Prescriptive Environmental Regulations
versus Market-Based Incentives
Jody Freeman & Charles D. Kolstad
When market strategies first emerged on the environmental policy scene over twenty years ago,1 there was a lively theoretical debate about their perceived advantages over traditional prescriptive regulation. The traditional approach—dubbed by its critics “command-and-control”—was seen as costly, cumbersome, and ineffective. Market approaches, by contrast, would enable government to accomplish its regulatory goals in a more efficient manner. Not only would market instruments be easier and cheaper to administer than prescriptive regulation, they would harness the profit motive in the service of environmental protection and dramatically reduce implementation costs. In addition, it was widely thought, market mechanisms would spur technological innovation, whereas commandand-control would freeze technology in place.
This collection of chapters asks whether, after over twenty years of experience, the promise of market mechanisms has been realized. How, in hindsight, do market-based approaches compare to command-andcontrol? What have we learned that might help us design the next generation of regulatory instruments for environmental protection? In an effort to provide a balanced discussion of these questions, the contributions are written by scholars from both economics and law, fields that sometimes have different perspectives on the effectiveness of environmental regulations. At the risk of oversimplifying, economists are often concerned with efficiency; legal scholars are often concerned with procedure and equity.
Why does evaluating the performance of market instruments matter, and why do it now? Historically, most of the arguments in favor of market mechanisms have been based on theory. Now that we have some empirical evidence of their performance, it is important to test that theory