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A key concern for environmental economists is the inefficiency of these regulations. Their ar- gument is a bit different from that of Pigou. In recent literature, such regulations are shown to be inefficient because different firms with different marginal abatement costs are required to take similar abatement measures. If governments take such a standardised approach, the total social costs of pollution control are substantially higher than if pollution is controlled where the marginal abatement costs are lowest. The use of economic instruments such as taxes, on the other hand, will assure that pollution control takes place only where the costs of control are smaller than or equal to the amount of the tax, thus for example inducing a low-cost firm to reduce 90 per cent of its discharges and for a high-cost firm only 10 per cent -- instead of command-and-control regulations requiring both of them to reduce pollution by 50 per cent.

In spite of the considerable progress in environmental regulation since Pigou’s first proposal, economists unfortunately continue, however, to treat the issue through micro-economic partial equilibrium analysis that disregards the complexities present today. The theory treats economic instruments not as a complement to other regulations, but as a perfect substitute to all other regulations.3 Although "command- and-control" regulations are criticised for not leading to efficient solutions, few attempts have been to explain governments’ preference for command-and-control regulations. Instead, economists assume that inefficient regulations can at one stroke be replaced by a single policy instrument -- the Pigouvian tax. The literature on environmental economics is essentially an exercise in refining the circumstances under which such a tax could be applied or eventually replaced by transferable pollution permits.

If environmental economists intended to confine themselves to the science of economics, their premises would be regarded as necessary tools to pursue economic research and would raise no objec- tions. However, environmental economists are probably the single group of researchers most inclined to make recommendations to policy-makers on the basis of their findings. Baumol and Oates claim that they work "is not meant to be theory for theory’s sake. Our prime concern is policy." (Baumol and Oates, 1988).


According to the authors of what has now become the standard work on environmental economics:

"The formal analysis confirms that in a competitive setting the solution to our problem requires only a single policy measure: a Pigouvian tax (or effluent fee) on emitters equal to marginal social damage. More precisely, the environmental authority should levy a fee per unit of smoke emissions equal to the marginal damages (residents and other firms)." (Baumol and Oates, 1988: 22 (Ibid).

The criterion according to which policy instruments are assessed is, as in the traditional Pigouvian solution, efficiency:

"As is generally recognized, the Pigouvian tax serves to internalize the external costs that the emitting factory imposes on others. Consequently, the factory owners will take into consideration not only their usual costs of production, but also the other forms of social cost that their activities entail (...) we find that a Pigouvian charge equal to marginal social damage leads to an efficient result." (Baumol and Oates, 1988:22).


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