Correcting the overuse or underprovision of important assets

Using markets - taxes and subsidies

Pollution can also be addressed through such market instruments as a tax, but the impact of tax rates on the levels of emissions cannot be known before the fact. Only by trial and error would a regulatory agency know the effect of a given tax rate. Increasingly it is being recognized that a combination of command and control and market-based instruments is superior to either alone. So if the interest is in reaching a desired quantity or quality at lowest cost, a target can be set for overall emissions, and permits or licenses would allow industry to emit up to the total but trade amongst themselves to achieve the overall goal at lowest cost to society.

Countries are thus moving to economic instruments to address environmental concerns. These offer more potential in terms of efficiency now (static) and over time (dynamic). They can offer more flexibility in meeting objectives. And they provide a source of government revenue that can address other public concerns. There are difficulties: many environmental assets do not have well-defined property rights, and operating in the market requires that property rights be assignable. Even so, some part of the depletion or degradation of the asset often takes place in the arena of markets-and is thus amenable to correction through economic instruments.⁷⁸ And technology can sometimes change whether an asset can have well-defined property rights and hence operate in the market (meters can foster water markets that would otherwise not be feasible).

For example, even though private property rights to clean air-the asset-are not assignable, it is still possible to deal with aspects of the degradation within markets. Emissions or fuels can be taxed, or vehicle use in the case of vehicles.

One proposal for dealing with global common-related concerns such as ozone depletion and climate change is to impose user charges or levies at the global level.⁷⁹ (Of course, curbing air pollution by taxing vehicle and industrial emissions in cities, as mentioned above, would also be an important component of a strategy to deal with climate change.)⁸⁰ User charges create incentives to reduce environmental pressures (the incentive function of user charges). They can also mobilize financial resources that can be earmarked to fund the conservation and restoration of global common goods (the financing function of user charges).