Edited by Michael A. Crew and David Parker
Chapter 12: Economics of Environmental Regulation: Instruments and Cases
1 Anthony Heyes and Catherine Liston Introduction The imperative of managing the exploitation of the natural environment is not a new one. Institutions – formal or informal – aimed at preventing inappropriate private exploitation of water, land and other resources were put in place or evolved in all ancient civilizations. In modern market economies, as pressures on the natural environment have intensified, robust and efficient environmental regulation has become a central ambition of most governments. Despite differences in view as to how heavily to weight environmental protection, the underlying rationale for regulation is well understood and has its roots in market failure. In particular in the notion of public goods and externality. Many components of the natural environment (clean air, biological diversity, water, quiet, aesthetically pleasing views, etc.) are public or quasi-public goods. Formal ownership rights for the environment are frequently non-existent. Even where such rights could be established and enforced there is a deep-seated attachment to the view that many of the key elements of the natural environment should remain in common ‘ownership’. In the absence of policy intervention the social cost of use of a common resource will exceed private cost and the public good will be over-exploited, to the detriment of social welfare (Coase, 1960). After a famous article published in the Science almost forty years ago this phenomenon has come to be referred to as the ‘tragedy of the commons’ (Hardin, 1968). The over-exploitation of a public good such as the environment is an example of the more...
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