Edited by Jeroen C.J.M. van den Bergh
Chapter 15: Standards versus Taxes in Pollution Control
Gloria E. Helfand 1. Introduction Much of the literature on controlling externalities focuses on efficiency. While economists have long argued that taxes on the externality provide an efficient solution, or at least a minimum-cost solution (for example, Baumol and Oates, 1988, chapters 4 and 11; Baumol, 1972),environmental legislation in the United States almost universally uses mandated standards rather than taxes (Dewees, 1983). In Europe, pollution taxes are used, though less to provide incentive for clean-up than to provide funds to subsidize abatement equipment (Howe, 1994). If taxes are generally more efficient than standards, why are standards often used? This chapter reviews the major arguments over pollution taxes versus standards. The efficiency of each approach depends heavily on the regulatory setting; the distributional consequences and political acceptability of each approach also differ. The following discussion begins with an overview of the efficiency advantages of taxes over standards. These results are then qualified through analysis of situations where taxes may not be efficient. Uncertainty in achieving abatement goals can make combinations of instruments appear preferable to single instruments. The final section identifies additional factors affecting a policy maker’s choice of regulatory instrument. 2. Efficiency advantages of taxes over standards Externalities can be viewed as arising because of a failure of property rights: some resources are not privately owned, are not exclusive, cannot be transferred, or cannot be enforced. As a result, normal market operations do not price these resources properly, and suboptimal levels of the resource are supplied. Much of the...
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