An introduction to the law and economics of environmental policy: Issues in institutional design

Published date15 August 2002
Date15 August 2002
AuthorTimothy Swanson
Timothy Swanson
The study of the law and economics of environmental policy is interesting
because it is the study of institutional design issues precisely in that area of
policy where institutions are most difficult to design. Almost by definition
environmental issues are those that sit at the intersection of complex natural,
social and institutional phenomena. Complicated environmental media (atmos-
pherical, hydrological, biological) render the derivation of optimal management
strategies difficult and complex. Complicated social contexts (inter-personal,
inter-generational, trans-national) render simple solution concepts inapplicable.
And the continuing need for increasingly more complicated institutions to deal
with these complexities, and those who exploit them, makes the question of
institutional design a dynamic and strategic enterprise.
An Introduction to the Law and Economies of Environmental Policy: Issues in Institutional
Design, Volume 20, pages 1-22.
© 2002 Published by Elsevier Science Ltd.
ISBN: 0-7623-0888-5
This volume charts the current state of the art in the analysis of the issues
of institutional design in the context of these complexities. It considers the core
topics of: (a) Policy Making; (b) Instrument Choice and Design; and (c)
Monitoring and Enforcement. Each of the papers takes a different issue or case
study as its motivation, but the sum of the papers constitutes a framework for
considering institutional design issues generally. The motivating concept in this
field concerns the importance of comparative institutional cost-effectiveness in
the pursuit of effective policy. That is, how is it that the institutions selected
to implement the chosen policy contribute to the ultimate cost-effectiveness and
efficiency of that policy?
We will see in the following sections, and in the ensuing chapters, that the
study of these issues in the context of environmental policy is a pursuit that is
increasingly focused on the costs of complexity. As we continue to study our
institutions and their weaknesses, we increasingly appreciate the large set of
weaknesses inherent in simplistic approaches; however, as we attempt to address
these weaknesses, we are reminded of the increasing costs of introducing
complexities into our institutions. For example, the study of marketable permits
once focused exclusively on the importance of incorporating heterogeneity
in firm's abatement costs, while now it is seen to be equally important to
incorporate other forms of heterogeneity within these systems as well (such as
spatial heterogeneity in environmental impacts). Can institutional design cope
with increasing complexity? This volume examines these same trade-offs again
and again in various facets of institution-building.
Another common theme in the volume is the increasing recognition of the
important potential role for private agents and institutions in policy design and
implementation. As institutions have become more complex, we have come to
recognize that there are many niches that might be inhabited by private
individuals and firms rather than public agencies. The potential for privatizing
many of the functions of environmental regulators is increasingly under scrutiny,
as it is in many other fields of regulation. Can individuals undertake some of
the monitoring of environmental performance under liability regimes?
Can financial institutions perform some of the enforcement roles previously
undertaken exclusively by government? What are the costs and impediments to
the substitution of private for public forms of environmental regulation?
Finally, the volume also illustrates the study of the issues at the intersection
between economics and the other disciplines of moral philosophy.
Environmental issues raise many of the most salient problems concerning the
role of the state in society: distribution, fairness, intergenerational equity and
the management of uncertainty. Many of the papers discuss the nature of
the limitations of the discipline in addressing these topics. Should individual

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