Chapter 6. Selection and design of environmental policy instruments

In this article, we provide an overview of a rather large topic: how economics can inform the selection and design of policy instruments to deal with environmental problems. We first identify (in Sections 1 – 2 ) underlying market failures that underscore the need for policy. Then, (in 3 ) we look at the menu of available policies. After that, we turn to the selection and design of appropriate policy instruments, with attention to the success or failure of policy instruments that have been tried in the past. In order to select instruments, we look to the root causes of the failures that motivate the use of instruments. Unfortunately, there is no single unified theory of policy selection. Instead, we present a series of results based on various special cases. This is complemented with a number of practical and political considerations related primarily to feasibility and the incidence of policy costs, which interact with distributional concerns. In Section 5 , we look at several specific examples to bring out the ideas and principles with more concrete, real-life details. Finally, the last section deals with policy making in the Anthropocene – the new period of history we are entering, when the human economy is the main driving force behind many crucial environmental parameters on Earth.