A Positive Theory of Environmental Quality Regulation

This paper demonstrates that environmental-quality regulation may enhance producer wealth while simultaneously reducing an externality problem by restricting access to common property. Regulation not only corrects a resource misallocation, but it creates a scarcity rent as well. In the recent history of environmental quality, the common-access problem has been addressed by federal and state agencies through a standards-based approach, rather than through the enforcement of tradable property rights. As a consequence, rents from the right to use these assets have accrued to producers. The data are convincing that there is a strong interplay between producers, consumers, and the victims of pollution. Each party has some influence on the outcome, and one-sided analysis neglects many important aspects of regulation. Environmental-quality regulation is complicated, but many of the observed perplexities are consistent with a rent-seeking, self-interest theory of government. 46 references, 1 figure, 7 tables.