Efficiency without Optimality: A Pragmatic Compromise for Environmental Policies in the Late 1960s

Abstract

In the late 1960s, new environmental policies emerged which attempted to reach predetermined pollution standards in a cost-effective way: i.e., the ‘standard-and-tax’ approach proposed by William J. Baumol and Wallace E. Oates and the permits market approach proposed by John Dales. This paper describes the early history of the two approaches, and compares them. Although they flow from different traditions, namely Pigovian versus Coasean, and are often contrasted in the literature, these cost-effective solutions emerged at the same time and for the same reasons. First, they both tried to promote incentives-based policies against traditional regulations; second, they criticized the optimal Pigovian tax, which raised the contentious issue of measuring pollution damage. More broadly, they emerged as a kind of pragmatic compromise, fed by a common attempt to move toward more practical policies: reaching efficiency without optimality, while relying on standards whose setting is a matter for political decision.

A History of Pricing Pollution (or, Why Pigouvian Taxes are Not Necessarily Pigouvian)

“…Before long, Crocker too had come to the same conclusion, arguing the free-rider problem would undermine green-brown trades (Crocker 1972). As pointed out by Berta (2020a), at this point, then, cap-and-trade proposals resembled the pollution charges suggested by Kneese and Baumol and Oates (1971) insofar as they were a program for efficient cost-minimization, rather than for achieving optimal pollution levels. Soon, additional work extending Dales's model would place it more in the style of work by the Cowles Commission, which highlighted the duality between Kneese's prices and Crocker and Dales's tradable quotas.…”

“…Viewing the history of economics in retrospect, it is natural to interpret Kneese's effluent fees as an application of Pigouvian remedies to market failures, albeit one enriched with technical and institutional details (Berta 2019, 2020a, Pearce 2002, Sandmo 2015, de Steiguer 2006. But, as such histories themselves have noted, this story raises the question of, first, why there a large lacuna in the Pigouvian literature on environmental externalities from the 1930s to '60s and, sec--12-ond, why, when it supposedly re-appeared, Pigou was not actually much mentioned in the environmental literature.…”

“…For discussion, seeLagueux (2010), McDonald (2013,Berta (2017), and Medema (2020a).4 On this point, seeLagueux (2010),Lane (2014),Sandmo (2015),Berta (2020a), and especially Medema (2020a).…”

“… See Berta (2017, 2020a andBerta and Bertrand (2014) for discussion of this approach to modeling externalities and its relationship to cap-and-trade.27 Even here, the connection to property rights remains: Weitzman, interestingly, at the time was also working on common property and enclosure movements, albeit from a more heterodox perspective(Weitzman 1974b, Cohen andWeitzman 1975).…”

A History of Pricing Pollution (Or, Why Pigouvian Taxes are not Necessarily Pigouvian)

“…Viewing the history of economics in retrospect, it is natural to interpret Kneese's effluent fees as an application of Pigouvian remedies to market failures, albeit one enriched with technical and institutional details (Berta 2019, 2020a, Pearce 2002, Sandmo 2015, de Steiguer 2006. But, as such histories themselves have noted, this story raises the question of, first, why there a large lacuna in the Pigouvian literature on environmental externalities from the 1930s to '60s and, sec--12-ond, why, when it supposedly re-appeared, Pigou was not actually much mentioned in the environmental literature.…”