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Our economic perspective of the pollution problem characterizes that problem as involving a conflict between the consumption of two broad classes of goods–physical (or produced) commodities and the direct consumption of 'clean environment'. After considering the relative merits of market and political decision‐making processes used to achieve appropriate social choices between the consumption of physical goods and 'clean environment', we focus on the alternative policy options for pollution control. The main conclusion we reach is that, in general, fiscal instruments (taxes and subsidies) are a more efficient means of controlling pollution than the widespread use of regulations or other legal instruments.

A remarkable process of reform of intergovernmental arrangements was initiated in Australia in 1990 designed, according to its proponents, ‘to improve our national efficiency and international competitiveness and to improve the delivery and quality of services governments provide’. Unlike previous ‘new federalisms’ in Australia (and elsewhere) the reform process on this occasion was neither totally unilateral, nor top‐down in design and implementation. Rather, while reflecting the commonwealth (federal) government's frustrations at the limits imposed by the federal system on its political power and administrative capacity, the process intentionally was cooperative, incorporating all state and temtory government leaders, and including representatives of local government. In the context of a review of the origins, nature and objectives of the reform initiative, this article points both to the valuable innovations embodied in its processes, and to the risks of reduced political access and citizen participation created by its attempts to apply ‘single‐government’ managerialist principles to the redesign of intergovernmental arrangements in federal systems. Political and bureaucratic objectives, combined with a lack of adequate appreciation of federal principles, led, in our view, to an attempt to supplant participatory politics with relatively less accessible and responsive managerial structures.

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