Theory of economic instruments
This chapter presents the economic arguments in favour of the use of economic instruments for environmental protection. In an ideal situation, economic instruments could be used to achieve the optimal level of pollution. The ideal Pigovian tax is clearly a powerful economic instrument but it has practical limitations. The taxation of pollution has been described as the stick approach to environmental management. Environmental policy is concerned with reducing the amount of environmental degradation that arises due to a range of human activities. The use of policy to reduce the type of environmental degradation just described presupposes that the degradation is in some sense excessive. Regulations such as standards, permits and quotas possess an important feature: they provide greater certainty as to their environmental outcome than many economic instruments. A combination of regulation and economic instruments may often be the best policy.