Framing Environmental Policy in the European Union
New Horizons in Environmental Economics series
Chapter 5: Coordination of Local Pollution Control in a Federal System
1. INTRODUCTION Analysis of the appropriate division of functions among levels of government goes back to Musgrave’s (1959) treatment of the public sector. The various layers of the public sector deal with matters of (supra)national, regional and local concern. Each layer of government has ﬁscal and regulatory responsibilities for its own geographical jurisdiction. This federal structure of the public sector opens up a large array of important issues, including the proper allocation of ﬁscal functions among the diﬀerent levels of government, assignment of speciﬁc instruments to the various levels, and the vertical assignment of regulatory responsibilities (Oates, 1994). An economic approach to the assignment of environmental regulatory responsibilities involves a balancing of control costs against damages. As illustrated earlier, if costs and beneﬁts are localized and speciﬁc, environmental policies should be tailored to the particular circumstances of localities. A local environmental problem should be regulated by a local authority. If pollution is transboundary, more centralized measures are required. This result assumes, however, complete information. This chapter examines local pollution control in a federal system where the central and the local authorities are incompletely informed. In our analysis, both the central and the local authorities possess information which should be used in the determination of environmental policies. Consequently, a wholly decentralized approach is inappropriate, and we examine how the central authority can induce the local authority to take central information into account. The USA and the European Union have diﬀerent experiences with the development of...
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