Implications of Economic Theory for Bioenergy Policy Design

Abstract

With the allocative and regulative challenges of bioenergy use outlined (see Chap. 2), this chapter's task is to develop the theoretical basis for a rational bioenergy policy. As discussed in Sect. 2.1.3, the defining characteristic of such a rational bioenergy policy is that it strives for efficiency and sustainability under the constraints imposed by multiple interacting market failures and various sources of government failures (cf. Fig. 2.2), while acknowledging the likely non-optimality of outcomes.Given the various allocative and regulative problems involved in bioenergy policy making, there is no single theoretical approach which covers all relevant aspects. Rather, a number of theories promise important insights. The following economic theories have been identified as especially relevant to the problems of bioenergy policy making:1. The neoclassical economics approach to target setting and instrument choice under perfect information as well as under uncertainty (Sect. 3.1); 2. The theory of second-best, which focuses on the handling of multiple market failures and other constraints on optimal policy design (Sect. 3.2); 3. Information economics contributions which examine the implications of incomplete knowledge for policy decision making (Sect. 3.3); 4. The economic theory of order, which examines more closely the constitutive lack of knowledge that policy makers face, drawing implications for the adequacy of structural or process policy measures (Sect. 3.4); 5. New institutional economics, which explores the consequences of imperfect information, positive transaction costs and self-interested policy makerswithin this theory family, the approaches of transaction cost economics, principal-agent theory, the theory of institutional change, and public choice theory appear particularly relevant (Sect. 3.5); 6. Ecological economics, which focuses on the design of sustainable economics systems while taking potential sources of government failure into account (Sect. 3.6).