ENVIRONMENTAL POLICY
toMBIs suggest that the case in favour of them is less persuasive than it first
appears.◗ Weaknesses in the economic case for market-based instruments
One problem with the MBI versus regulation debate is that it often involves a
highly stylised and sharply distinguished comparison of perfect ‘laboratory’
MBIs with flawed real-life regulations. In practice, MBIs encounter implemen-
tation difficulties that are either ignored or glossed over in the economics
textbooks.
One common claim is that MBIs will not encounter the informational
asymmetries that force regulators to use resources to discover how polluters
behave. Yet economic theory places great importance on setting a tax at
the correct level, so that it both builds in the external environmental costs
of the polluting activity in question and that it is set sufficiently high to
offer a real incentive for firms to reduce pollution and hence to maximise
thepotential efficiency of the tax. To ensure such accuracy the regulator
will need detailed technical information, which may only be obtainable
from the polluter or technically very difficult to assess. Indeed, the UK land-
fill tax is a rare instance of an eco-tax where the tax rate is based on the
marginal cost of the activity – managing landfills (EEA2006a: 24–5). Fur-
ther, the need to monitor performance and update assumptions about pol-
lution levels, demand elasticities and the relative value of goods, might –
in theory – oblige the regulator to make frequent adjustments to the tax
level; in practice, this would be costly and disruptive to both industry and
government planning, as illustrated by the (now withdrawn) Dutch MINAS
manure tax (OECD2005a). Crucially, if a proposed tax is perceived as too
onerous, then the government may encounter strong resistance from busi-
nesses, trade unions or consumers. Not surprisingly, eco-taxes are therefore
often set below the optimal level, which limits the efficiency gains, as with
French water pollution charges (Andersen 1994 ). A sub-optimal rate also
limits their effectiveness because, as in the case of fertiliser taxes in several
countries, the price was set too low to have any significant effect on sales
(Eckerberg 1997 :31); indeed, they have been withdrawn in Austria, Finland
and Norway (EEA2006a: 7). In practice, the environmental benefits of ear-
marked taxes may not come from persuading polluting firms or consumers
to change behaviour but from investing the revenues raised in environmen-
tally beneficial ways, such as subsidising firms to adopt cleaner technologies
(Andersen 1994 ).
Similarly, the case for MBIs seems to have been ‘developed in an imagi-
nary world where market solutions are self-enforcing and therefore require
little or no policing’ (Braadbaart 1998 :143). The flaws of real-world regula-
tions are compared to apparently perfect textbook MBIs, but MBIs encounter
implementation problems too. It is unlikely that all polluters will be honest
citizens. After all, if polluters are prepared to ignore regulatory standards