RFF-Resources-151-Marketapproaches - U Market-Based...

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U pon hearing the term “market-based approaches to (or economic incentives for) environmental protection,” some people assume this means letting unfet- tered competition between unregulated private Frms determine how clean our air or water will be, how much open space we will have, or how many Fsh stocks will be driven to collapse. Nothing of the sort is intended. In fact, market-based ap- proaches to environmental protection are a clever form of government regulation. They are premised on the recogni- tion that while competitive markets are a wonderfully efF- cient means of deciding what types and quantities of consumer goods should be produced, they generally fail with respect to environmental quality, the provision of “public goods” like open space and common-property resources like Fsheries. Every undergraduate and graduate economics text- book discusses this notion of “market failure,” and the envi- ronment is always the Frst illustration that is used. Given the very necessary government role in protecting the environment, the real question becomes how best to do this. Market-based approaches to environmental protection are premised on the idea that it is possible to confront pri- vate Frms, individuals, and even other levels of government with the same kinds of incentives they face in markets for la- bor, capital, and raw materials—that is, prices that force them to economize. The rationale for market-based approaches, in other words, is to try to put the powerful advantages of markets to work in service to the environment. Command-and-Control Era To paint a quick picture of traditional regulation, consider the case of air and water pollution control. Prior to the early 1970s, the regulation of air and water pollution was almost exclusively the responsibility of state and local governments. In fact, the Clean Air Act amendments of 1970 and the ±ed- eral Water Pollution Control Act Amendments of 1972 marked the Frst really substantial federal involvement in en- vironmental protection. Under the Clean Air Act, the federal government (in the form of the then-new U.S. Environmental Protection Agency, or EPA) began specifying the pollution-control equipment that any new plant had to embody. In addition, EPA required local areas to formulate plans to reduce pollution from ex- isting sources so that the air quality standards that EPA be- gan issuing would be met. These plans typically required large, privately owned industrial facilities to reduce their pol- lution the most, and often required other sources to roll back their pollution by uniform amounts. Both new and old facil- Market-Based Approaches to Environmental Policy A “REFRESHER” COURSE Paul R. Portney 15
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ities had to apply for and receive operating permits from EPA that speciFed allowable emissions. In addition, the federal government also began limiting for the Frst time the tailpipe emissions of new cars rolling off the assembly lines of both domestic and foreign manufacturers. While the emerging wa-
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This note was uploaded on 05/30/2008 for the course AEM 2500 taught by Professor Poe,g. during the Spring '07 term at Cornell.

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RFF-Resources-151-Marketapproaches - U Market-Based...

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