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the turn of the century. Although hydrological water authorities existed in parts of Germany (and in south-western Denmark), these institutions were evidently too weak to be trusted with the task of water pollution control. A ban on cost-shifting and better coordination among local authorities could have facilitated a more coherent use of the Polluter-Pays Principle.

A related lesson from this study, then, is that the choice of an agent responsible for the im- plementation of a system of economic instruments, and the careful construction of incentives that support policy objectives, can be just as important as the introduction of economic instruments. In particular, substantial consideration should be given to the interests of agents to act in accordance with the purpose of the policy, as well as to the possible economic loopholes.

Unfortunately, economic instruments are often introduced on a marginal basis, that is, they are simply added to existing structures and policies in the hope that everything will work smoothly together. This approach clearly does not produce an appropriate understanding of the incentives at work at the level of implementation. Incentives that derive from programmes under the auspices of other ministries or sectors are neglected or inappropriately considered, and among officials accustomed to traditional legal instruments, there is often a defective perception even of the economic incentives accruing from the regulations under their own responsibility. In France, for example, it is useless to levy communes for their discharges, as the communes’limited financial resources offer them limited leeway to respond to the levy (an official in a River Basin Agency complained that communes were not willing to construct sewage plants even at a 80 per cent subsidy, but it appears that they have little chance of raising the remaining 20 per cent by themselves).

Because the use of economic and market-oriented policy instruments has become fashionable, some administrations are eager to increase their use of these policy instruments, regardless of their possible impacts. In this sense, the use of market-oriented instruments has become an institutionalised

response to all kinds quickly discredit this

of regulatory problems. policy instrument. Since

But to apply economic instruments thoughtlessly may the experience of individual departments in the use of

economic instruments is often limited, a specialised task force that the construct of economic incentives could be helpful for many

could assist in governments.

reviewing and assessing Although Ministries of

Finance are often involved in the establishment usually limited to possible revenues.

of

new

economic

instruments,

their

scope

of

interest

is

An appropriate institutional framework should be seen as an important precondition for the use of economic instruments. Governments should therefore consider how existing institutions could be used to directly facilitate the implementation of the programme. The existence of the Rijkswaterstaat is instructive; in itself a conservative and traditional body, its research facility RIZA provided information on control technologies to those subject to the effluent charges so that transaction costs were minimised. Economic instruments are important in providing incentives, but frequently the regulated -- whether individuals or firms -- lack the information, skills and know-how to respond in a rational way. Firms frequently miss information on how water and energy use is distributed among different parts of the production process, paying attention only to the final bill. To reduce costs, including taxes on energy and water use, firms must spend resources to investigate alternative solutions. Such transaction costs can impede the incentives to react to economic instruments. By building an institutional network of actors who can assist in lowering such transaction costs, more modest economic instruments are more likely to be successful, and at reduced social costs, than draconian economic instruments that are sufficiently high to outweigh heavy transaction costs.

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