Economic incentives for environmental protection: Integrating theory and practice

For decades, economists have been extolling the virtues of market-based or economic-incentive approaches to environmental protection. Some 70 years ago, Arthur Cecil Pigou (1920) suggested corrective taxes to discourage activities that generate externalities. A half century later, J. Dales (1968) showed how the introduction of transferable property rights could work to promote environmental protection at lower aggregate cost than conventional standards. From these two seminal ideas - corrective taxes and transferable property rights - a substantial body of research has developed. Both environmental taxes and marketable permits are coming of age in the policy arena. Examples include the introduction of marketable permits in the United States to control acid rain, the use of changes in Europe to limit air and water pollution, and the employment of deposit-refund schemes for products ranging from beverage containers to batteries. The introduction of these tools on a large scale provides a unique opportunity to extend the frontiers of knowledge. This essay strives to identify prominent issues that merit investigation. 8 refs.