The Role of Economic
Thomas H. Tietenberg
Environmental regulators and lobbying groups with special interests in environmental protection in the United States traditionally have looked upon the market system as a powerful and potentially dangerous adversary.That the market unleashed powerful forces was widely recognized, and that those forces clearly acted to degrade the environment was widely lamented. Meanwhile, growth proponents have traditionally seen environmental concerns as blocking projects that had the potential to raise living standards significantly. Conflict and confrontation became the modus operandi for dealing with this clash of objectives.
The climate for dealing effectively with these concerns has improved dramatically within the last few years. Not only have growth proponents learned that in many cases short-term wealth enhancement projects that degrade the environment are ultimately counterproductive, but environmental groups have come to realize that poverty itself is a major threat to environmental protection. No longer is the issue of economic development and environmental protection seen as an "either-or" proposition. Sustainability has become an important, if still somewhat vaguely defined, criterion for choosing among alternative growth paths. 1 Rather, the focus has shifted toward the identification of policies or policy instruments that can promote the alleviation of poverty and at the same time protect the environment.
One approach that is generating a great deal of interest is known generically as an economic incentives approach to environmental regulation. Instead of mandating prescribed actions, such as requiring the installation of a particular piece of control equipment, which is the more traditional form of regulation, environmental objectives are achieved by changing the economic incentives of the agents. This can be done with fees or charges, transferable permits, or even liability law. By changing the incentives agents face, they can use their typically superior informa-____________________