Dutch Manure Policy: The Lack of Economic Instruments

Abstract

In the welfare economic literature environmental problems are traditionally described as external diseconomies (cf. Maler, 1985;Bromley, 1986). This tradition has its roots in Pigou’sEconomics of Welfare(Pigou, 1920). Just as much a tradition among economists is Pigou’s recommendation to internalize external (dis)economies. According to Pigou (Pigou, 1920, p. 192) the state should correct the market failure by imposing a tax on the production of external diseconomies (e.g. charging for the emission of processing water) and by subsidizing the production of external economies (e.g. purification of processing water). In this way the external economy (e.g. the natural resource used) receives a shadow price which is included in the agents’ private cost-benefit calculations. If the shadow prices are set at the right level, a Pareto optimal exploitation of nature - that is pollution of the environment and depletion of natural resources according to the preferences of the economic agents - is supposed to be the result.