people and property. Local zoning laws regulate the ways we use land.
Regulatory commissions set rates for electricity, natural gas, local
telephone service, and a host of other goods and services. Seat belts,
brake lights, turn signals, air bags, internal door panels, bumpers, and
catalytic converters are compulsory and regulated in quality—all in a
single industry. The list goes on. A good case can be made that various
governments in Canada have more effect on the economy through
regulation than through taxing and spending.
The focus in this chapter is on a specific type of government intervention
in the economy, one that has become increasingly important in recent
years. In particular, we examine the negative externalities that lead to
environmental degradation and the government policies designed to
address them. As we will see, policies intended to protect the
environment do not always do so in an efficient manner. One of the
central themes in this chapter is that information available to the
regulatory agencies, especially regarding firms’ technologies for reducing
pollution, is generally incomplete. This lack of good information leads to
the result that market-based environmental policies are usually more
successful than direct regulatory controls imposed by government.
The chapter concludes with a discussion of a crucial policy issue. We
examine how greenhouse gas emissions are contributing to global climate
change, the technical challenges associated with reducing these
emissions, and policies designed to address this enormous challenge.