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Joseph E. Aldy

Regulations represent the primary tool for governments to remedy market failures. The modern administrative state has established a set of institutions – regulatory governance – that shape, constrain, and guide regulators in the development of such regulations. Requiring transparent analyses of the benefits and costs of proposed rules and subjecting them to public comment and legislative review can address a number of pitfalls in political markets, including regulatory capture and principal–agent problems as regulators attempt to implement the will of the public, the legislature, and/or the executive. New Institutional Economics frameworks and tools provide the means for evaluating the impacts of regulations and the impacts of regulatory governance on policy-relevant outcomes. This chapter highlights five areas where future research could further illuminate the role of institutions in influencing government’s efforts in correcting market failures: (1) prospective benefit–cost analyses; (2) ad hoc retrospective analyses; (3) 1-in/X-out regulatory cost budgets; (4) cumulative regulatory costs; and (5) non-regulatory contexts.

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Joseph E. Aldy

Market-based instruments – including cap-and-trade programs, pollution taxes, and tradable credit programs – have emerged as common instruments for federal, state, and local policymakers in addressing environmental challenges. This chapter describes the key characteristics that define these instruments and illustrates their environmental and economic impacts through a series of brief case studies on lead phase-down, sulfur dioxide and nitrogen oxides cap-and-trade programs, waste charges and bag fees, and the renewable fuel standard. These experiences provide a foundation for drawing out key lessons in the design and implementation of market-based instruments. The chapter concludes with a discussion of their potential application to climate change and highlights opportunities for future research on pricing pollution through market-based instruments.