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Factors that determine the cost-effectiveness ranking of second-best instruments for environmental regulation


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  • Raúl O’Ryan


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    This paper develops a conceptual model to analyze how specific factors affect the compliance costs of three suboptimal policy instruments, when compared to the optimal ambient permit system (APS) benchmark. The model considers a non-uniformly mixed pollutant and explicitly incorporates the following factors: number of polluting sources; size, in terms of emissions, of each process; marginal abatement costs for each process; effluent concentrations; the transfer coefficient that relates emissions to environmental quality at the receptor; and the desired environmental quality target. APS is compared to a suboptimal emission permit system (EPS), and two Command and Control (CAC) policies—equal percentage reduction (PER) and a uniform effluent concentration standard (STD). The results show the importance of the different factors and their interactions in determining each policy instrument’s cost-effectiveness ranking. Surprisingly, EPS performs well within the usual values of these factors and in specific cases STD and PER also perform similarly to APS. Copyright Springer Science+Business Media, LLC 2006

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    Bibliographic Info

    Article provided by Springer in its journal Journal of Regulatory Economics.

    Volume (Year): 30 (2006)
    Issue (Month): 2 (08)
    Pages: 179-198

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    Handle: RePEc:kap:regeco:v:30:y:2006:i:2:p:179-198

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    Keywords: Environmental regulation; Policy instrument choice; Cost-effectiveness; Environmental economics; Tradable permits; Command and control; Q58; Q50;

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    1. Bohm, Peter & Russell, Clifford S., 1985. "Comparative analysis of alternative policy instruments," Handbook of Natural Resource and Energy Economics, in: A. V. Kneese† & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 1, chapter 10, pages 395-460 Elsevier.
    2. O'Ryan, Ra l & Miller, Sebastian & de Miguel, Carlos J., 2003. "A CGE framework to evaluate policy options for reducing air pollution emissions in Chile," Environment and Development Economics, Cambridge University Press, vol. 8(02), pages 285-309, May.
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