The role of market incentives in environmental policy
This article surveys the framework that economics brings to environmental policy and, in particular, the use of market incentives in relation to conventional approaches to regulating environmental quality. The article is organized as follows. Section 2 defines market failure more precisely in the context of environmental problems. Section 3 considers what economic theory has to say about solutions to market failure in the environmental realm. Section 4 compares and contrasts market-based environmental policies with more traditional, prescriptive approaches. Section 5 offers a closer focus on market-based policy instruments themselves; it compares and contrasts the two most common approaches, taxes and tradable permits. Section 6 summarizes the experience with selected market-based environmental policies in practice. Conclusions and possible areas for future research are offered in Section 7.