Chapter 5
The Economics of Environmental Regulations I: Emission Standards and Effluent Charges
Chapter Summary
This chapter discussed the theoretical underpinning of the two widely used policy instruments to
regulate environmental pollution; namely, emission standards and effluent charges. The chapter also
provided the relative merits of these two policy instruments using the following specific criteria:
cost-effectiveness, compliance (transaction) costs, moral and ethical considerations, fairness or
equity considerations, and adverse ecological effects, such as loss of biodiversity.
A. Review and Discussion Questions: Emission Standards
1. What is an emission standard and why is it often called the command-and-control approach to
pollution control?
2. What are the key technological, ecological, economic, and institutional information needed for
setting emission standards? Try to answer this question by identifying a specific pollutant as an
example.
3. Can regulators expect to get all the information they need to set emission standards at what is
considered to be optimal (ideal)? If not, how do they attempt to set emission standards with
incomplete information?
4. Does it comfort you to hear that the EPA is setting emission standards on the basis of the ‘best’
available information? Why or why not?
5. Can you identify some of the major transaction costs associated with setting emission standards,
in general? Be specific.
6. Emission standards can be set in three different bases: namely, quantity (volume) base,
performance base, and technology base. Provide a real world example(s) for each one of these
three ways of setting emission standards (Google may help).
7. In the United States, the Environmental Agency (EPA) is responsible for implementing
environmental laws enacted by Congress. It does this by setting the minimum standards that all
states have to follow. However, the state agencies are responsible for implementing and
monitoring many of the major environmental statutes. Does this division of labor between the
federal and states make sense to you? What do you think is the rationale behind this division of
labor? Is it based on politics or economics or a mixture of the two? Discuss.
8. With regard to setting emission standards, what does a ‘regulatory capture’ mean? Provide two
real world examples (Google may help).
9. It is suggested that pollution control policy based on emission standards is likely to provide
incentive for firms (polluters) to hide technological advances on pollution control from the
regulatory authorities. What could possibly explain this kind behavior of polluting agents who
generally are expected to be rational and calculating? In other words, what is there to gain by
hiding technological advances? Can you provide a real world example that supports this
situation? Hint: think about the auto industry!
10. As you read on page 84 and 85 of your textbook, economists tend to be critical of using emission
standards as policy instrument to control pollution on the ground that it is not cost-effective.
© 2014 Ahmed Hussen
Make sure that you fully understand what economists mean by cost-effective in this particular
context. Make sure also that you understand the arguments presented using Figure 5.2, page 85.
B. Review and Discussion Questions : Effluent Charge
1. What is an effluent charge and why is it identified as both a decentralized or market-based form
of pollution-control policy instrument?
2. Make sure you fully understand the arguments presented using Figure 5.3, page 87. This is
important for your understanding and appreciation of why effluent charge is considered to be (i)
a decentralized and market-based form of pollution-control policy instrument, and (ii) able to
generate tax revenue that could be used for further clean-up.
3. Provide three real world examples where effluent charge is used to control pollution (Google
may help).
4. What makes effluent charge to be cost-effective? Be specific. A look at the discussion on page 89
of your textbook may help!
5. It is said that, in general, to be cost-effective does not necessarily imply attainment of social
optimal level of pollution-control? Why is this so? Be specific. A look at page 89 of your textbook
may help!
6. Can you identify some of the major transaction costs associated in setting effluent charge? It is
sometimes argued that the transaction costs associated in setting effluent charge are higher
than the one associated with setting emissions standards. Can this kind of assertion hold to be
invariably true? Why or why not? Be specific.
7. Why do you think effluent charge is more commonly and effectively used in Western Europe
than in the United States? Speculate (Google may help!).
8. It is often argued that to curtail pollution that are highly toxic and persistent, a policy based on
emission standards is far more effective than that based on effluent charge. Explain. An example
may help.
9. In the case of water pollution, do you think the choice of pollution emission policy instrument
(such as emission standards versus effluent charge) depends on whether the source of pollution
emission is: (i) a ‘point source’ such as a sewage-outflow pipe, or (ii) a ‘non-point source’ such as
agricultural runoff, in the form of sediment and fertilizers, that are emptied into a large water
body, for example, a river? Hint: In attempting to answer this question, you may find it helpful to
think that the main objective of the public policy is to use pollution control instrument that is
cost effective.
10. It is often argued that effluent charge provides firms with an incentive to improve their wastecontrol technology. Make sure that you have a good understanding of the theoretical
justification for this argument as shown using Figure 5.5 on page 89 of your textbook.
© 2014 Ahmed Hussen