The role of economics in environmental policy

Abstract

Economic growth will almost certainly continue. Although there are those who dispute the compatibility between economic growth and environmental sustainability, it is likely that future economic development will be increasingly based on the principle of sustainability. Systems for decision making therefore need to be designed with this in view. A distinctive feature of the existing decision making process surrounding environmental policy is the minor role played by markets, and the predominance of government intervention in the allocation of resources. The resolution of environmental issues within the political process has been time consuming and in many cases inadequate. Critics of the market process argue that private sector agents will try to internalise benefits and externalise costs wherever possible. However, the political process also creates externalities by diffusing costs and concentrating benefits. Either way, the potential for the creation of externalities exists. Hence a combination of market-based policies with some outright regulation is suggested as a means of integrating economic and environmental considerations. There is undoubtedly more scope to use market-based mechanisms in the resolution of environmental problems. In the event of a move to a more market-orientated approach, the role of government would be more to ensure the smooth workings of the market through regulation, the provision of information and education. Direct regulation could be reserved for the more difficult environmental issues. In this paper, the potential role of market-based mechanisms in solving environmental problems is examined, with reference to some particular policy instruments.