I acknowledge helpful comments from Magdalena Six, Christoph Graf, Clemens Ornstein, from two anonymous referees, an editor (Prof. Conley), and an associate editor from the journal.
Comparing Environmental Policy Instruments Within an Incomplete Contract Framework
Article first published online: 12 MAR 2013
© 2013 Wiley Periodicals, Inc.
Journal of Public Economic Theory
Volume 15, Issue 2, pages 319–340, April 2013
How to Cite
WIRL, F. (2013), Comparing Environmental Policy Instruments Within an Incomplete Contract Framework. Journal of Public Economic Theory, 15: 319–340. doi: 10.1111/jpet.12020
- Issue published online: 12 MAR 2013
- Article first published online: 12 MAR 2013
- Received August 19, 2010; Accepted April 28, 2011.
This paper compares three different legal means—no environmental policy (the pollutee pays), full liability (the polluter pays), and pollution standards—to reduce and regulate neighborhood externalities within an incomplete contract framework. It turns out that the relative efficiency of these instruments depends, in general, on details. However, moderate standards are preferable to no environmental policy and tight (but not too tight) standards dominate liability. This provides under the given assumptions (neighborhood externalities, incomplete contracts) a justification for “sensible” standards for three reasons. First, unilateral allocations of property rights are biased that distort allocations even if ex post bargaining takes place. Second, a standard is superior in the following sense: if it is set equal to the outcome under any allocation of rights, it will be improved in the process of ex post bargaining. Third, unilateral property rights encourage strategic ex ante investments up to the point that committing to no bargaining would be beneficial (if possible).