Environmental Politics

Building on the seminal contributions by Pigou (1920), Coase (1960) and Baumol and Oates (1971), economists have extensively explored the role that economic incentives might play in bringing a more efficient allocation of natural resources. The theory of environmental economics suggests that pricing instruments are an adequate means to internalize external costs. More specifically, there is widespread agreement within the scientific community that from a theoretical point of view pricing instruments are preferable to alternative measures, owing to their efficiency advantages (Frey et al., 1985). However, though economists see pricing instruments as an attractive policy tool, most attempts to introduce economic incentives in environmental policy have failed, and the acceptance of these mechanisms in the political debate is still rather limited (Hahn, 1989; Schneider and Weck-Hannemann, 2005). There are many possible reasons why incentive instruments as a means to internalize external costs have been rarely applied in the past. It certainly would be too simple just to refer to imperfect information on the part of decision-makers about the advantages of incentive-based instruments. On the contrary, there seem to be good reasons why politicians, voters, bureaucrats, and/or representatives of interest groups are rather reluctant to favor price instruments on a large scale in environmental politics.