Economic Instruments: Suited to Developing Countries?
Chapter 10, p. 218-262 in: Environmental Law in Development: Lessons from the Indonesian Experience, Michael Faure & Nicole Niessen (eds.), Cheltenham, Edward Elgar, 2006.
46 Pages Posted: 30 Nov 2013
Date Written: November 29, 2013
In this contribution Michael Faure, Marjan Peeters and Andri Wibisana discussed the question whether economic instruments, also referred to as marketable instruments, are also suited for developing countries. The classic arguments concerning the shortcomings of command and control instruments are discussed as well as the potential advantages of market-based instruments in controlling environmental pollution. Then the theory concerning environmental taxation as well as concerning emission trading is explained and attention is paid to a comparison of regulation, marketable permits and taxes. Also some practical experiences with the way in which marketable permits and environmental taxes have reduced emissions are presented as well. In addition to this public interest analysis attention is also paid to the so-called private interest analysis, showing that in some cases private interest may affect the choice of instruments for environmental policy. With respect to the specific case of developing countries the authors warn that one should not necessarily be overenthusiastic concerning the use of so-called economic instruments. One problem is that they require a lot of information and enforcement costs to be applied in an effective manner and another problem is that the use of those instruments may entail serious risks of collusion and corruption. In a collusion prone environment (which may often be the case in developing countries) one should hence be very careful with propagating so-called economic instruments that involve a transfer of money.
Keywords: instrument choice, environmental pollution, command and control, economic instruments, market based instruments, developing countries, environmental taxation, marketable permits, emission trading, public choice, interest group analysis
JEL Classification: K23, K13, K32
Suggested Citation: Suggested Citation