learning objectivesAfter reading this chapter you will be familiar with the following:
• salient features of effluent charges;
• the advantages and disadvantages of using effluent charges as a policy tool for environmental regulations;
• transferable emission permits as a concept and environmental policy instrument;
• strengths and weakness of transferable emission permits;
• how emissions trading, banking, offset and bubble policies are designed to work;
• emissions trading in practice: the case of the United States acid rain reduction program.
Thrust a price theorist into a world with externalities and he will pray for second best—many firms producing and many firms and/or consumers consuming each externality, with full convexity everywhere. No problem for the price theorist. He will just establish a set of artificial markets for externalities, commodities for which property rights were not previously defined. Decision units, being small relative to the market, will take price as given. The resulting allocation will be competitive outcome of the classical type. If artificial markets do not appeal, an equally efficient taxing procedure is available.
(Starrett and Zeckhauser 1992:253)