Environmental Economics: a Survey

Environmental Economics: A Survey Maureen L. Cropper; Wallace E. Oates Journal of Economic Literature, Vol. 30, No. 2. (Jun., 1992), pp. 675-740. Stable URL: http://links.jstor.org/sici?sici=0022-0515%28199206%2930%3A2%3C675%3AEEAS%3E2.0.CO%3B2-D Journal of Economic Literature is currently published by American Economic Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/aea.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is an independent not-for-profit organization dedicated to and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact [email protected]. http://www.jstor.org Mon May 7 12:41:42 2007 journal of Economic Literature Vol. XXX ('June 1992), pp. 675-740 Environmental Economics: A Survey BY MAUREENL. CROPPERAND WALLACEE. OATES University of Ma yhnd and Resources for the Future Both authors are members of the Department of Economics, Uniuer- sity of Maryland, and are Fellows at Resources for the Future. We are grateful for many valuable comments on earlier drafts of this paper to a host of economists: Nancy Bockstael, Gardner Brown, Richard Carson, John Cumberland, Diane DeWitt, Anthony Fisher, A. Myrick Freeman, Tom Grigalunas, Winston Harrington, Robert Hahn, Charles Howe, Dale Jorgenson, Charles Kolstad, Ray Kopp, Allen Kneese, Alan Krupnick, Randolph Lyon, Ted McConnell, Albert McGartland, Robert Mitchell, Arun Malik, Roger Noll, Raymond Palmquist, John Pezzey, Paul Portney, V. Kery Smith, Tom Tieten- berg, and James Tobey. Finally, we want to thank Jonathan Dunn, Joy Hall, Dan Mussatti, and Rene Worley for their assistance in the preparation of the manuscript. I. Introduction the analysis was of a fairly general charac- ter, there was at least some careful re- HEN THE ENVIRONMENTAL~~VO~U~~O~search underway exploring the applica- Warrived in the late 1960s, the eco- tion of economic solutions to certain nomics profession was ready and waiting. pressing environmental problems (e.g., Economists had what they saw as a coher- Allen Kneese and Blair Bower 1968). ent and compelling view of the nature The economist's view had-to the dis- of pollution with a straightforward set of may of the profession-little impact on policy implications. The problem of ex- the initial surge of legislation for the con- ternalities and the associated market fail- trol of pollution. In fact, the cornerstones ure had long been a part of microeco- of federal environmental policy in the nomic theory and was embedded in a United States, the Amendments to the number of standard texts. Economists Clean Air Act in 1970 and to the Clean saw pollution as the consequence of an Water Act in 1972, explicitly prohibited absence of prices for certain scarce envi- the weighing of benefits against costs in ronmental resources (such as clean air the setting of environmental standards. and water), and they prescribed the in- The former directed the Environmental troduction of surrogate prices in the form Protection Agency to set maximum limi- of unit taxes or "effluent fees" to provide tations on pollutant concentrations in the the needed signals to economize on the atmosphere "to protect the public use of these resources. While much of health"; the latter set as an objective the 676 Journal of Economic Literature, Vol. XXX (June 1992) "elimination of the discharge of all [our der the new 1990 Ainendinents to the emphasis] pollutants into the navigable Clean Air Act. More broadly, an innova- waters by 1985."' tive report from within the U.S. Con- The evolution of environmental policy, gress sponsored by Senators Timothy both in the U. S. and elsewhere, has inev- Wirth and John Heinz, Project 88: Har- itably brought economic issues to the nessing Market Forces to Protect Our fore; environmental regulation has neces- Environment (Robert Stavins 1988) ex- sarily involved costs-and the question plores a lengthy list of potential applica- of how far and how fast to push for pollu- tions of economic incentives for environ- tion control in light of these costs has mental management. Likewise, there is entered into the public debate. Under widespread, ongoing discussion in Eu- Executive Order 12291 issued in 1981, rope of the role of economic measures many proposed environmental measures for pollution control. Most recently in have been subjected to a benefit-cost January of 1991, the Council of the Orga- test. In addition, some more recent nization for Economic Cooperation and pieces of environmental legislation, nota- Development (OECD) has gone on rec- bly the Toxic Substances Control Act ord urging member countries to "make (TSCA) and the Federal Insecticide, a greater and more consistent use of eco- Fungicide, and Rodenticide Act (FI- nomic instruments" for environinental FRA), call for weighing benefits against management. Of particular note is the costs in the setting of standards. At the emerging international concern with same time, economic incentives for the global environinental issues, especially containment of waste discharges have with planetary warming; the enornious crept into selected regulatory measures. challenge and awesome costs of policies In the United States, for example, the to address this issue have focused interest 1977 Amendments to the Clean Air Act on proposals for "Green Taxes" and sys- introduced a provision for "emission off- tems of tradable permits to contain global sets" that has evolved into the Emissions einissions of greenhouse gases. In short, Trading Program under which sources this seems to be a time when there is a are allowed to trade "rights" to emit air real opportunity for environmental econ- pollutants. And outside the United omists to make some valuable contribu- States, there have been some interesting tions in the policy arena-if, as we shall uses of effluent fees for pollution control. argue, they are willing to move from This is a most exciting time-and per- "purist" solutions to a realistic consider- haps a critical juncture-in the evolution ation of the design and implementation of econoinic incentives for environmental of policy measures. protection. The Bush Administration Our survey of environinental econom- proposed, and the Congress has intro- ics is structured with an eye toward its duced, a measure for the trading of sulfur policy potential. The theoretical founda- emissions for the control of acid rain un- tions for the field are found in the theory of externalities. And so we begin in Sec- 'Although standards were to be set solely on the tion I1 with a review of the theory of basis of health criteria, the 1970 Amendments to the environmental regulation in which we Clean Air Act did include economic feasibility among explore recent theoretical results regard- its guidelines for setting source-specific standards. Roger Noll has suggested that the later 1977 Amend- ing the choice among the key policy in- ments were, in fact, more "anti-economic" than any struments for the control of externalities: that went before. See Matthew McCubbins, Roger effluent fees, subsidies, and marketable Noll, and Barry Weingast (1989)for a careful analysis of this legislation. emission permits. Section I11 takes us Cropper and Oates: Environmental Economics 677 from the theory of externalities to policy mists have shown considerable ingenuity applications with a focus on the structur- in the development of techniques- ing and implementation of realistic mea- known as indirect market methods-that sures for environmental management. exploit the relationships between envi- This section reviews the work of environ- ronmental quality and various marketed mental economists in trying to move from goods. These methods allow us to infer formal theorems to measures that ad- the value of improved environmental dress the variety of issues confronting an amenities from the prices of the market environmental regulator. We describe goods to which they are, in various ways, and evaluate briefly, as part of this treat- related. Second, environmental econo- ment, the U.S. and European experi- mists have turned to an approach re- ences with economic incentives for pollu- garded historically with suspicion in our tion control. In addition, we explore a profession: the direct questioning of series of regulatory issues--centraliza- individuals about their valuation of en- tion versus decentralization of regulatory vironmental goods. Developing with authority, international effects of domes- considerable sophistication the so-called tic environmental policies, and enforce- "contingent valuation" approach, they ment-matters on which environmental have been able to elicit apparently reli- economists have had something to say. able answers to questions involving the In Section IV, we turn to the measure- valuation of an improved environment. ment of the benefits and costs of environ- In Section IV, we explore these various mental programs. This has been a partic- methods for the valuation of the benefits ularly troublesome area for at least two and costs of environmental programs and reasons. First, many of the benefits and present some empirical findings. costs of these programs involve elements In Section V, we try to pull together for which we do not have ready market our treatment of measuring benefits and measures: health benefits and aesthetic costs with a review of cases where bene- improvements.

Load more