Budgetary Policies for Environmental Improvement
International Studies in Environmental Policy Making series
Edited by J. Peter Clinch, Kai Schlegelmilch, Rolf-Ulrich Sprenger and Ursula Triebswetter
Chapter 2: The perversity of government subsidies for energy and water
André de Moor and Cees van Beers INTRODUCTION Prices are the most efficient information system; they largely determine decisions by producers and consumers. Prices can therefore play an important role in the process of environmental degradation. When prices reflect the full costs and benefits of production and consumption, welfare economic theory teaches that resource use and allocation will be optimal. However, when full cost pricing is failing, information is not accurately passed along on resource scarcity and environmental values, nor on the true costs of producing or consuming goods and services. Yet people will make their decisions based on this erroneous information, resulting in overuse and environmental degradation. Economists usually identify two classic types of inefficiencies that result in mispricing: market failures and policy failures. A market failure results when markets do not reflect the external costs and benefits of production in the price of traded products and inputs. The lack of markets for some inputs or outputs, in particular environmental services, is also classed as a market failure.1 The improper valuation of ecosystems and poorly defined property rights are two examples of environment-related market failures. The other classic type of inefficiency arises from the failure of government interventions. Governments intervene in markets to achieve certain objectives. However, these policy interventions may create distortions of their own by failing to correct for market failures or by making them worse. When they do, the result is a policy failure. Policy failures can arise from sector subsidies, inappropriate pricing, taxation policies, price...
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