Market-Oriented Environmental Tools

Read this section to learn more about how permits and the Coase theorem can be applied to solve environmental problems by defining user and property rights in society. Make sure to answer the "Try It" questions.

3. Applying Market-Oriented Environmental Tools

Market-oriented environmental policies are a tool kit. Specific policy tools will work better in some situations than in others. For example, marketable permits work best when a few dozen or a few hundred parties are highly interested in trading, as in the cases of oil refineries that trade lead permits or electrical utilities that trade sulfur dioxide permits. However, for cases in which millions of users emit small amounts of pollution - such as emissions from car engines or unrecycled soda cans - and have no strong interest in trading, pollution charges will typically offer a better choice. We can also combine market-oriented environmental tools. We can view marketable permits as a form of improved property rights. Alternatively, the government could combine marketable permits with a pollution tax on any emissions not covered by a permit.

Alternatively, if the externality is such that even a small amount poses catastrophic danger, like the earlier smallpox example or nuclear waste concerns, a government-imposed effluent standard is likely preferable.