Environmental market creation: saviour or oversell?

In recent years considerable attention has been paid to the notion of market creation for the conservation of environmental assets. Market creation establishes a market in the external benefit or cost in question (e.g. biodiversity or pollution reduction) and leaves the relevant parties to adjust their behaviour accordingly. While most attention has been paid to market creation through tradable permits and taxes (the polluter-pays), it is less easy to secure a perspective on beneficiary-pays initiatives. Both polluter-pays and beneficiary-pays initiatives are examples of modified Coaseian bargains in which governments intervene in the bargains to lower transactions costs, establish property rights, deal with public goods issues, or act on behalf of disadvantaged groups. This paper reviews four major initiatives in this respect - debt-for-nature swaps, bioprospecting and the Global Environment Facility at the global level, and the Costa Rican Forest Law at the local level. It finds that while there is much to applaud in initiatives in these new markets, serious questions remain about the modest flows of funds associated with such global bargains, and the extent to which they secure environmental improvements relative to the baseline of business-as-usual.JEL Classification: D49, D62, H41, O19, Q57, Q2I am indebted to members of the Wildlife Conservation Research Unit at Oxford University and to David Simpson of Resources for the Future and University College London for valuable comments on an earlier version of this paper. Any remaining mistakes are entirely my responsibility.     

The measurement of entry rates: Recondiseration and resolution

This paper extends the recent analysis of Audretsch and Fritsch on entry rates, and suggests a resolution to the possible policy confusion which they discuss. British data also show very different results for the determinants of entry depending on whether the ecological or labour market entry rate is used. It is shown that, in addition to the static, size-distribution effect discussed by Audretsch and Fritsch, there are dynamic factors at work which may lead to this result. However, there need be no conflict in policy signals arising from this, because the labour market approach can be shown to be a superior measure of entry rates where spatial analysis is undertaken.     

Measuring the trade-off between economic growth and a clean environment

This article surveys various aspects of the measurement of environmental quality from the view point of national accounting and welfare economics. It focuses on the question whether GNP or NNP should be corrected for environmental change (green or eco-GNP) or whether physical accounts provide sufficient information for an assessment of the trade-off mentioned above. We conclude that valuation of (services from) environmental capital cannot be avoided for such assessment, but can only be made using a model based approach. Statistical agencies should continue to collect data on environmental quality and to value changes in environmental capital in the context of national resource accounting. However, official statisticians should refrain from correcting GNP or NNP for environmental change, as this correction implicitly contains a political judgment and cannot be based on mere technical knowledge.     

Efficiency of Nonpoint Source Pollution Instruments: An Experimental Study

In nonpoint source pollution problems, the regulator does not observe each polluters individual emission, which prevents him from using the conventional policy instruments. Therefore, new instruments have been designed to regulate this type of pollution. In an experiment, we compare the efficiency of some of these instruments: an input-based tax, an ambient tax/subsidy, an ambient tax, and a group fine. We assume that polluters themselves are affected by environmental damages. A control session without any regulation is also carried out in order to study the status quo situation. Our experimental data show that the input tax and the ambient tax are very efficient and reliable, and the group fine is fairly efficient and reliable. These instruments improve social welfare with respect to the status quo. On the contrary, the ambient tax/subsidy decreases social welfare with respect to the status quo, and its effect is very unreliable.     

From “tax state” to “debt state”

The paper is motivated by Joseph A. Schumpeter's The Crisis of the Tax State. It inquires whether the buildup of government debt in peacetimeprosperity is a threat to the stability, existence or creation of viable tax states. The paper begins by setting out Schumpeter's conception of the tax state and the nature of recent political-economic events which have reinvigorated the concept. Next the paper sets out some simple debt dynamics and sketches a debt-induced business cycle arising from heavy reliance on debt finance in peacetimeprosperity. Finally, the paper assesses threats to the tax state in light of recent work on path dependence and positive feedback. An attempt is made to throw some light on whether the plethora of new, and often small, states spawned by the demise of communism can be viable tax states.Essay on Government, the Tax State and Economic Dynamics submitted to the Third Schumpeter Prize Competition.     

Economic instruments for emission abatement under appreciable technological indivisibilities

The paper explores the performance of decentralized incentives when abatement involves technological indivisibilities. Technologically, pollution abatement is often carried out as a discrete process, if pollution reduction involves relatively large-scale investments in emission abatement equipment.Consequently, the firm's response to decentralized economic incentives for pollution abatement is affected by the indivisible property of the technology. It can be shown that in such cases efficiency may not be realized. Installing an abatement device may entail too much or too little investment compared with the eficient solution.To partially remedy this problem, an incentive scheme which incorporates a fine (penalty) on pollution-induced damages is proposed in this paper. Essentially, as in the case of the command and control approach, the mechanism imposes a fine when firms do not meet an aggregate (e.g., a bubble) emission level. The fine is set as a proportion of the polluting firm's share of the total excess damage inflicted when the standard has been violated. The paper explores alternative outcomes under this scheme in the framework of a non-cooperative game.The outcomes under command and control (uniform percentage reductions), taxes, pollution permits and the fine scheme are illustrated with data from the haifa area in northern Israel. They are compared with the social planner solution in terms of efficiency (achieving a given standard at minimum cost) and the volume of transfer cost.     

Corporate Lobbying, Regulatory Conduct and the Porter Hypothesis

Michael Porter, the influential Harvard management guru, has promoted the idea that compliance with stricter environmental regulations can afford secondary benefits to firms through improved product design, innovation, corporate morale and in other ways. Once these secondary benefits are factored, the net cost of compliance is argued to be lower than conventionally thought and may even be negative. Whilst environmental economists have rejected the Porter Hypothesis as being based on excessively optimistic expectations of the likely size of such secondary benefits the underlying ideas do enjoy significant credence in the business community. In the context of a lobbying model of regulatory policy-making we argue that the EPA should change the way it conducts regulatory policy to take account of Porter's views – even if it knows those views to be misguided. The model serves to illustrate the more general point that fashions in management thinking can be expected to impact the optimal conduct of regulatory policy.     

Constitutional “Rules” and Intergenerational Fiscal Policy

This paper analyzes the impact of alternative political institutions on sustainable fiscal policies. We study the choice of intergenerational transfers as outcomes of an infinite social security game among successive selfish median voters. Majoritarian systems accord the current median voter maximum fiscal discretion but no direct influence over future policy. This political arrangement sustains, among others, dynamically inefficient transfers and volatile, non-stationary sequences. Constitutional rules award to the minorities veto power over fiscal policy changes proposed by the majority. This unanimity provision is equivalent to partial precommitment. Under constitutional rules, sustainable fiscal policies feature Pareto efficient, non decreasing transfer sequences.     

Biological Adaptation in Human Societies: a ‘Basic Needs’ Approach

The groundzero premise (so to speak) of the biological sciences is that survival and reproduction is the basic, continuing, inescapable problem for all living organisms; life is at bottom a survival enterprise. It follows that survival is the paradigmatic problem for human societies as well; it is a prerequisite for any other, more exalted objectives. Although the term adaptation is also familiar to social scientists, until recently it has been used only selectively, and often very imprecisely. Here a more rigorous and systematic approach to the concept of adaptation is proposed in terms of basic needs. The concept of basic human needs has a venerable history – tracing back at least to Plato and Aristotle. Yet the development of a formal theory of basic needs has lagged far behind. The reason is that the concept of objective, measurable needs is inconsistent with the theoretical assumptions that have dominated economic and social theory for most of this century, namely, valuerelativism and cultural determinism. Nevertheless, there have been a number of efforts over the past 30 years to develop more universalistic criteria for basic needs, both for use in monitoring social wellbeing (social indicators) and for public policy formulation. Here I will advance a strictly biological approach to perationalizing the concept of basic needs. It is argued that much of our economic and social life (and the motivations behind our revealed preferences and subjective utility assessments), not to mention the actions of modern governments, are either directly or indirectly related to the meeting of our basic survival needs. Furthermore, these needs can be specified to a first approximation and supported empirically to varying degrees, with the obvious caveat that there are major individual and contextual variations in their application. Equally important, complex human societies generate an array of instrumental needs which, as the term implies, serve as intermediaries between our primary needs and the specific economic, cultural and political contexts within which these needs must be satisfied. An explicit framework of Survival Indicators, including a profile of Personal Fitness and an aggregate index of Population Fitness, is briefly elucidated. Finally, it is suggested that a basic needs paradigm could provide an analytical tool (a biologic) for examining more closely the relationship between our social, economic and political behaviors and institutions and their survival consequences, as well as providing a predictive tool of some value.     

Does International Harmonization of Environmental Policy Instruments Make Economic Sense?

Harmonization of the instruments used in environmental policy has beenconsidered necessary to guarantee fair competition in internationalmarkets. We examine the economic costs of harmonizing paper recyclingstandards in countries where the urgency of the waste disposal problemsdiffer. Using data of seven European countries we estimate thetechnologically feasible input combinations of pulp and waste paper forpaper production. Short-term effects of two environmental policy measures,minimum content requirement and utilization rate target, are analyzed. Bytranslating the two administrative instruments into taxes and subsidies, weshow that the shadow costs of the harmonization vary considerably betweencountries. The difference in the domestic availability of waste may explainthe variation, and a modification of the policy measures to incorporate thisaspect is suggested.     

Regulatory ‘Balancing’ and the Efficiency of Green R&D

We identify and analyse several dynamic implications of setting environmental standards such as to balance marginal costs and benefits. The adoption of such a regulatory approach is shown to effect (i) the speed of improvement of abatement technologies; (ii) the direction (in a sense to be defined) of that improvement; (iii) its source and the distribution of the rents from it; and (iv) the rate of development of defensive (averting) technologies. Existing views are thoroughly synthesised in the context of a simple diagrammatic model, several new results are derived and at least one conventional wisdom questioned. The message of the analysis for legislators and regulators is that cost–benefit balancing should be done with care.     

Information processing for a finite resource allocation mechanism

Summary deal with an organization havingm individual agents (the agents) and one central agent or agency (the coordinator), and the problem of allocating a fixed supply ofn commodities among the agents. The coordinator wishes to distribute the commodities in such a way as to maximize an objective function whose arguments are functions known (implicitly) to the individual agents, but not to the coordinator. The more information the coordinator obtains about the individual agents' functions, the better the allocation decision he or she can make; however, gaining such information is costly, so that the coordinator must balance the potential gain against the cost of acquiring additional information. We find a satisficing solution to this problem which is computable and which terminates in a finite number of steps.We would like to thank Leo Hurwicz, Ken Matheny, Shailendra Mehta, Bill Novshek, Roy Radner, Stan Reiter, Vernon Smith, Mark Walker, and, especially, John Ledyard and Tom Marschak, for helpful comments and suggestions. We must, of course, however reluctantly, accept responsibility for any remaining defects.     

Nineteenth Century Urban Market Failure?: Chadwick on Funeral Industry Regulation

This essay analyzes the regulatory theory and policy preceptions of Edwin Chadwick (1800-1890), the premier Benthamite utilitarian reformer. We focus on and analyze Chadwicks economic diagnosis of the London funeral market in the first half of the nineteenth century. In his view, externalities and market failure in both the burial and funeral service markets demanded socialization of property rights and implementation of a franchise bidding scheme. Chadwicks rationales for government intervention, including high taxes and information costs—unique, we believe, for his time—provide the basis for numerous forms of contemporary regulations at all levels in the United States today.     

Institutional Evolution through Purposeful Selection: The Constitutional Economics of John R. Commons

The paper relates John. R. Commons view on the roleof human design in institutional evolution to the views thathave been advanced on this matter by F. A. Hayek, in German ordo-liberalism,and in constitutional political economy. It is argued that Commonsconcept of purposeful selection points in the direction ofa theoretical perspective that consistently integrates the notionsof institutional evolution and constitutional design.     

Individual Decision Making in a Negative Externality Experiment

The experimental treatments analysed in this paper are simple in that there is a unique Nash equilibrium resulting in each player having a dominant strategy. However, the data show quite clearly that subjects do not always choose this strategy. In fact, when this dominant strategy is not a focal outcome it does not even describe the average decision adequately. It is shown that average individual decisions are best described by a decision error model based on a censored distribution as opposed to the truncated regression model which is typically used in similar studies. Moreover it is shown that in the treatments where the dominant strategy is not focal dynamics are important with average subject decisions initially corresponding to the focal outcome and then adjusting towards the Nash prediction. Overall, 66.7% of subjects are consistent with Payoff Maximization, 27.8% are consistent with an alternate preference maximization and 5.6% are random.     

Tax Interaction Effects,Environmental Regulation,and “Rule of Thumb” Adjustments to Social Cost

Preexisting distortions in factor markets complicate the estimation of the social welfare effects of regulatory interventions. The existence of these tax interaction effects (TIEs) suggests that general equilibrium (GE) approaches should be used to evaluate regulatory policies. However, formal GE analysis is not always feasible for the numerous environmental regulations proposed by federal, state, and local agencies. The question addressed in this paper is whether an empirically based rule of thumb upward adjustment factor is appropriate to properly scale social cost estimates in environmental policy. We argue that such rule of thumb adjustments are significantly less reliable than estimates based on a detailed general equilibrium analysis because of the uncertainty about both the magnitude and sign of the social cost distortion. In addition to addressing this question, the paper gives an overview of TIEs and their relevance to environmental policy.     

The Regulation of Private Schools Serving Low-Income Families in Andhra Pradesh,India

This paper sets out some findings of a research project carried out in private unaided schools in low-income areas of Hyderabad, India. The part of the research project documented here was designed to examine the question: Is the regulatory regime conducive to entrepreneurial action and market discovery with particular reference to the low-income schools in Hyderabad. This paper is narrowly focused, setting out the results of pattern matching empirical data with the Austrian economic concepts of entrepreneurship, rivalry, and market discovery. The research discovered that two regulatory regimes exist, one that is set out on paper in the Education Acts and associated rules, and another that operates in practice. That is, there is a combination of regulations on paper and regulations existing in an extra-legal sector. Generally it was found that the regulations in practice are consistent with market principles. Conversely the regulations set out on paper are not conducive to entrepreneurial innovation and market discovery. Recommendations for potential policy initiatives include the possibility of legitimising the extra-legal sector by introducing self-regulation possibly via self-evaluation systems for the private unaided schools.     

Population Genetics and Economic Growth

This paper builds an age-structured model of human population genetics in which explicit individual choices drive the dynamics via sexual selection. In the model, agents are endowed with a high-dimensional genome that determines their cognitive and physical characteristics. Young adults optimally search for a marriage partner, work for firms, consume goods, save for old age and, if married, decide how many children to have. In accord with the fundamental genetic operators, children receive genes from their parents. An agent's human capital (productivity) is an aggregate of the received genetic endowment and environmental influences so that the population of agents and the economy co-evolve. After calibrating the model, we examine the impact of physical, social, and economic institutions on population growth and economic performance. We find that institutional factors significantly impact economic performance by affecting marriage, family size, and the intergenerational transmission of genes. The principal novel findings are that i) genetic diversity has a nonmonotone causal impact on population size and economic performance; ii) an endogenous population threshold exists which, absent frictions, causes societies with declining populations and output to reverse course and grow; and iii) that the emotion love substantially accelerates economic growth by increasing genetic diversity just enough, which we term The Goldilocks Principle.     

Natural resource accounting

There is as yet no consensus on the most appropriate way to incorporate the degradation of environmental capital into national income accounting procedure. Net product is currently derived by deducting from gross product the depreciation of man-made capital only. Deducting depreciation of natural capital in a similar manner will give a figure for true net product that provides a better indicator of that level of current income which is sustainable into the future. The user cost and net price methods of calculating the value of natural resource depreciation are analysed and assessed. On the basis of this assessment, the net price method is then used to adjust the national accounts of Zimbabwe for depletion of forests, soils and mineral resources, for the period 1980 to 1989. The results suggest that economic depreciation of natural resources represents approximately 2% of annual GDP, although this is regarded as a significant underestimate. The implications for integrating natural resource depletion into policy making, within the current national political climate, are then addressed.     

Some notes on trichotomous choice discrete valuation

For some respondents, the bid offered by the dichotomous choice format used in the discrete choice technique can in fact be the true optimum. In this case the correct answer is neither yes or no, but indifferent. We shall show results from a trichotomous choice format and analyse whether it produces welfare measures with narrower confidence intervals than the dichotomous technique. Another well known problem in contingent valuation (CV) studies is that the volume of the good to be purchased from hypothetical markets is not, in many cases, defined in precise terms. We show how the trichotomous choice technique can be used to test for possible vagueness in the volume of the project to be valued.