Environmental Externalities and Political Externalities: The Political Economy of Environmental Regulation and Reform

Abstract:     
For years, economists and lawyers have bemoaned the inefficiencies of the current centralized, command-and-control regime of environmental regulation. Despite the manifest failure of the current regime, however, the system of environmental regulation seems to be largely immune to rationalization and reform. This article advances a public choice explanation for the persistence of the current centralized, command-and-control system of environmental regulation. The model is premised on a simple model of gains to trade. Because of the defects of the political process, well-organized and powerful special interests can use the apparatus of government to transfer wealth to themselves. To the extent that the strategic use of regulation creates economic rents, it creates the opportunity for the division of those rents among these same interest groups. This article identifies a number of special interests that share an attachment to the current regime, and hostility to decentralized, market-based alternatives. In particular, this article identifies industries and firms directly-benefited from environmental regulation; industries and firms indirectly-benefited through cartel-like effect of restricting industry output and preventing entry; organized environmental interests who gain power, prestige, and money from the current system; politicians and regulators; and lawyers. Through the system of environmental regulation, these interests can generate economic rents to be distributed among themselves at the expense of the dispersed public. Thus, the article challenges the conventional portrayal of the system of environmental regulation as a struggle between industry polluters who oppose regulation and the public represented by environmental lobbying groups and regulators that favor regulation. Finally, the possibilities for reform of the current regime are presented.

Note: Reprinted with the permission of the Tulane Law Review Association, which holds the copyright. All rights reserved.

JEL Classification: Q28, Q38

Accepted Paper Series