Economic Analysis of Environmental Policies - Example

Economics Name: Institution: Course: Tutor: Date: Introduction The command and control Regulations can be understood as the direct directive of a firm or an action by law that defines the activities permitted and those that are illegal. This method becomes different from other control approaches such as, the use of monetary incentives that comprises the application of taxation and subsidy as incentives for conformity. Therefore, the command is considered as the staging of quality standards by the authority to be conformed. The control element implies to the sanctions, which can result from non-conformity such as prosecution. The command and control techniques include influencing behavior through legislation, incentives, threats, agreement and contracts. Strengths and weaknesses of command and control regulations The conventional method to maintaining the environment is normally referred to as the Command and Control approaches and commonly considered as a lawful mechanism, which aims at defending the environment. Command and control regulations are commands intended to independent assessment takers needing them to locate one or more outputs or inputs given set principles or prohibiting them from exceeding such standards. (Theodore & Theodore, 2010). The most common form of command and control standards or levels are technological standards and performance standards that specify identical limits on the amount of pollution a firm can produce. The company therefore, regulates its amount produced or reduction to meet the set standards. When firms fail to comply with the set values they are considered lawbreakers and financial fines and other sanctions are used to get non-complying firms into compliance. Command and control strategy permits reasonably slight elasticity in conformity efforts given that such policies aim to compel all companies to take on similar portions of the pollution control burden, despite the cost involved. In areas where there is a major heterogeneity of abatement expenditure, command and control regulations will not be cost-effective. Except when all the polluters face the same pollution abatement costs, uniform emissions levels will not lower the costs of reducing emissions. However, in reality, abatement costs differ considerably between companies due to the different production plan, physical pattern, age of resources and other factors. One of the major weaknesses of the command and control method to environmental strategy creation is that costs of conformity may be significantly elevated than under supple techniques such as emissions trading and charges on emissions. This weakness becomes exacerbated as policies take the form of technological instruction or compulsory use of a given form of equipment. (Boersema & Reijnders, 2009). The presupposition then would be that the command and control regulations could obtain an environmental purpose in similar low cost approach as a market based mechanism. However, in order to attain this environmental goal, the regulator must characterize various standards for each pollution source while considering the abatement expenditure that each company faces. Since such information may not be presented and sometimes might not be disclosed by companies, and thus the command and control regulations will particularly attest to be more costly than other approaches. The strengths They are mostly favored in areas where the pollutant is extremely toxic such that the concern over their effect is likely to outweigh any economic efficiency concerns. And since the gains in this case will be much less than the costs to the environment, then the command and control mechanisms takes effect. The government will regulate and impose sanctions to the polluting firms in order to combat the negative effects resulting from the production process from industries, (Kolstad, 2000). Favored in cases when the marginal abatement Cost is uniform across all of the companies in the regulated industry and the government can easily know the costs. This implies that the government can easily regulate cost of pollutions in cases where the costs are identical, since it would be very easy for the government to get the information about the costs. (Boersema & Reijnders, 2009). When the original decrease for pollutant considerably benefits the public, as sustained reduction does not give as much gain, then the command and control approach proves the best. The command and control regulation are aimed at benefiting the society, and thus, where this objective is likely to be attained, then the government should consider implementing the mechanism. The command and control regulations have a fixed performance standards backed up in law to control environmental pollution. There is clear definition of undesirable behavior for the firms to comply, which are set to achieve maximum environmental benefit. This command and control regulations are sometimes considered as politically decisive, for some countries and can be used to obtain a sustainable environment. These regulations can be well with a high level of commitments from firms, and becomes cheap for the government. The command and control are very easy to change or alter to fit situations as compared to other approaches of environmental regulation and sustainability. They are flexible and easily applicable in all the sectors with low level of enforcement costs. With the approach of command and control rules, the firms are aware of the costs of polluting the environment. The weaknesses With the technology continually evolving, it becomes extremely complex for the regulatory agency to stay up to date with the most effective methods to environmental conservation. All of the command and control standards such as design, performance, and input are just one part of the dilemma to reduce pollution levels. This does not mean that the government should amalgamate all of the standards into a homogeneous regulation. This would significantly decrease the elasticity of selection for the firms. The command and control regulations limit a firm’s capacity to acquire the highest cost reduction way in order to carry on the production process while minimizing pollution. This happens because every individual company has differing cost structures, and the standard authorized from a national government agency does not give the companies the elasticity to address their given external issues, therefore this brings about to economic inefficiency. Sometimes it becomes difficulty and unfeasible for the government to identify the cost structures of each of the polluting companies. Therefore, this information is necessary if the regulation would to be efficient. (James, Jansen, & Opschoor, 1978). Although conventional approaches lead to an efficient result, they may depict unfairness from the polluting companies. To achieve efficiency in nearly all markets, the regulators should divide the liability for decreasing pollution unevenly between the polluting companies. The firms that are required to cut down pollution the most may complain over being treated differently. (Kolstad, 2000). Often times the relationship between the regulator and the firms might lead to a regulatory capture, and sometimes prove to be intricate and legalistic. Defining the conventional standards can be complex and costly for both the government and firms. The command and control regulations might be self-serving and undemocratic due to the bureaucratic procedures involved. They may also have a weak enforcement procedures, uncertainties, and transaction costs. (Kolstad, 2000). These command and control measures involves contentious standards, low intervention costs to individual firms and sometimes might experience legal difficulties. Monitoring the performance of these regulations becomes difficult and much more inefficient. These regulations in most cases depend entirely on the reliability of information in the market for the government to make decisions. In addition, this may create barriers for the participants to resolve disputes, (Kolstad, 2000). At times, the circumstances in the market can correct for command and control policies to work by itself. However, more often the situation, they do not work well since, the enforcement is weak, compliance low, and the objective of pollution abatement is not attained. High organizational and information outlay can influence the government, whereas high conformity costs for the companies generate more economic inadequacy, (Kolstad, 2000). Environmental control encompasses two key objectives, to control the quantity and intensity of pollution, and to promote the environmental value to a satisfactory level. These objectives can be attained through two different control techniques: the command-and-control regulations, and the economic instruments. The substantial cost benefit of effecting the environmental regulations and policies through economic tools as compared to command and control has resulted into a new horizon for environmental policy designers. It is now shared by the majority of the environmental strategy design and the open environmental bodies, which are cost of economic instruments is less than that of executing the command and control measures. In addition, the efficiency of the economic instruments is not less than command and control methods. The main distinction between the command and economic tools signify to their influence in the markets. Whereas command and control requires the markets to shelter the environmental outlays and savings, the economic instrument requires the ideal manner of behaviors equally from consumers and producers The strengths and weaknesses of economic instruments such as emissions taxes or emissions trading in the regulation of industrial pollution Strengths (i) Static in efficiency gains through reallocation of abatement In cases where the costs of pollution abatement differ across firms, economic instruments such as environmental taxes and emissions trading have the potential to minimize costs; this is because strategy mechanisms fail to distinguish among polluters with varying marginal expenses of reduction process. The polluter is provided with incentive to abate in all of the least expensive ways and thereby achieving a particular standard of abatement at lower cost, (Kolstad, 2000). (ii) Dynamic innovation incentive Regulatory regulation which specify that polluters have to use a given technologies or maintain emissions below a particular limit might obtain conformity although it does not support polluters to create additional reductions below this specified limit. The environmental taxes offers an continuing incentive for polluters to aim at reducing emissions, even lower than the present cost effective standards, since the tax implies to each unit of residual emissions, then creating an encouragement to make new technologies that have marginal cost below the tax rate is possible. (Kolstad, 2000). (iii) Robustness to negotiated erosion Efficient accomplishment of rules requires negotiation between firms for individual abatement. Therefore, the command and control regulations should necessitate different amounts of pollution abatement from different companies, to minimize the entire abatement costs. (iv)Revenue potential Environmental taxes and tradable permits generate incomes, as a consequence of the expenses made on each unit of residual emissions. The degree to which these incomes are applied should count as a further gain of the use of environmental taxes or emissions trading to firms and the government. (Kolstad, 2000). Weaknesses (i) Geographically varying damage When pollution damage differs with the source of emissions, then a consistent pollution tax is accountable to produce ineffectiveness, and firm-by-firm policies may be required to attain a more efficient result. In reality an environmental tax require not be controlled to apply the same rate to all firms, and could thus attain the efficient result through properly differentiated tax levels. However, once the tax level has to been set individually for each firm, the tax might become exposed to lobbying manipulation from the regulated firms. (Kolstad, 2000). (ii) Inappropriateness with firm’s decision-making structures For environmental taxes to encourage competent polluter responses, firms have to draw together information on both equipment selection and tax expenses. Companies contemplating whether to take on more pollution reduction are expected to balance the marginal tax investments against the marginal costs of reduction. (Harlan, 2000). This kind of interface may not prove to be a high priority in the internal organization of the company, and might need key changes to the decision process of the firm in order to amalgamate both the tax and abatement technology decisions. (Dewees & Everson, 1975). (iii) Harming avoidance activities At times, the penalty of an environmental tax may be unfavorable, if those firms subject to the tax react in a manner that is more destructive to the environment than the levied emissions. This could result to a detrimental outcome, (Kolstad, 2000). (iv)Distributional effects Environmental taxes may perhaps apply to transport, carbon components of fuels, and energy. Yet a high part of low earning individual budgets is used up on electricity, heating fuel, and transportation. Therefore, environmental taxes become often regressive. It sometimes leads to the gains from environmental protection accruing to high-income individuals who have the potential to pay for a public protection. However, this distributional dilemma is not precise to environmental taxes, (Kolstad, 2000). (iv)Concerns about global competitiveness Taxes on industrial inputs amplify the expenses of production. Where domestic production competes with goods of foreign manufacturers not subject to identical environmental taxes, the effect on the competitive situation of domestic companies becomes a major concern, (Kolstad, 2000). In conclusion, The application of both command and control and economic instruments either at the macro or at the micro level, proves that economic instruments becomes more efficient than the command and control tools because of the low-level execution and management costs involved. References Boersema, J. J., & Reijnders, L. (2009). Principles of environmental sciences. New York, N.Y: Springer. Dewees, D. N., & Everson, C. K. (1975). Economic analysis of environmental policies. Toronto: Published for the Ontario Economic Council by University of Toronto Press. Harlan, J. (2000). Environmental policies in the new millennium: incentive-based approaches to environmental management and ecosystem stewardship : a conference summary. Washington, D.C.: World Resources Institute in cooperation with the U.S. Environmental Protection Agency. James, D. E., Jansen, H. M., & Opschoor, J. B. (1978). Economic approaches to environmental problems: techniques and results of empirical analysis. Amsterdam: Elsevier Scientific Pub. Co. Kolstad, C. D. (2000). Environmental economics. New York: Oxford University Press. Theodore, M. K., & Theodore, L. (2010). Introduction to environmental management. Boca Raton: CRC Press/Taylor & Francis Group. Read More