Policy objectives

1
Policy objectives targets

• Pollutants - (negative) externalities exist
  when some of the consequences of production
  (pollutions imposing costs on others) are not
  considered when production decisions are made.
  resource misallocation
• Pollution control policy goals
• Ideal maximise expected net economic benefits
  to society (economically efficient or first-best
  outcome)
• Second-best / cost-efficient achieve specific
  environmental objectives at least cost given
  circumstances (i.e. available policy instruments,
  transaction costs, political, legal or
  informational costs)
• Alternative policy targets
• Performance-based measures
• Design-based measures

2
Evaluation criteria

• Economic performance ability to achieve
  objectives at minimal cost
• Administration and enforcement costs
• Flexibility effectiveness of control in the
  context of changing environmental and economic
  conditions
• Incentives for innovation
• Political feasibility (interest groups, path
  dependency, etc.)

3
Economic incentives

• Realign private social costs
• Performance-based (i.e. taxes on water quality)
• Monitoring runoff prohibitively costly
• High levels of information needed by both parties
• Uncertainty makes compliance unattractive to
  risk-averse producers
• Design-based (i.e. taxes/subsidies on
  inputs/technology)
• Expected runoff-based instruments more costly
  than those based on input and technology use
  directly
• Market-based (i.e. emissions trading)
• Requires that activities can be regulated
  effectively binding constraints, enforceable
  system, etc.

4
Standards

• Legally require producers to behave in a
  specified manner
• Performance (not feasible)
• Runoff - cannot observe if compliant
• Ambient - predicting how actions will affect
  pollution levels difficult
• Need homogeneity of producer expectations
• Natural variability of effects must set limits
• Design
• Inputs / technologies - only moderate welfare
  loss from uniform application
• Expected runoff - higher administration costs

5
Liability

• While imposed ex-post, serve as ex-ante incentive
  to account for externalities
• Strict liability vs. negligence (based on
  performance or actions)
• Unilateral vs. bilateral care
• Feasibility of efficient control limited
• Inability to trace pollution back to source
• Require knowledge of how choices affect
  performance measures to be effective
• Negligence rules also require site-specific
  information
• Litigation process expensive

6
The Nitrates Directive

• Standards approach
• Performance-based definition of vulnerable zones
  appropriate?
• Voluntary code of good practice
• Binding action plans for vulnerable areas
• Design-based must ensure fixed limit on amount
  of manure spread per unit of area not exceeded