The Case for Market-Based Instruments in the Real World

Abstract

now we know how market-based instruments can be used—at least in theory—to restore the efficiency of markets. however, efficiency may not be the relevant target in the real world, for several reasons. as we have seen, it is very difficult to ascertain just how much benefit we get from these policies; indeed, it may even be hard to estimate the actual costs. But without knowing costs and benefits, we cannot determine the efficient level of pollution. even if the marginal benefits and costs of pollution control are known, moreover, there is no guarantee that the government will set the efficient target as the goal. distributional equity and other worthy social goals may be at odds with efficiency. and of course the political process in the real world is driven by interest group competition and the desires of legislators to satisfy their constituents as much as (or more than) by an objective attempt to maximize social welfare. even if economic efficiency is elusive in practice, there are still advan-tages to market-based instruments. First, such policies are cost-effective, meaning that they can achieve any given abatement target at the mini-mum total cost—something that is not generally true of command-and-control approaches. 1 second, over the long run, market-based instruments are likely to provide stronger incentives for the development of new pollution control technologies. this dynamic incentive will tend to lower abatement costs over time. in this chapter, we first discuss each of these advantages in detail for the case of pollution control. next, we consider how similar principles play out in the realm of natural resource management, focusing on the 168