Question

Why could the market based environmental policies be an issue if the emissions are not uniformly mixed?

Answer 1

While traditional regulatory and voluntary methods are useful policy instruments for certain kinds of environmental issues, incentive-based strategies are increasingly becoming common as instruments to address a broad variety of environmental issues, from acid rain to climate change. Market-based approaches or incentives provide ongoing financial and quasi-monetary inducements to encourage polluting companies to decrease damaging pollutant releases.

As a consequence, market-based approaches generate an incentive for the private sector to integrate pollution reduction into manufacturing or consumption choices and innovate in such a manner that the least expensive technique of reducing pollution is continuously searched for. A criticism of command-and-control strategies is that companies are only encouraged to lower themselves to a controlled level. Companies will decrease their emissions with market incentives as long as it is financially important for them to do so, and this usually occurs at a stage where marginal cost reduction is equated across all controlled companies.

Company cost savings also often translate into cost savings for clients who buy products from controlled companies, leading to reduced general social expenses. The primary disadvantage connected with financial incentives is that they may be unsuitable to address environmental issues that raise concerns about equity. For instance, emissions trading programs could result in unintended concentration of pollution in economically disadvantaged regions