Specifically, the study assesses the implementation of water pollution control policies from 1970 to 1990 in four countries: Denmark, France, Germany and the Netherlands.
The study shows that economic instruments are indeed powerful instruments for the implementation of public policy.2 But the study also shows the importance of institutional settings in determining the success of economic instruments. Historical traditions of water management led the Netherlands to establish a coherent and very effective system, based on economic instruments, for pollution control of the surface waters, but different management traditions in France and Germany impaired the use of economic instruments. In Denmark, traditions of public policy-making impeded the use of economic policy instruments from the very beginning, and consequently results were especially disappointing.
WHY ECONOMIC INSTRUMENTS?
There is a considerable and rich literature on the use of economic instruments for pollution control (Baumol, 1972; Baumol and Oates, 1988; Crandell, 1983; Pearce, et al, 1989). The idea was first introduced by the British welfare economist Arthur Cecil Pigou, a founding father of welfare economics (Pigou, 1920). Reflecting on the famous London fog at the turn of the century and the economic costs imposed on the city due to reduced sunlight, resulting diseases and other serious damages, Pigou found a strong case for the taxation of air pollution externalities. His 1920 work, Economics of Welfare, in which the use of economic instruments for pollution control was first introduced, is regarded as a ‘blueprint’ for the subsequent North-European welfare state, although the pollution tax proposal, contrary to many other proposals for regulations, did not win support in the 1930s (Collard, 1981).
While the pricing of external effects of industrial production was originally seen as a response to market failures, e.g. the failure of the market to include the costs of external effects in market transactions, more recent advocates of economic instruments have seen the use of such instruments as appropriate also to deal with so-called policy failures, e.g. the failure of ‘command-and-control’policies to deal effectively with pollution.
Pigou’s argument was essentially that when pollution remains an unpriced externality to market transactions, it will result in a less optimal allocation of resources than if pollution is properly priced. By adding a tax to pollution, it is, at least in theory, possible to equate net marginal private costs with net marginal social costs, and thus to assure that market transactions lead to outcomes that are Pareto optimum.
When modern environmental economists began to appear in the late 1960s and early 1970s, as pollution became a prime concern for governments, they found not only market failures but also numerous and detailed regulations for the control of pollution. These regulations had evolved gradually since the turn of the century, and were mainly based on the command-and-control philosophy; e.g. they forced all businesses to adopt the same measures and practices for pollution control and thus to accept identical shares of the pollution control burden regardless of their relative costs and impacts.
The research project was carried out from 1990-1992 and supported by the Social Sciences Research Council in Denmark.