7 - Market-Based Instruments

Summary

The Law and Economics literature details how information can be generated from legal rules drawn from both private and public spheres; designing legal rules to become more effective in creating useful information to improve both private and public decision making. We examined the market-based tool known as marketable emission permits or as tradable permits. The ability to sell permits does provide incentives if holders of permits can find greener solutions at prices attractive enough to sell off their permits. Pigou advocated for placing taxes on activities that led to negative externalities; that by carefully adding tax costs to the activity so that the marginal costs could become accurate, fully reflective of the externalities. Coase’s analysis of transaction costs complicates the question of against whom should the taxes be levied. Taxing activities that could give rise to environmental injuries must carefully understand the relative elasticities of demand to ensure that the tax will actually fall on the correct party and thus create the correct incentives. In conclusion, we found that market-based instruments worked best alongside more traditional forms of public regulation, that market-based instruments are not robustly implemented as a stand-alone alternative to traditional forms of public regulation.