Choosing policy instruments for pollution control : a review

This paper presents the design of cost effective interventions to protect the environment from excessive pollution in developing countries. The concept of intervention is motivated by the typical explanation for environmental problems in economic theory--external effects. The aim of the paper is to review the relevant theoretical and empirical economic literature in order: (a) to distill the principal lessons and evaluate general rules of thumb; and (b) to identify gaps that need to be filled in order to make them more accessible and relevant to developing countries. The paper defines broadly the range of policy instruments that can be used to address pollution problems in developing countries. It includes instruments that have traditionally been in the realm of public finance, such as taxes, prices and subsidies. But it also covers regulations and other instruments designed to affect the amount of pollution or to mitigate its damage. To limit the scope of this paper, the authors treat pollution control policies, but not policies to address other environmental problems, such as soil erosion, deforestation, desertification or other natural resource problems. Many of the principles presented, however, broadly relate to the problem of correcting for external effects, and can be applied to these other problems as well. It also focuses on domestic problems and does not deal explicitly with trans-national or global pollution externalities.