Edited by Janet E. Milne and Mikael S. Andersen
Chapter 24: Bounded rationality in an imperfect world of regulations: what if individuals are not optimizing?
Environmental economists have increasingly persuaded policymakers that market-based instruments are preferable to the more traditional command-and-control approach to environmental regulation (OECD 2001; Tietenberg 1990; Speck et al. 2006). Taxes appear to remain the first instrument of choice among market-based policy instruments, at least as calculated by the number of schemes (OECD 2010). According to economic theory, environmental taxes have several benefits: firstly, they effectively regulate the behavior of producers and consumers through economic incentives to either consume more environmentally sustainable products, switch to more sustainable production methods, reduce waste or consume less natural resources. Secondly, environmental taxes produce such changes in a more cost-effective manner than other types of policy instruments, as the taxes ensure that those economic actors who face the lowest abatement costs will undertake a larger share of abatement than those with higher abatement costs (Sprenger 2000; Andersen 2000a; Perman et al. 1999). Thirdly, economic theory also holds that environmental taxes are a welfare-efficient way toward environmental improvements, as the price mechanism ensures that the levels of environmental damage and environmental abatement costs reflect the preferences of a given community (Sprenger 2000; OECD 2001; Kolstad 1999).
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