ABSTRACT
This chapter discusses the theoretical foundations of two policy instruments widely used to regulate environmental pollution: emission standards and effluent charges. While theory considers expected social damage and control costs to prescribe a specific policy goal (i.e., the desired reduction of the emissions of a certain pollutant) to achieve a ‘socially’ optimal outcome, in reality achieving such a goal is complicated for several reasons. How far the actual outcome deviates from the socially optimal goal depends on the nature of the pollution under consideration (i.e., highly toxic versus municipal wastes), the policy instruments used (emission standards versus effluent changes), compliance (transaction) costs, and the prevailing ideology of society towards the environment and environmental policy. In addition, the chapter discusses the relative merit of the two policy instruments using specific criteria: cost-effectiveness, compliance (transaction) costs, moral and ethical considerations, fairness or equity considerations, and adverse ecological effects, such as loss of biodiversity. The analytical approach follows standard economics, although the chapter tries to mitigate economists’ bias to market-based pollution instrument, in this case the use of effluent charges.
