Framing Environmental Policy Instrument Choice: Another View

Article excerpt

I. INTRODUCTION

In his innovative and interesting article, Kenneth Richards endeavors to offer a framework for understanding environmental policy choices. Though it is not entirely clear from his article, it appears that Richards views his contribution as providing a better understanding of the relative merits of alternative policy mechanisms for achieving environmental goals. Specifically, he appears to view the economics literature as focusing on a rather narrow criterion, production cost-efficiency, in evaluating alternative policy mechanisms.(1) Further, he observes that economic analysis is often used to support incentive-based policies and that the wide variety of actual policy choices made by public decision-makers suggests that a broader set of criteria are used in practice. Assuming, as Richards appears to do, that government decision-makers are motivated by social welfare maximization, these observations suggest some inherent flaw in the economics framework. This, in turn, appears to be Richards' primary rationale for developing a more comprehensive framework for analysis.

The development of such a framework appears to be the purpose of Richards' paper. A secondary purpose of the article appears to be a defense of the proposition that, contrary to the conclusions of most environmental economists, the alleged superiority of incentive-based policies over command-and-control regulation and government production is not sustained by a more complete analysis of social cost.

While we agree with Professor Richards that a better understanding of the full implications of alternative policy mechanisms, as well as the implications of legal and political factors that constrain policy choices, would be useful, it is not clear that the taxonomy proposed by Richards substantially contributes to that understanding. In some measure, his misunderstanding of the theoretical underpinning for the environmental economics framework drives his claims regarding the relative merits of his own framework.

This misunderstanding is not surprising. In economics, as in most disciplines, fundamental concepts that are well understood by most of those who work in the area are seldom reiterated in discipline-specific articles. Further, when these concepts are complex or highly technical, they are often glossed over in textbooks. For example, as we discuss below, Richards' statement that production costs are those "most commonly addressed in the environmental economics literature" is misleading when used to characterize the framework used by environmental economists.(2) If this characterization were accurate, it would certainly suggest that a more comprehensive framework is needed for policy analysis. However, it would be inappropriate to conclude that, because some economists may implicitly or explicitly assume away other factors, the economics framework itself is somehow defective and in need of replacement or reform.

There are many other points on which we respectfully take issue with Professor Richards. Space limitations prevent us from addressing all of these points. As a consequence, we will address only four points that we find most troubling. In the remarks of Part II below, we first address what we believe to be Richards' characterization of the framework used in economic analyses of policy alternatives and his ambiguity regarding the meaning of social costs. In Part III, we discuss his assumptions regarding the incentives and behavior of government decision-makers. Part IV is concerned with Richards' treatment of the distributional effects of pollution abatement, which we believe contains misleading statements that may inappropriately skew the policy debate. Finally, in Part V we address flaws in Richards' rationale for developing a new framework for policy instrument choice.

II. THE STANDARD ECONOMICS FRAMEWORK

In making his case that a more comprehensive framework is needed than that provided by environmental economics in order to fully analyze the social cost of environmental policy, Richards states:

   [W]hat we observe is a plurality of instruments and combinations thereof
   that have steadfastly defied economists' and policy analysts'
   prescriptions. …