l l y t r a n s f e r a b l e pro- p e r t y r i g h t s , and any w e l c h i n g on t h e e n f o r c e m e n t o f t h e r i g h t would be a b r e a c h of t r u s t . " But one wonders b y which i n s t i t u t i o n a l means a n e n v i r o n - m e n t a l p o l i c y o f t h i s t y p e would s u c c e e d i n r e s o l v i n g t h e c o n f l i c t between i n t e g r i t y and e x p e d i e n c y t h a t h a s c h a r a c t e r i z e d , s a y , d i s c r e t i o n a r y f i s c a l p o l i c i e s o v e r t h e l a s t d e c a d e s . The a n a l o g y w i t h t h e d i f f i c u l t r e l a t i o n s b e t - ween t h e U.S. Congress, t h e c e n t r a l monetary a u t h o r i t i e s , and t h e e x e c u t i v e o v e r f i s c a l p o l i c i e s i s , I would a r g u e , a p e r t i n e n t one, and j u s t i f i e s a good d e a l o f s k e p t i c i s m i n t h i s r e s p e c t . I t i s known, f o r i n s t a n c e , t h a t on a number o f o c c a s i o n s , t h e F e d e r a l Reserve Board h a s y i e l d e d t o p r e s s u r e from C o n g r e s s and t h e P r e s i d e n t t o a v o i d h i g h e r e x p l i c i t t a x e s , by s t a n d i n g r e a d y t o p u r c h a s e
( o r lend a g a i n s t ) any q u a n t i t y of government s e c u r i t i e s a t p a r . 16
Can one r e a l l y e x p e c t t h a t t h e e n v i r o n m e n t a l a u t h o r i t i e s would b e a b l e t o with-
s t a n d analogous ~ o l i t i c a l p r e s s u r e s t o tamper w i t h t h e r u l e s of t h e a r t i f i c i a l market i n p o l l u t i o n r i g h t s ? The p r a c t i c a l s i g n i f i c a n c e of a p o l i c y i n s t r u m e n t ,
i n t e l l e c t u a l l y a t t r a c t i v e a s , i t may be, cannot b e e v a l u a t e d w i t h o u t some s p e c i f i c assumptions a b o u t t h e i n s t i t u t i o n a l framework i n which i t i s supposed t o o p e r a t e .
Up t o t h i s p o i n t , t h e d i s c u s s i o n h a s proceeded a s i f c o n t r o l of w a s t e d i s c h a r g e s and of dangerous e m i s s i o n s a t i n d i v i d u a l p o i n t - s o u r c e s , was t h e only way of d e a l i n g w i t h p o l l u t i o n problems. A c t u a l l y , a b r o a d e r approach i s o f t e n c a l l e d f o r , a t l e a s t f o r two r e a s o n s . F i r s t , i m p o r t a n t economies of s c a l e c a n b e a c h i e v e d by j o i n t a c t i o n . I n t h e f i e l d of w a t e r management, f o r example, low- f l o w augmentation, s t r e a m r e a e r a t i o n , ground-water r e c h a r g e f o r q u a l i t y improve- ment, and e f f l u e n t d i v e r s i o n o r r e d i s t r i b u t i o n t o make b e t t e r u s e of n a t u r a l a s s i m i l a t i v e c a p a c i t y , a r e more e f f i c i e n t l y o r g a n i z e d on a c o l l e c t i v e b a s i s . Second, t h e r e a r e i m p o r t a n t i n t e r d e p e n d e n c i e s among t h e d i f f e r e n t u s e s of t h e environment, which cannot b e s a t i s f a c t o r i l y t r e a t e d a t t h e m i c r o l e v e l .
Consequently, i t h a s been proposed t.hat a g e n c i e s b e c r e a t e d t o manage r i v e r b a s i n s and a i r s h e d s on an i n t e g r a t e d b a s i s . I n t h e s t r o n g v e r s i o n of t h e p r o p o s a l , t h e a g e n c i e s should b e empowered t o p l a n , d e s i g n , c o n s t r u c t , o p e r a t e , and f i n a n c e v i r t u a l l y a l l e n v i r o n m e n t a l q u a l i t y - c o n t r o l measures. 17
1 6 . Armen A. A l c h i a n and William R. A l l e n , u n i v e r s i t y Economics, London:
P r e n t i c e I H a l l I n t e r n a t i o n a l I n c . , 3rd e d i t . 1974, ch. 2 8 .
1 7 . A l l e n V. Kneese and B l a i r T. Bower, Managing Water Q u a l i t y : Economics, Technology, I n s t i t u t i o n s , B a l t i m o r e and London: The J o h n s Hop- k i n s P r e s s , 1968, c h . 10.
No e x i s t i n g o r g a n i z a t i o n f u l l y r e a l i z e s t h i s g o a l , b u t t h e Wassergenossen- s c h a f t e n of t h e Ruhr r e g i o n i n Germany, t h e Regional Water Boards (Hooghernm- raadschap) i n t h e N e t h e r l a n d s and, perhaps, t h e Delaware River B a s i n Commission i n t h e United S t a t e s a r e r e a s o n a b l y c l o s e approximations. E x p e c t a t i o n s t h a t t h e French River Basin Agencies (Agences F i n a n c i e r e s de B a s s i n ) c r e a t e d by t h e l o i - c a d r e of December 16, 1964, would be given a u t h o r i t y t o b u i l d and o p e r a t e r e g i o n a l - s c a l e p r o j e c t s have n o t been f u l f i l l e d s o f a r .
The e x t e n t of t h e powers t h a t an environmental p r o t e c t i o n o r g a n i z a t i o n should have, i s only one of t h e problems of i n s t i t u t i o n b u i l d i n g i n t h i s a r e a , and n o t t h e most i m p o r t a n t one. The c r u c i a l i s s u e i s t h a t of b a l a n c i n g t h e immediate needs of environmental e f f e c t i v e n e s s and economic e f f i c i e n c y w i t h t h e long-run r e q u i r e m e n t s of i n s t i t u t i o n a l v i a b i l i t y . The c e n t r a l r o l e played by b a r g a i n i n g p r o c e s s e s i n r e c o n c i l i n g t h e s e c o n f l i c t i n g aims has been a b l y d i s c u s s e d by Matthew ~ o l d e n ' ~ , and l i t t l e needs t o be added t o h i s a n a l y s i s a t t h i s p o i n t of my argument. However, t h e e x p e r i e n c e of t h e French r i v e r b a s i n a g e n c i e s , a b o u t which more w i l l b e s a i d l a t e r , may be mentioned h e r e a s a good example of t h e gap s e p a r a t i n g s y n o p t i c i d e a l s from a c t u a l p r a c t i c e . According t o two w e l l known American e x p e r t s , w r i t i n g a few y e a r s a f t e r t h e enactment of t h e 1964 law,
1 1 [ t l h e French a g e n c i e s
...
seem t o have an a b s o l u t e l y c l e a r ob-j e c t i v e
--
economic e f f i c i e n c y i n t h e f u l l s e n s e of t h e term.The aim i s t o e s t a b l i s h n system i n which t h e i n c r e m e n t a l c o s t s
I
-
18. Matthew Holden J r . , P o l l u t i o n C o n t r o l a s a B a r g a i n i n g P r o c e s s , I t h a c a , New York: C o r n e l l U n i v e r s i t y Water Resource Center, 1966.
of f u r t h e r improvement of water q u a l i t y b a l a n c e t h e i n c r e m e n t a l b e n e f i t s , and i n which t h e f u l l range of a l t e r n a t i v e ways of
improving water q u a l i t y can be a s s e s s e d and a l l measures brought i n t o o p t i m a l b a l a n c e . 1119
The a c t u a l r e s u l t s have been d i f f e r e n t , a s noted by a r e c e n t French o b s e r v e r : 2 0
I t
There i s no doubt t h a t t h e Agences f i n a n c i e r e s de b a s s i n a r e t h e keystone of t h e system, b u t one cannot f a i l t o be s t r u c k by t h e motley a r r a y of arrangements f o r i s s u i n g l i c e n s e s and of t e c h n i c a l and economic c o n t r o l s . On t h e one hand, u s e r s a r e faced w i t h a p l e t h o r a of complicated r e g u l a t i o n s , w h i l e , on t h e o t h e r hand e f f o r t s a r e b e i n g made t o remedy t h e d e f e c t s by means of more modern arrangements which i n c l u d e shadow program- ming on t h e l i n e s of t h e French Economic P l a n and depend on economic i n c e n t i v e s i n v o l v i n g f i n a n c i a l l o s s f o r t h o s e who cause p o l l u t i o n i n d e f i a n c e of t h e r e g ~ ~ l a t i o n s
."
Even i n t h e land of C a r t e s i a n c l a r i t y , t h e p o l i c y maker does n o t w r i t e on a c l e a n s l a t e ; second-best s o l u t i o n s a r e t h e i n e v i t a b l e r e s u l t of t h e c l a s h b e t - ween t e c h n o c r a t i c a s p i r a t i o n s and what Toynbee has c a l l e d t h e " i n t r a c t a b i l i t y of i n s t i t u t i o n s . "
- -- . . . . . . . .- . . . . . . . . - - . . . . - -. .-
19. Kneese and Bower, Managing Water Q u a l i t y , c i t . , p. 283.
20. J e a n - P h i l l i p e Barde, "An Examination Of The P o l l u t e r - P a y s P r i n c i p l e Based On Case S t u d i e s " , i n O r g a n i z a t i o n For Economic GO-Operation And Develop- ment, The P o l l u t e r Pays P r i n c i p l e , P a r i s : O.E.C.D., 1975, P- 100-
3 . THE CHOICE PROBLEM
Faced w i t h a m u l t i p l i c i t y of p o s s i b l e approaches, how does t h e p o l i c y maker choose t h e most promising i n s t r u m e n t , o r combination of i n s t r u m e n t s ? O r i s t h i s , perhaps, a m i s l e a d i n g way of r e p r e s e n t i n g h i s problem? These a r e t h e i s s u e s t o be examined now.
The s y n o p t i c problem s o l v e r would proceed a l o n g f a m i l i a r l i n e s . 2 1 He would s t a r t o u t by e x p l i c i t l y l i s t i n g a. s e t of c r i t e r i a ; he would t h e n s e l e c t
t h a t t o o l , a m i x t u r e of t o o l s , t h a t i s optimal w i t h r e s p e c t t o t h e chosen c r i t e r i a o r a t l e a s t , i s n o t uniformly dominated by any o t h e r a l t e r n a t i v e . A l t e r n a t i v e l y , he may s i n g l e o u t one c r i t e r i o n a s t h e most i m p o r t a n t one, which t h e n becomes h i s o p e r a t i o n a l goal, t r e a t i n g o t h e r r e l e v a . n t c r i t e r i a
a s c o n s t r a i n t s
.
. ... -
21. The s y n o p t i c problem s o l v e r : "1. i d e n t i f i e s , s c r u t i n i z e s , and p u t s i n t o c o n s i s t e n t o r d e r t h o s e o b j e c t i v e s and o t h e r v a l u e s t h a t he b e l i e v e s should govern t h e c h o i c e of a s o l u t i o n t o t h e problem; 2. comprehensively s u r v e y s a l l p o s s i b l e means of a c h i e v i n g t h o s e v a l u e s ; 3 . e x h a u s t i v e l y examines t h e p r o b a b l e consequences of employing each of t h e p o s s i b l e means; 4 . chooses a means
--
t h a t i s , a p o l i c y o r combination of p o l i c i e s--
t h a t w i l l probably a c h i e v e a maximum of t h e v a l u e s o r a c h i e v e some a c c e p t a b l e l e v e l of achieve- ment." Cf.
C h a r l e s E . Lindbolm, The I n t e l l i g e n c e Of Democracy, New York: - The F r e e P r e s s , 1965, pp. 137-138.The c r i t e r i a commonly used i n s y n o p t i c e v a l u a t i o n s of e n v i r o n m e n t a l p o l i c y t o o l s a r e : e n v i r o n m e n t a l e f f e c t i v e n e s s ; economic e f f i c i e n c y ; p o l i t i c a l and a d m i n i s t r a t i v e f e a s i b i l i t y ; f l e x i b i l i t y ; c o m p a t i b i l i t y w i t h t h e e x i s t i n g i n s t i t u t i o n a l framework ( e . g . , w i t h t h e b a s i c p r i n c i p l e s of a market economy).
I n a d d i t i o n , a good d e a l of a t t e n t i o n h a s been r e c e n t l y given, e s p e c i a l l y by i n t e r n a t i o n a l o r g a n i z a t i o n s l i k e O.E.C.D. and t h e European Economic Community, t o t h e s o - c a l l e d p o l l u t e r - p a y s p r i n c i p l e , a s a s o r t of h i g h e r - l e v e l c r i t e r i o n .
The p r i n c i p l e s a y s t h a t t h e p o l l u t e r s h o u l d b e a r t h e e x p e n s e s of c a r r y i n g o u t t h e measures d e c i d e d by t h e p u b l i c a u t h o r i t i e s t o e n s u r e t h a t t h e e n v i r o n - ment i s i n an a c c e p t a b l e c o n d i t i o n . I n p r a c t i c e , t h i s means two t h i n g s :
(1) t h e c o s t of t h e s e measures should b e r e f l e c . t e d i n t h e c o s t of goods and s e r v i c e s c a u s i n g p o l l u t i o n i n p r o d u c t i o n and/or consumption; ( 2 ) t h e measures should n o t b e accompanied by s u b s i d i e s t h a t would d i s t o r t i n t e r n a t i o n a l t r a d e and i n v e s t m e n t .
The f i r s t t h i n g t o b e n o t i c e d a b o u t t h e c r i t e r i a i s t h e h e t e r o g e n e i t y of t h e v a l u e s t h a t t h e y i n d i v i d u a l l y embody; t h e second, i s t h e i r l a c k of s p e c i f i c i t y . Value h e t e r o g e n e i t y i s e x e m p l i f i e d by t h e d i f f i c u l t y of r e c o n c i l . i n g p o l i t i c a l
f e a s i b i l i t y w i t h t h e c o n d i t i o n s f o r economic e f f i c i e n c y . The l a c k of s p e c i f i - c i t y i s p a r t i c u l a r l y o b v i o u s i n t h e c a s e of t h e p o l l u t e r - p a y s p r i n c i p l e which, a s u s u a l l y i n t e r p r e t e d , r u l e s o u t o n l y t h e s u b s i d i e s a l t e r n a t i v e ; . and even t h i s ' l i m i t a t i o n i s weakened by a number of e x c e p t i o n s . 2 2
.. . . " ~ . ~ . - - -.-. -. - . -- . .
-
2 2 . E x c e p t i o n s a r e g e n e r a l l y a d m i t t e d i n c a s e of a c u t e socio-economic d i s l o c a t i o n o r of c o n f l i c t s w i t h o t h e r governmental o b j e c t i v e s , such a s r e g i o n a l development, o r i n o r d e r t o s t i m u l a t e e x p e r i m e n t a t i o n w i t h new p o l l u t i o n c o n t r o l t e c h n o l o g i e s . The p r i n c i p l e c o u l d p e r h a p s b e i n t e r p r e t e d s o a s t o r u l e o u t a l s o t h e " b r i b e " s o l u t i o n , and any o t h e r form of b a r g a i n i n g
.
But t h i s a p r i o r iIn view of the partially conflicting nature of the criteria, it is not surprising that a uniformly better approach cannot be found. Even with respect to
asingle criterion, there is no generally superior approach. Thus, although the superiority of effluent charges over regulation is assumed by most economists, it has been shown that an economically optimal policy may require a combination of both. In the case of fisheries, for instance, optimality is achieved by a
2 3
tax on catch, accompanied by regulation of mesh size. And while the in- effectiveness of regulatory environmental policies has been documented in a number of studies, an unbiased observer can easily find non trivial counter- examples. The United Kingdom Clean Air Act of 1956, for example, has been quite effective in reducing the level of smoke emissions in the atmosphere.
This law relies primarily on prohibitions, regulations (of smoke emissions, with a varying standard depending on location, and of height of chimneys), and on various forms of subsidies to consumers and industries. The positive results achieved can be shown by a number of indices. In 1951, domestic con- sumers used 11.9 billion therms (1 therm
=100.000 British thermal units) of solid fuel, out of a total consumption of 14.1 billion therms, in 1971 total consumption had remained at the same level, but consumption of solid fuel had been reduced to 6.1 billion therms. In 1952, domestic users, industries, and railways used 37.3, 63.3, and 14.1 million tons of coal, respectively, but only '27.4, 37.9, and 2.8 million tons in 1965. Finally, the emission of smoke de-
creased from 2.42 million metric tons (mrnt) in 1951, to 1.56 in 1961 and 0.77
exclusion of potentially useful methods should be regarded as a serious short- coming of the principle, even if
itincreases its selective power.
23. Ralph Turvey, "Optimization And Suboptimization In Fishery Regulation,"
The American Economic Review, March 1964, pp. 64-76.
i n 1970 (on t h e o t h e r hand, t h e e m i s s i o n of s u l p h u r d i o x i d e , t h a t was l e f t o u t of t h e scope of t h e 1956 Act, went from 4.77 mmt i n 1951, t o 5.53 i n 1961 and 5.95 i n 1970)
.
The i m p o s s i b i l i t y of f i n d i n g a n unambiguous r a n k i n g of p o l i c y i n s t r u m e n t s h a s led some a n a l y s t s t o conclude t h a t one should always use a m i x t u r e of i n s t r u - ments, and t h a t "each c a s e must be c o n s i d e r e d on i t s own m e r i t s . !lz4 But t h i s s y n c r e t i c philosophy f a i l s t o r e c o g n i z e t h e r e a l s o u r c e of t h e d i f f i c u l t y . L e t us c o n s i d e r a g a i n economic e f f i c i e n c y a s a c r i t e r i o n of c h o i c e . A l l t h r e e p r i c e - based approaches d i s c u s s e d i n s e c t i o n 2 ( e f f l u e n t c h a r g e s , b r i b e s , and marketable p o l l u t i o n r i g h t s ) s a t i s f y t h i s c r i t e r i o n , i n s p i t e of s i g n i f i c a n t d i f f e r e n c e s i n
t h e c o r r e s p o n d i n g i n s t i t u t i o n a l arrangements. Thus, under t h e b r i b e s system, t h e p o l l u t e e s o r t h e p u b l i c a u t h o r i t i e s o f f e r t o pay a n amount e q u a l t o t h e marginal damage avoided f o r e a c h d e c r e a s e i n r e s i d u a l s d i s c h a r g e . S i n c e an a d d i t i o n a l u n i t of d i s c h a r g e r e p r e s e n t s an o p p o r t u n i t y c o s t f o r t h e p o l l u t e r , e q u a l t o t h e foregone r e c e i p t of t h e b r i b e , t h e method would have t h e same a l l o - c a t i v e consequences a s a system of charges: t h e two i n s t r u m e n t s a r e e q u i v a l e n t i n terms of economic e f f i c i e n c y . But i n t h e b r i b e s s o l u t i o n , p r o p e r t y r i g h t s i n t h e environment a r e h e l d t o be v e s t e d i n t h e p o l l u t e r s , w h i l e t h e u s e of c h a r g e s i m p l i e s t h a t t h o s e r i g h t s a r e v e s t e d i n t h e community, w i t h t h e p u b l i c
~ ..-....-.---
24. See, f o r i n s t a n c e , Ralph Turvey, "Side E f f e c t s Of Resource Use", c i t . ; 0. A. Davies and M. I. Kainien, " E x t e r n a l i t i e s , I n f o r m a t i o n And Alterna- t i v e C o l l e c t i v e Action" i n The A n a l y s i s And E v a l u a t i o n Of P u b l i c Expenditures:
The PPB System, Washington, D.C.: U.S. Government P r i n t i n g Off i c e , 1969, pp. 67-68; Rat von S a c h v e r s t a e n d i g e r . f u e r Umweltfragen, Umweltgutachten 1974, S t u t t g a r t : V e r l a g Kohlhammer, G.M.B.H. 1974.
a u t h o r i t i e s a c t i n g a s a g e n t s f o r t h e s a l e of r i g h t s t o t h e a s s i m i l a t i v e c a p a c i t y of t h e environment. The a c t u a l i m p l i c a t i o n s of t h e c h a r g e s approach have been r e c o g n i z e d by i n d u s t r i a l spokesmen, who have a t t a c k e d e f f l u e n t c h a r g e s a s "puni-
t i v e l e v i e s , " whose purpose i s n o t p o l l u t i o n abatement, b u t revenue and " u l t i m a t e l y , a c o n t r o l o v e r t h e n a t i o n a l economy. "25 Advocates of t h e approach i n a s e n s e s h a r e t h e same view when t h e y admit t h a t " [ s l u c h massive t r a n s f e r s of p r o p e r t y r i g h t s and t h e w e a l t h t h e y r e p r e s e n t seldom occur i n t h e a b s e n c e of s u b s t a n t i a l p o l i t i c a l upheaval. 1126
The inadequacy of economic e f f i c i e n c y a s a c r i t e r i o n of c h o i c e among p o l i c y i n s t r u m e n t s i s now c l e a r , i f i t i s admitted t h a t e f f i c i e n c y and e q u i t y c o n s i d e r a - t i o n s cannot b e s e p a r a t e d i n p o l i c y making ( a l t h o u g h t h e y may b e u s e f u l l y d i s - t i n g u i s h e d i n o t h e r , more l i m i t e d , c o n t e x t s ) . For, a s Coase h a s shown, t h e ab- s e n c e o r e x i s t e n c e of a r i g h t t o t h e use of t h e environment d o e s n o t a f f e c t t h e a l l o c a t i o n of r e s o u r c e s , b u t o n l y t h e f a i r n e s s of what happens. More g e n e r a l l y , i t i s i m p o s s i b l e t o draw c o n c l u s i o n s a b o u t a p p r o p r i a t e i n s t i t u t i o n a l arrangements from a n a n a l y s i s of t h e f o r m a l c o n d i t i o n s f o r an optimum, s i n c e t h e same f o r m a l c o n d i t i o n s c a n b e s a t i s f i e d by a v a r i e t y of e s s e n t i a l l y d i f f e r e n t a r r a n g e m e n t s . 27
- . . - .. .- . . .- .. .. .- - - -. - - - . - --
25. J o h n E
.
Kinney, " E f f l u e n t Taxes: Abatement Prods O r Budget-Balances?", I n d u s t r i a l Water E n g i n e e r i n g , A p r i l 1971, pp. 18-22.26. Freeman, Haveman, and Kneese, The Economics Of Environmental P o l i c y , c i t . , p. 170.
27. I n t h e same way t h a t , a s P a r e t o and Barone have shown, " t h e e q u i l i b r i u m a l l o c a t i o n of r e s o u r c e s i n a f r e e l y c o m p e t i t i v e s o c i e t y based on p r i v a t e p r o p e r t y i s i d e n t i c a l w i t h t h e a l l o c a t i o n t h a t s h o u l d b e s o u g h t by a s o c i a l i s t s t a t e s t r i v - i n g t o a c h i e v e a maximum of " o p h e l i m i t y l ' and t h a t , on t h e formal l e v e l a l o n e , t o t a l i t a r i a n d i r e c t i o n might a c h i e v e t h e same a l l o c a t i o n of r e s o u r c e s a s a f r e e
I n c i d e n t a l l y , t h i s e x p l a i n s why s o many d i s c u s s i o n s of t h e "economics of en- v i r o n m e n t a l p o l i c y " f a i l t o c a r r y c o n v i c t i o n i n t h e i r p o l i c y recommendations.
The r e a s o n i s n o t t h a t t h e y d i s r e g a r d t h e non-economic a s p e c t s of e n v i r o n m e n t a l problems. R a t h e r , t h e i r t r e a t m e n t of t h e p o l i t i c a l , a d m i n i s t r a t i v e and l e g a l i s s u e s , o r of t h e d i s t r i b u t i o n a l i m p l i c a t i o n s of t h e proposed s o l u t i o n s , u s u a l l y b e a r s l i t t l e l o g i c a l r e l a t i o n t o t h e f o r m a l economic a n a l y s i s .
To s t a t e once more t h e c e n t r a l t h e s i s of t h i s paper: p o l i c y i n s t r u m e n t s a r e n o t s e l e c t e d on t h e b a s i s of t h e i r formal p r o p e r t i e s , f o r t h e s e a l l o w a number of d i f f e r e n t , even c o n f l i c t i n g , i n s t i t u t i o n a l r e a l i z a t i o n s . A c t u a l p o l i c i e s a r e determined i n t h e a r e n a of i n s t i t u t i o n a l c h o i c e , n o t by a s i n g l e , w e l l - d e f i n e d d e c i s i o n maker, b u t by a m u l t i p l i c i t y of p l a y e r s who c o n s t a n t l y
a t t e m p t t o modify t h e r u l e s of t h e game; t h e s y n o p t i c model of c h o i c e misre- p r e s e n t s t h e b a s i c l o g i c of t h e s i t u a t i o n .
4. ENVIRONMENTAL POLICY FORMATION: THE CLOSED MODEL
The p r i n c i p a l c h a r a c t e r s i n a c l o s e d model of t h e policy-making p r o c e s s a r e : l e g i s l a t o r s and e x e c u t i v e s , governmental a g e n c i e s , c i t i z e n s , i n t e r e s t group l e a d e r s , and p a r t y l e a d e r s . P o l i c i e s a r e shaped by b a r g a i n i n g and o t h e r
forms of p a r t i s a n mutual a d j u s t m e n t among t h e s e a c t o r s , w i t h i n t h e c o n v e n t i o n s a b o u t ends and m e a n s , t h a t , t o some e x t e n t , c o n t r o l t h e b e h a v i o r of e a c h p a r t i c i p a n t . 28
p r i c e s y s t e m ( i . e . b o t h might s o l v e t h e same e q u a t i o n s ) " ; s e e M i l t o n Friedman,
11 L e r n e r On The Economics Of C o n t r o l , " J o u r n a l Of P o l i t i c a l Economy, LV, October, 1947, pp. 405-416.
2 8 . C. E . Lindblom, The I n t e l l i g e n c e Of Democracy, c i t . , ch. 6 .
I n terms of t h i s model, i t i s e a s y t o s e e why, i n s p i t e of t h e t h e o r e t i c a l
a d v a n t a g e s of e f f l u e n t c h a r g e s and e q u i v a l e n t methods of i n t e r n a l i z i n g p o l l u t i o n c o s t s , e n v i r o n m e n t a l l e g i s l a t i o n i n e v e r y c o u n t r y r e l i e s p r i m a r i l y on a r e g u l a t o r y approach, supplemented by generous amounts o f s u b s i d i e s .
The s t r e n g t h of t h e p r e f e r e n c e f o r r e g u l a t i o n / e n f o r c e m e n t i s r e v e a l e d by r e c e n t developments i n t h e United S t a t e s . For i n s t a n c e , t h e 1972 Water P o l l u t i o n C o n t r o l Act ( t h e s o - c a l l e d Muskie B i l l ) h a s gone even f u r t h e r t h a n p r e v i o u s l e g i s l a t i o n i n t h e d i r e c t i o n o f r e g u l a t i o n , s i n c e i t " e s s e n t i a l l y e n d s t h e u s e of w a t e r q u a l i t y s t a n d a r d s a s t h e measuring r o d f o r performance and
s u b s t i t u t e s s t a n d a r d s o r r e g u l a t i o n s r e g a r d i n g e f f l u e n t c o n t r o l and t r e a t m e n t . 1129 The same r e g u l a t o r y p h i l o s o p h y permeates t h e 1967 A i r Q u a l i t y Act ( s e e , i n p a r t i c - u l a r , i t s T i t l e 11: N a t i o n a l Emission S t a n d a r d s A c t ) , t h e 1972 N o i s e C o n t r o l Act, and t h e 1974 S a f e D r i n k i n g Water Act. P e r h a p s even more i n d i c a t i v e , i s t h e
f a c t t h a t a t t e m p t s by i n d i v i d u a l l e g i s l a t o r s t o i n t r o d u c e measures g i v i n g more emphasis t o economic t o o l s , have m e t w i t h no s u c c e s s , a t l e a s t s o f a r . The f a t e of S e n a t o r P r o x m i r e ' s b i l l e s t a b l i s h i n g e f f l u e n t c h a r g e s on i n d u s t r i a l p o l l u t e r s a t t h e n a t i o n a l l e v e l ( t h e "Penny a pound" b i l l ) i s symbolic. F i r s t s u b m i t t e d i n November 1969, i t had n o t y e t been r e p o r t e d o u t of committee i n 1973. The b i l l h a s n o t even been r e i n t r o d u c e d i n t h i s Congress, and a l t h o u g h S e n a t o r Proxmire a p p a r e n t l y t h i n k s t h a t t h e r e i s some chance f o r t h e i d e a on a s t a t e b a s i s , he i s n o t p u s h i n g t h e m a t t e r i n t h e S e n a t e . A s one of h i s s t a f f members e x p l a i n e d , i t is, a p p a r e n t l y , dead. On t h e o t h e r hand, t h e Muskie B i l l ,
-.--- -- ---- -. . .. . ." -...
29. A. Myrick Freeman 111, and Robert H. Haveman, "Clean R b e t o r i c And D i r t y Water," i n A. C. Enthoven and A. M. Freeman, e d i t o r s , P o l l u t i o n , Re- s o u r c e s , and The Environment, New York: W. W. Norton and Co. I n c . , 1972, p. 130.
w i t h i t s s t r o n g emphasis on e f f l u e n t s t a n d a r d s and o t h e r forms of r e g u l a t i o n , passed t h e S e n a t e by an 86-0 v o t e .
I n o t h e r c o u n t r i e s , n o t a b l y France and t h e N e t h e r l a n d s , p o l l u t i o n c h a r g e s have been i n t r o d u c e d i n t o w a t e r q u a l i t y l e g i s l a t i o n . B i i t t h e c h a r g e system, f a r from becoming t h e c o r n e r s t o n e of e n v i r o n m e n t a l p o l i c y t h a t some o b s e r v e r s had hoped, h a s i n f a c t been used a s p a r t of a machinery of d i r e c t c o n t r o l s ; a method f o r s p r e a d i n g t h e burden of e x p e n d i t u r e among p o l l u t e r s i n ways t h a t f a v o r t h e major i n d u s t r i a l i n t e r e s t s ( e . g . through t h e mechanism of t h e f l a t - r a t e s c h e d u l e , s e e below), r a t h e r t h a n a means of e f f i c i e n t l y a c h i e v i n g g i v e n l e v e l s of environmental q u a l i t y .
Large i n d u s t r i a l p o l l u t e r s have s t r e n u o u s l y o b j e c t e d t o t h e i n t r o d u c t i o n of e f f l u e n t charges; 30 and when some form of p o l l u t i o n c o n t r o l seemed unavoid- a b l e , t h e y have s y s t e m a t i c a l l y favored t h e use of s t a n d a r d s , l i c e n s e s , and q u o t a s . 3 1
The somewhat p a r a d o x i c a l p r e f e r e n c e of p r i v a t e i n d u s t r y f o r government r e g u l a t i o n s , r a t h e r t h a n f o r an impersonal and a u t o m a t i c system o f t a x e s t h a t would minimize i n t e r f e r e n c e w i t h t h e normal o p e r a t i o n s of t h e market, h a s been
_ l _ _ _ - l _ _ _ _ _ _ _ _ _ _ . l . _ --.-. -
30. See, f o r i n s t a n c e , J . E . Kinney, op. c i t . , and Harold C . Lumb,
" F a l l a c i e s Of A P o l l u t i o n Tax," I n d u s t r i a l Water Engineering, A p r i l 1971, pp. 15-18.
31. On t h e o p p o s i t i o n of German i n d u s t r y and of t h e s t a t e s (Laender) t o a proposed f e d e r a l law t h a t would i n t r o d u c e e f f l u e n t c h a r g e s , s e e Renate Mayntz, E x t e r n a l P r e s s u r e s And C o n f l i c t s I n The Formation And Implementation Of Environmental P o l i c y , B e r l i n : I n t e r n a t i o n a l I n s t i t u t e of Management, 1975.
