Economic Instruments for Environmental Protection: Can We Trust the “Magic Carpet”?

Economic instruments appear at first to be a promising alternative to regulations as instruments of environmental policy. Because they put market forces to work for the goal of a sustainable society, they are often portrayed as achieving goals at much lower costs. In this sense, economic instruments appear as a type of “magic carpet” for the trip to sustainable development. The article presents a “pre-flight check” of the carpet’s viability, and finds several potential design problems. Economic instruments in practice often don’t comply with the underlying economic theory. Further, the dominating notion of cost-effectiveness is only one of many criteria which policy-makers must taken into account in the real world. It is not a question of “good science” vs. “bad politics,” but a recognition that politics has a rationality of its own. The lessons learned from analyses of policy-making and implementation deserve, therefore, equal attention with the presupposed behavioral reactions of key target groups. Issues to be taken into account include the interests of the actors involved, and the institutional contexts of both policy-making and policy-learning. Such factors are discussed by using them to shed light on observed deviations in instrument design.