Env Policymaking

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Department of Agricultural and Resource Economics University of California at Berkeley David Zilberman and Jennifer Alix PRINCIPLES OF ENVIRONMENTAL POLICYMAKING Table of Contents Introduction 2 Identifying the problem 2 Global versus Local 4 Causes 5 Externalities Tragedy of the Commons Public Goods Myopic Behavior Failures of Governance Towards Policy Interventions 9 Policy Objectives 9 Efficiency Cost Effectiveness Distributional Objectives Variability Reduction Environmental and Health Quality Parameters Policy Outcomes 14 Behavior Modification Resource Reallocation Resource and Capital Augmentation Policy Tools 16 Incentives Direct Control Establishment of Property Rights and Trading Education, Information and Communication Improvements in Governance A few words on Public Goods Constraints on Policymaking and Implementation 23 Budget Knowledge Ability to Enforce and Monitor Dynamic Considerations 26 Heterogeneity 26 Political Economy 29 References 29

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Environmental

Transcript of Env Policymaking

  • Department of Agricultural and Resource EconomicsUniversity of California at BerkeleyDavid Zilberman and Jennifer Alix

    PRINCIPLES OF ENVIRONMENTAL POLICYMAKING

    Table of Contents

    Introduction 2

    Identifying the problem 2Global versus Local 4Causes 5

    ExternalitiesTragedy of the CommonsPublic GoodsMyopic BehaviorFailures of Governance

    Towards Policy Interventions 9Policy Objectives 9

    EfficiencyCost EffectivenessDistributional ObjectivesVariability ReductionEnvironmental and Health Quality Parameters

    Policy Outcomes 14Behavior ModificationResource ReallocationResource and Capital Augmentation

    Policy Tools 16IncentivesDirect ControlEstablishment of Property Rights and TradingEducation, Information and CommunicationImprovements in GovernanceA few words on Public Goods

    Constraints on Policymaking and Implementation 23BudgetKnowledgeAbility to Enforce and Monitor

    Dynamic Considerations 26Heterogeneity 26Political Economy 29

    References 29

  • 2IntroductionFrom aqueducts to water treatment plants, wind-blown pollen to gene splicing, carriages

    to electric cars, there seems to be no end to mans ingenuity in designing technologies and

    improving processes to minimize the time spent on satisfying basic needs. Nevertheless, even the

    most industrialized of countries have yet to invent food that doesnt require earth, ozone-

    absorbing air, or self-cleaning water. All around the globe, we cannot escape the ties that bind

    our existence to that of the environment where we live and the natural resources we consume.

    Environmental problems present a particular challenge to policymakers, as their causes

    and manifestations occur on local, regional and global levels. In addition, the nature of

    environmental policymaking requires close coordination between social and natural scientists.

    This paper develops a way to categorize some of these problems and think about their causes.

    This will be the basis for developing policy responses to them.

    Identifying the problemOne way of beginning to classify environmental problems is to divide them into three

    groups:

    1) Pollution

    2) Resource Depletion and Extinction

    3) Resource Preservation and Restoration

    The opposite side of these divisions is to view the environment as a provider of certain

    services to society, including sustaining production of goods consumed by humans, being a

    source of recreational activities, and providing aesthetic or religious value. For example, people

    may benefit from the existence of a forest for multiple reasons: wood to build houses, increased

    production of carbon, shelter the woods provide to animals consumed by a village, religious value

    associated with burial places in the forest, and others. In this case, policy intervention is

    warranted if one of these services is threatened.

    The manifestations of these problems vary in scale and intensity both within and between

    nations. In more industrialized countries, resource depletion has inspired the formation of

    powerful environmental advocacy groups and extensive legislation protecting air and water

    quality, as well as preserving resources for aesthetic and recreational value. In developing

    countries, on the other hand, some of the most severe health problems result from environmental

    mismanagement. Malaria and dengue are in large part pest problems, while typhoid, diarrhea and

    other water-borne diseases can been viewed as a pollution issue (associated with poverty and lack

  • 3of access to basic health care). In 1992, the Financial Times reported that 80% of all diseases and

    33% of all deaths in developing countries result from sorely inadequate access to clean drinking

    water and hygiene.

    Within regions of a country, the variation in environmental problems can be extreme. In

    rural areas of developing countries, the interface between man and nature is even more immediate

    - survival for subsistence farm families often depends on favorable rains, the flow of a stream and

    fertile soil on a small parcel of land. According to the World Bank (2001), 70% of the worlds

    extremely poor live in rural areas. In general, this implies that their subsistence depends directly

    upon agricultural and pastoral activities. Declining soil fertility, depleted aquifers and worsening

    water quality have no easy solution, especially in areas where input-enhancing technologies are

    non-existent or too expensive. Currently, according to the FAO, 70% of the earths land surface

    is degraded or subject to heavy degradation. While only 10% of the worlds population lives in

    sensitive mountain areas, approximately 40% live in the watersheds they service (IFAD, 2002).

    In urban areas of developing countries, among the upper classes, we see concerns similar

    to those of the more industrialized world in many places, environmental groups have formed to

    advocate for the preservation of rainforests and other sensitive ecosystems. Indeed, much of their

    concern focuses on environmental quality issues having to do with pollution from vehicles or

    industrial runoff, issues similar to those addressed by many policies in Europe and the United

    States. The urban poor, like the rural poor, often suffer most from urban environmental

    problems, since it is more likely that polluting firms will locate in poor rather than rich

    neighborhoods. In addition, population density and crowding, both of which result in more

    intense pollution problems, are likely to be worse in less affluent urban areas. This phenomenon

    has led to a growing interest in understanding and demanding environmental justice.

    Many of the examples above are of point source pollution, that is, pollution whose source

    can be readily identified; it may be a smokestack or a sewer pipe. Point source pollution is

    usually much easier to mitigate since the culprit is readily identifiable. Non-point source

    pollution, like agricultural runoff or auto emissions, on the other hand, is much more expensive to

    control, and the incentives to do so are often weak, given that its effects are often felt on a

    regional or global level.

    There is a vast literature detailing poverty-environment linkages, some of which are

    referenced at the end of this reading. New research has moved away from the simplistic

    conclusion that poverty causes environmental degradation towards recognition of the

    heterogeneity of poverty and unique solutions found by rural and urban communities to adapt to

  • 4resource degradation. However, it remains true that the poor are often forced to overexploit

    limited local resources in order to satisfy immediate household necessities.

    While earlier studies concluded that economic growth would provide the means to solve

    all environmental problems in developing countries, new policy thinking has moved towards

    solutions that seek poverty alleviation jointly with environmental preservation. This philosophy

    coincides with the vision of natural resources as providers of amenities or services which may or

    may not have a market value. A useful extension includes the loss or lack of title to

    environmental assets as an additional component of poverty, leading to the conclusion that

    environmental conservation is actually a necessary fundamental to poverty alleviation. This

    reversal of causality allows us to recognize that degradation of the resource base often leads

    directly to increased poverty and hunger through the loss of agricultural production. The overall

    conclusion is that the poor are both victims and agents of environmental destruction, and that

    policies addressing either issue must consciously consider both.

    Global vs. LocalScope and location are key considerations in the design of any policy. While pesticide

    contamination, industrial pollution, or soil erosion might be dealt with on a local or regional level,

    issues like the preservation of biodiversity or management of fish stocks require cooperation

    among many countries. Environmental problems also move from local to regional to global when

    the resources in question are either so large that everyone must share them like air,

    transboundary rivers, and the ozone layer or so mobile that they cross national borders during

    their normal lifecycle. Examples of these are migrating birds and straddling fish stocks.

    At a global level, efforts have already been made to address increasing scarcity of

    particular sets of natural resources. Indeed, more concerted attention has been given to

    formulating policy guidelines at a global level than at a local one. Policy frameworks exist to

    guide international decision making regarding the management of climate change (the Kyoto

    Protocol), endangered species (the Convention on the International Trade of Endangered

    Species), toxic chemicals (the Basel Convention on the Control of Transboundary Movement of

    Hazardous Waste), desertification (United Nations Convention to Combat Desertification and

    Drought), the ozone layer (Montreal Protocol), and persistent organic pollutants (POPs) among

    others. These conventions are often non-binding in the sense that there are few incentives and

    requirements to comply with them, however, they do present useful guidelines for policymaking

    and global responsibility. Enormous efforts have been made to facilitate international

    cooperation for the preservation of the environment, including the Rio Declaration (1992) and the

  • 5upcoming World Sustainable Development Summit in Johannesburg (2002). To date, these

    conferences have resulted in more planning than implementation, and the next challenge is to

    enforce national compliance plans drawn up in accordance with Agenda 21.

    CausesEnvironmental problems take on a vast array of forms, and will certainly increase in variety

    as we continue to change the technologies and goods that we consume. Fortunately for

    policymakers, we find that their root causes are often quite similar. The following is one possible

    categorization of them:

    1. Externalities in production process. In many cases, the nature of the technology and the

    structure of governance institutions result in a situation where an activity might damage the

    environment while not hurting the person who undertakes the activity. A manufacturing firm

    whose production process creates toxins that then flow into a river is one example of this type

    of market failure. In this case, the manufacturer is unhurt by his toxins, but the residents

    downstream may become ill or die from them. If the manufacturers production process

    affects air quality, then the problem immediately becomes one of a regional or global nature.

    The source of the problem is the same, but the policy responses must be quite different.

    We illustrate this problem on a graph that we will use repeatedly t o

    help us understand failures and possible policy responses. We will

    couch this discussion in the manufacturer example. In the f igure

    below, the cost to the manufacturer to produce the good in question is

    represented by the curve MPC, for marginal private cost. The

    horizontal axis is the quantity produced and the vertical is mone ta ry

    units. Each point on the MPC curve tells how m a ny monetary units a r e

    required to produce Q numbers of the good. MEC is the marginal

    externality cost. In this case, it is the pollution cost to society fo r

    producing a given amount of goods. This cost could reflect m a n y

    different burdens on society. For example, it might be the cost o f

    cleaning up the pollution plus the cost of medical treatment for those

    who become sick from it. The sum of these two curves is the MSC, t h e

  • 6marginal social cost. This represents the true cost to society o f

    manufacturing a good whose process is destructive to the environment .

    In the absence of a policy intervention, the price charged for the good

    will be Pc, and the quantity purchased will be Qc. The best solution fo r

    society is at point B, with price P* and quantity Q*. This po in t

    represents the level of production where the cost of the pollution t o

    society is taken into account (note that the optimal solution implies a

    reduction in quantity and an increase in price, moving society toward

    an environmental sustainable level of consumption) .

    Production Externalities and the Failure of Competitive Markets

    The determination of the MEC curve requires a foundation in science; that is, it reflects a

    defined relationship between the level of production and the level of pollution. The cost is

    then determined by the relationship between the pollution output and the negative effects on

    society (health, cleanup, ecosystem damage, etc.).

  • 72. The tragedy of the commons. Popularized by Hardin (1974), the tragedy of the commons

    results when groups of people are responsible for the management of a resource for which

    none of them holds exclusive rights. The resource in question is one from which nobody is

    excluded, but for which consumption by one participant reduces the stock available to all

    other participants. Originally developed to describe the degradation of commonly held

    pastures, examples of this sort abound: groundwater, pesticide resistance, communal forests

    and fisheries are but four of them. The over-use of the resource in question might occur

    because participants are unaware of the effect of their activity on the long-run quality of the

    resource. It is more likely, however, that overexploitation occurs because users are in a race

    to capture the benefits provided by the resource. For example, each fisherman recognizes

    that if he doesnt remove as many fish as possible from the existing stock, someone else will.

    A participant gains nothing from restricting his catch; in fact, he only loses profits (at least, in

    the short-run).

    Worldwide, statistics regarding fish stocks reflect this tension. According to the FAO, in

    most regions of the world, at least 70% of the fish stocks are fished beyond their maximum

    sustainable yield. The range for over-fishing ranges from 41% in the East Central Pacific to

    100% in the Southwest Pacific and Western Indian Ocean.

    Examples of common resources abound. In Mexico, the majority o f

    the forest left in the country is held in common by small villages

    throughout the countryside. In Africa, pastures are often managed at a

    community rather than a household level. Regionally, shoreline fish

    stocks constitute a common resource often exploited by several

    different countries.

    3. Public Goods. Public goods are similar to common property resources in the sense that they

    are goods that are shared and consumed by many people. However, in this case consumption

    of the good by one person does not limit or reduce its use by another. Biological diversity

    presents a prime example of this sort of good. Even if some people pay for biodiversity,

    other consumers are able to free ride on this purchase. Because everyone else thinks that

    other people will pay for it, there is little incentive to contribute to its preservation.

    Agricultural production and cattle-raising are the biggest causes of worldwide loss in

    plant and animal biodiversity. The evidence shows that these resources are typically depleted

    in order to produce subsistence crops or low-quality cattle. Some conservation-oriented

  • 8groups and individuals are willing to pay a high price for the preservation of tropical

    rainforests and their biodiversity through land acquisitions and establishment of nature

    reserves. The optimal solution might be for those with a concern for biodiversity to pay the

    ranchers and farmers to be good stewards of the forest, that is, to compensate them for

    providing highly desirable environmental services; however, these types of arrangements for

    dealing with market failures are still uncommon.

    4. Myopic Behavior. Short-sighted or myopic behavior can also result in the misuse of a

    resource even if property rights are well-defined. It may occur because of a lack of

    knowledge regarding the consequences of resource use. More often than not, however,

    behavior labeled myopic is the result of an agent discounting the future at a high rate. This

    may happen among the extremely poor, whose immediate needs force them to sacrifice

    longer-term planning for present-day survival.

    A higher discount rate can also result from high-risk activities. This does not necessarily

    imply that the activity itself is risky (although farming is a good example of this). It could

    also mean that owners of property are uncertain of the nature of their property rights. A

    farmer who rents a property has the incentive to extract everything he can during the duration

    of his rental contract. In some countries, property owners fearing expropriation will also tend

    to exploit resources more quickly than would be socially desirable. The biggest source of

    uncertainty in many countries, particularly in Africa, is civil unrest. War and political

    instability play a major role in undermining property rights, discouraging investment in

    sustainable resource management and encouraging rapid extraction of resources. The

    environmental devastation wrought during times of war often takes much longer to recover

    from than the destruction of infrastructure. Deforestation that occurred at a rapid rate during

    the Salvadoran civil war remains one of the most pressing issues in the country, long after

    roads have been rebuilt and services re-established.

    5. Failures of governance. The above categories are very much rooted in a missing markets

    approach to explaining environmental problems. However, it is often the case that poorly

    planned or inappropriately applied government policies result in environmental disasters.

    Interest groups often determine government decisions. For example, it is often the urban elite

    whose agenda dominates government policy-making. For this reason, we often see protection

    of polluting industries owned by influential families, and a preference towards investment in

    urban infrastructure rather than rural development.

  • 9At the root of these characteristics is b a d governance. Clearly, if

    politicians do not adequately represent the populations interests,

    institutions are riddled with corruption, and resources do not exist t o

    consistently monitor and enforce regulations, policies cannot b e

    effectively designed nor implemented. A large part of a governments

    responsibility is to clearly explain rules to a regulated population a n d

    enforce them without preference to particular groups. If the regula ted

    population does not understand the limitations placed on them by t h e

    responsible institution, or if they do not believe that the policy will

    actually be enforced, it is highly unlikely that new regulations o r

    projects can be effectively put into action. Mexico has some of t h e

    most advanced environmental legislation in the world; in spite of this,

    their capital also has some of the most severe air pollution and the i r

    deforestation rates rival those of Brazil.

    In their analysis of over 150 countries, Kaufmann et al (1999) ,

    found good governance to be highly correlated with super ior

    development indicators, including literacy, economic growth, a n d

    infant mortality. Clearly, these characteristics are also fundamental fo r

    local management of natural resources. Good governance m e a n s

    putting control and funding in appropr ia te hands. While some

    problems require national, centralized management, decisions

    regarding resources such as water and pests need to be made at s ta te

    or local levels. Mis-specification of the appropriate level o f

    management can have disastrous results.

    Towards policy interventionsThe above examples illustrate the variety of forms that natural resource and

    environmental issues can take - rural or urban, local, national or global. These categories are far

    from mutually exclusive, but they give us a starting point for thinking about the instruments and

    policies we might want to use to address them. In the following section, we first discuss the

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    larger objectives of policymaking, then move on to the range of outcomes sought by

    policymakers, and finally, introduce the tools used to achieve these goals. The final sections offer

    a discussion of the constraints under which policies must be designed and implemented.

    Policy ObjectivesEconomists and decision scientists view policymaking as a way to solve the problem of

    making a target population as well off as possible subject to the limitations imposed by the policy

    environment. Generally, policymakers have several policy instruments at their disposal, and their

    freedom to implement a particular policy strategy is restricted by budgetary informational and

    institutional constraints. There is a large literature discussing policy objectives, and we present

    the most common ones below:

    1. Efficiency

    In his 1906 work the Manual of Political Economy, economist and engineer Vilfredo Pareto

    first proposed the Pareto criterion. This criterion suggests that a project or policy should be

    accepted if its implementation would make at least one member of society better off without

    making others worse off. This idea is the basis of a concept of much importance in the literature

    regarding human welfare- Pareto efficiency. Pareto efficiency defines situations where one

    cannot improve the lot of one individual (by changing resource allocation) without hurting

    someone else. To obtain Pareto efficient outcomes, policymakers seek to maximize the well-

    being of an individual or group in society without pushing the welfare of other members of

    society below a certain level. This level represents the best that they can do given the available

    resources. In theory this is nice, however, in practice it is quite difficult to achieve. For this

    reason, most policy exercises use weaker efficiency criteria. Sometimes they aim to maximize

    aggregate well-being of members of society (measured by monetary or utility units). Many

    applied policy analysts aim to maximize the sum of economic surplus that accrue to various

    groups in society, namely, producers and consumers in different markets.

    Surplus is a concept that will allow us to evaluate the impacts of policy on different affected

    groups. Surplus for consumers is defined as the difference between the price charged for a good

    and how much a particular consumer is willing to pay. For producers, surplus is the difference

    between the cost of production and the price received. For example, if a consumer is willing to

    pay $10 for bread, but it only costs $5, then her surplus is $5. Similarly, if it only costs a baker

    $2 to make the bread, then producer surplus is $3. Efficiency in this case is the maximization of

    consumer plus producer surpluses, or $8. This sum of surpluses of all the involved parties is

    referred to as social surplus. On an aggregate level, if we were to line up all the consumers

    willingness to pay for particular quantities, we would end up with a demand curve. The

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    analogous relationship for a producer is the extra cost expended to produce each additional unit.

    The following figure gives a visual interpretation of producer and consumer surplus.

    Consumer and Producer Surplus

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    Quantity of Bread

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    The supply curve, S, shows the amount that producers are willing to put on the market at

    a given price. The demand curve illustrates the amount that consumers are willing to buy at a

    given price. Where these two lines intersect, we find that price that would be charged in a

    competitive market, P = 10. The area between what buyers are willing to pay and the price they

    actually pay is A. This is the surplus for all the consumers in the society. The area above the

    supply curve and below the price, B, shows what sellers of the good are gaining above and

    beyond their production costs. It follows that the sum of these two areas, A+B, is the social

    surplus.

    While consumer and producer are the most commonly discussed types of surplus, the

    concept can be generalized. Surplus can be calculated for various sub-groups of society,

    including workers, providers of environmental amenities, those who suffer from pollution, etc. In

    the case of pollution, if we truly take into account the costs paid by those whose health or living

    situation is affected, then that actual sum of all the surpluses is less than it would be if we were

    just considering plain old producer and consumer benefits. Net surplus, therefore, must be

    adjusted to account for government expenditures as well as cost of environmental damages. If we

    consider the optimal subsidy aimed to reduce use of pesticides, for instance, the optimization

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    criterion is the sum of consumer welfare, producer welfare, and environmental quality minus

    government expenditure.

    When the decision problem relates to situations that entail long-term decisions, we must

    include a time component into our measure of efficiency. In this case, benefits of different

    periods are discounted to represent decision-makers or societies time preference. There is a

    continuous debate about the appropriate discount rate to use for various projects. But in most

    cases, there is an agreement that a dollar earned next year will be worth less than a dollar earned

    at present (if everything else is the same). Given that policymakers almost always operate under

    conditions of uncertainty, they must base decisions upon expected net benefits discounted to the

    present period. This is the foundation of cost-benefit analysis.

    2. Cost Effectiveness

    Sometimes political or other pressures predetermine policy objectives, and in such situations

    policymakers may aim to minimize the cost to attain certain policy targets. For example,

    governments may decide to improve water quality to meet specified health standards, and the

    challenge to policymakers is to design policy instruments that reach this goal at the lowest cost.

    Because of difficulties in assessing the monetary value of environmental objectives, a reasonable

    criterion for assessing the preferred policy would be the maximization of market surplus (the sum

    of the well-being of consumers and producers minus government costs associated with meeting an

    environmental objective). These policies can be interpreted as cost effective in the sense that they

    minimize the social cost that is required to meet an environmental policy objective.

    2. Distributional Objectives

    Pareto-efficient outcomes are optimal given the initial distribution of resources. This implies

    that equity is not considered in the efficiency concept. In other words, it is possible to have an

    efficient resource allocation where 90 percent of societys resources are controlled by 5 percent of

    its population. It is for this reason that equity is an important policy criterion in itself. One

    extreme policy objective for the achievement of equity was advocated by the philosopher John

    Rawls, author of A Theory of Justice, who said that the only fair policy criterion was to maximize

    the well being of lowest-income groups. An alternative approach is to aim to achieve poverty

    alleviation. In this case, the policy objective is not to maximize the welfare of the lowest-income

    groups, but rather to help them achieve a given level of income or well-being.

    There are various mechanisms to measure income distribution and equity, of which the Gini

    coefficient is one example. The visual representation of the Gini coefficient is the Lorenz curve.

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    Lorenz curves consist of lining up each member of the population on the horizontal axis in order

    of increasing wealth. On the vertical axis is the cumulative percentage of the total wealth of the

    country possessed by each person. Perfect equality is represented by a straight line from the

    lower left corner to the upper right. The more curved is the Lorenz curve, the greater the

    inequality. The Gini coefficient can be calculated by dividing the area A by the area A+B in the

    picture below. Therefore, higher Gini coefficients indicate greater inequality. Gini coefficients

    are quite useful for doing policy impact analysis. In the graph below, the dotted line represents

    perfect equality. The curve below it is the Lorenz curve.

    Lorenz Curves

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    Cumulative Percentage of the Population

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    Another measure of inequality is variance in income. The choice of which measure to use

    depends both on the type of policy being evaluated and the ease of calculation. Often, but not

    always, there are tradeoffs to be made between efficiency and equity. For example, although

    many Eastern European countries had low Gini coefficients in the late eighties, implying a

    relatively equitable distribution of wealth, policies and projects were notoriously inefficient.

    Bulgaria, whose economic growth was impressive during the 90s, saw its Gini coefficient rise

    from .22 in 1989 to .34 in 1997. These statistics, of course, are to be taken only as loose

    approximations of the real dynamics of society. Distribution of income, environmental benefits,

    and economic efficiency, can vary greatly within a country, and although tools like variance,

    Lorenz curves and Gini coefficients can be broken down regionally, they remain imperfect

    measures.

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    4. Variability reduction

    Reduction of uncertainty and fluctuation is also a common policy objective. Weather

    conditions, for example, may cause variation in yields that will affect prices. Inventory control

    policies may then be introduced to smooth supply and stabilize prices. Similarly, variation in

    weather may result in acute environmental conditions that endanger environmental amenities and

    necessitate intervention. The policy objectives in these cases may be expressed in terms of

    variance or fluctuation reduction or intervention in cases where key indicators are below

    threshold levels based on a statistical distribution. For example, flood control projects are

    designed to reduce damage in the case of ten years maximum rainfall, i.e., the maximum amount

    of rain to fall in a 24 hour period within a ten year span.

    Indeed, many examples of variance reducing policy interventions come from agricultural

    and natural resource management. Marketing boards for non-perishable agricultural goods,

    coffee, for example, have the stated objective of helping to reduce price uncertainty for farmers.

    They often do this by setting guaranteed prices and then controlling the supply of the product

    released into the market. In Uganda (and throughout much of Africa), marketing boards existed

    for many years for all of the countrys main commodities: coffee, cacao, cotton, and major food

    items like groundnuts, beans and maize.

    5. Environmental and health quality parameters

    Policymakers may be guided by specific indicators on environmental and human health

    conditions. In some cases, environmental indicators serve as an objective to be maximized

    subject to a budget constraint. While in other cases a policymaker may take a cost-minimization

    approach and design policies to achieve a target level of environmental or health conditions.

    Costa Rica, for example, has recently implemented a policy of payment for environmental

    amenities/services. The program targets small and medium farmers and its objective is to

    maintain or restore forests on designated fragile lands. In order to do so, the government pays

    farmers different rates for reforestation or soil maintenance. This policy achieves multiple

    objectives by enhancing farmer incomes while protecting forest cover and biodiversity. Another

    example is payment for immunization programs aimed to eliminate or minimize the incidence of

    a particular disease.

    Policy OutcomesOnce a problem has been identified, appropriate policy outcomes need to be specified in

    the context of the policy objectives discussed above. Different policy tools can then be applied.

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    The choice of tools depends not only on the nature of the problem, but also on the resources

    available to the policymaker, both in terms of human and financial capital. The following

    represents the range of outcomes that policymakers commonly seek to achieve. Often several of

    these outcomes are needed to remedy the problems discussed in the first section.

    1. Behavior Modification

    Behavior modification, invasive as it sounds, is the goal behind a large number of

    policies. Mandatory schooling, soil conservation programs and food subsidies all include

    behavior-modifying elements. It is important to distinguish between short- and long-run behavior

    modification. In the short run, behavior modification consists of changes in existing production

    and consumption patterns, while longer-term change may involve adoption of new practices. In

    the case of externalities, policies may aim to reduce pollution-generating activities or introduce

    pollution-abatement activities that protect individuals from negative side effects. In some cases,

    the intervention seeks to reduce the use of inputs, say, pesticides, that cause negative

    environmental side effects. In other cases, they may induce individuals to change behaviors that

    put them at risk, such as applying pesticides without protection, or even something as simple as

    washing hands before eating. Another example might be an inefficient food preparation

    technology that either causes pollution or depletion of resources (say, deforestation to use wood

    for cooking). In this case, incentives, education, and access to alternatives may induce people to

    adopt solar, gas heating or more efficient wood-burning stoves.

    In the long run, behavior modification results in innovation and the introduction and

    adoption of new technologies. This innovation may be both technological and institutional. For

    example, stricter pesticide regulations may lead individuals to invest in alternative chemicals or

    different approaches to pest control. Government policies restricting pollution may induce

    concerned civil society groups to form organizations that manage and monitor pollution-

    controlling activities. These organizations may also lobby for penalties for polluters or trades in

    pollution rights that aim to reduce total pollution.

    2. Resource Reallocation

    A major outcome of many policies is a change in income distribution. For example,

    welfare policies result in a transfer of income to poor or disadvantaged groups. Policies may also

    result in changes in land allocation and other resources. For example, a policy like Costa Ricas,

    mentioned above, may lead to reduction in agricultural land and increase the land used for

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    environmental services. In other cases, a policy may divert water from low-value to high-value

    crops, as has been the case in many water-scarce countries like Israel and Jordan. Three Gorges

    dam in China is a striking example of reallocation. In an effort to control the Yangtze River,

    whose dangerous floods kill hundreds of people every year, and with an eye on hydroelectric

    power - a predicted supply of 1/9 of the countrys power - the Chinese government has

    undertaken the construction of this multi-billion dollar water project. The trade-off, however is

    the largest relocation project in history; nearly 2 million people will be resettled in different

    villages while their land will become part of the dams basin. The other exchange to be made is

    with the environment, the damage to which is hotly debated but essentially unknown.

    It is important to distinguish between intended and unintended consequences of policies.

    Bad policy designs may result in outcomes that are not foreseen or are contradictory to the initial

    objectives of the policy design. For example, the Endangered Species Act of the United States

    aims to save endangered species by restricting exploitation of land and water resources that

    support endangered species. However, owners of these resources may destroy endangered

    species to avoid the restriction before the authorities become aware of the situation. On a global

    scale, the implementation of CITES resulted in extraordinarily high ivory prices that are difficult

    for residents of poor countries to resist. Poaching of elephants in countries across Africa has

    resulted in a policy conundrum that costs governments substantially in both domestic

    expenditures to control it and international negotiations to soften the zero sale clause.

    3. Resource and Capital Augmentation

    Finally, government policies may result in expansion of economic activities. This occurs when

    government spending or tax relief are used during periods of recession. Governments may also

    subsidize certain economic activities such as cleanup of contaminated sites. These policies

    typically result in the expansion of different types of capital: physical, human, social and natural

    capital. Physical capital is essentially infrastructure. In the case of the environment, this might

    include damns to modify water movement and use, or repairs of irrigation canals to reduce

    seepage, or water body restoration projects Human capital expansion refers to the transfer of

    knowledge and skills. Clearly, education, both formal and informal is fundamental to human

    capital expansion. Public health workers may promote educational efforts to improve water use

    efficiency quality, both of which increase human capital . Finally, environmental policies that

    reduce pollution or protect biodiversity, for example, improve environmental quality and thus

    enhance natural capital.

  • 1 7

    Policy Tools

    1. Incentives

    Incentives may include carrots such as subsidies and sticks such as taxes and penalties. The key

    to the design of incentives is understanding the factors that affect decision-makers choices as

    well as how these choices are aggregated and affected by market outcomes. Well-designed

    policies are incentive-compatible in the sense that they provide individuals the incentives that

    result in outcomes that are consistent with social objectives. To establish effective policies,

    information about individual objectives, preferences, economic situations, and other variables that

    affect behavior is essential. It is also important to be able to observe individual choices or

    responses to assess performance of policies and effectiveness of incentives.

    Under quite reasonable conditions, different incentives may result in the same desirable

    outcomes, but may have different distributional effects. For example, a tax on pollution and a

    subsidy to reduce pollution may result in the same final pollution level, but polluters will be

    better off with the subsidy and may lose from the tax. Lets consider the following table

    describing the benefits of using coal for energy production:

    Lbs of Coal Value of Energy Damage from Pollution1 15 102 30 206 66 3010 100 50

    The damage from pollution is measured in the same way as the value of energy, for example, in

    dollars, and quantifies the impact on human and environmental health from using the

    corresponding amount of coal for home heating. The policymaker wishes to maximize the

    benefit per pound of coal consumption minus the pollution damage per unit of coal. This occurs

    when 6 pounds of coal are consumed. In this case, the social surplus is 6, which is greater than

    the surplus from consumption of any other amount of coal. Left to their own devices, consumers

    will want 10 lbs. of coal, since that gives them the most benefit if they ignore the pollution

    damage.

    In order to encourage the consumption of 6 units of coal, the government can set a per

    pound tax that equals the average damage from pollution. i.e., the tax would be 5 per pound for

    10 pounds, 5 for 6 pounds, 10 for 2 pounds, and 10 for 1 pound. This forces consumers to pay for

    the cost of the pollution that their consumption produces. The tax revenue for this case, where

    consumers will choose to consume 6 units, is 30.

  • 1 8

    A subsidy can be used to achieve this same effect. In this case, the government could

    subsidize producers to make it worth their while to provide 6, instead of 10 pounds of coal. In

    this case, they have to pay the producers enough to make it worth their while to not provide 10

    pounds of coal. We are assuming here that there are no costs to providing coal, so what the

    producer receives is simply the value of the product. In this case, then, the government will have

    to transfer 34 dollars (show calculation) to producers in order that they will provide 6 pounds of

    coal. The distributional effects are obvious; in the producer subsidy, coal companies are happier.

    The government loses revenue. In the tax case, the government gains revenue, though consumers

    are hurt. The environmental damage is the same in either case, although one might imagine a

    situation where tax revenues could be used to pay to eliminate or lesson the damages.

    These concepts can also be illustrated on a graph. Here, the policymaker wishes to

    achieve a pollution level associated with the production of an amount, Q* of output. Determining

    the appropriate level of Q requires the participation of scientists, who must both establish the

    relationship between the level of production and the level of pollution, in addition to deciding the

    appropriate level of damage tolerated from the polluting compound. Once the target level of

    output is decided upon, there are three strategies which can be used to achieve it: 1. A tax. 2. A

    subsidy, and 3. Direct control. We will compare the outcomes of the first two here:

    In the case of the tax, the government may charge producers a per unit tax which makes it

    more expensive for them to produce their goods. They will decrease production and the

    government will earn tax revenues. Equivalently, the tax could be levied on the consumption of

    the polluting good in order to achieve the same outcome. This situation is depicted graphically as

    follows: A tax on consumption raises the price paid by buyers of the good. If all things are held

    equal, consumers will buy less. If the pre-tax demand for the good is illustrated by the curve

    labeled D=MB. After the imposition of the tax, the demand perceived by the firm is reduced;

    i.e., the curve representing the amount consumers purchase at each price (NMB) is shifted

    downward in a parallel fashion by the amount of the tax.

  • 1 9

    As in the production tax case, output is reduced to the desired level, Q*. The price paid by

    consumers is Pc* and the amount received by producers is Ps* = Pc* - t, where t represents the

    cost of the externality to society.

    Another possibility to achieve the same outcome Q is to pay producers a per unit price

    NOT to produce a certain amount of output. This policy can be designed to produce the same

    outcome as the tax, but the distribution of the benefits is different. In the case of the subsidy, the

    producers experience a windfall.

    In the case of either strategy, there may be unintended and undesirable outcomes. The

    tax may generate revenues for which government officials may eventually compete in order to

    redistribute them to interest groups. The subsidy may actually end up costing the government far

    more that originally anticipated, since such a payment may attract more firms to the industry.

    2. Direct Controls

    Policymakers may order members of society to conduct certain activities. They may

    establish target levels that have to be met and dictate how certain activities should be performed.

    They may also establish, for example, threshold levels of allowed pollution and constrain firms to

    abide by these upper levels. While these two policy levers can be designed to have the same

    effect on pollution, their institutional requirements, efficiency and equity effects are entirely

    different.

    Returning to the example above, we can illustrate in the following graph that a direct control

    can achieve the same outcome as either the tax or the subsidy. Government regulators will

    simply tell the polluting manufacturer that they must produce Q* amount of output, which is the

    level that scientists have determined is the socially optimal quantity. This approach is quite

  • 2 0

    common and in the case at hand is known as a production quota. In the coal production case

    above, the government would give the producer a quota of 30 pollution units. The difference

    between a standard and a tax are the distributional outcomes; in the case of a tax, the government

    earns revenues, while in the case of a standard, the producer receives the same amount as extra

    profit.

    If pollution taxes are so efficient, why does most environmental legislation use direct

    controls? The answer lies in the other two issues alluded to above - equity and institutional

    strength. Our simple analysis showed that producers prefer direct controls because they make

    more profit; essentially, they are given a market advantage by the government mandate to reduce

    production and prices can increase. It has been suggested that laborers might also favor

    standards/production quotas, since the rise in production costs caused by taxes may reduce

    employment. In addition, there are several cases, namely when risk or uncertainty affects the

    industry in question, when a mixture of taxes and controls may be preferable (a good review of

    these concepts is given by Helfand, 1999). Finally, and most importantly for developing

    countries, it is often easier to legislate and monitor a standard than to impose and collect a tax.

    This is due both to lower resistance to the imposition of standards for the reasons just mentioned,

    as well as to the fact that taxes are a strong government policy. They require considerably

    more infrastructure both in terms of human capital and institutions. The monitoring aspects are

    especially difficult.

    3. Establishment of Property Rights and Trading

    A major cause of many environmental and other misallocation problems is missing

    markets. This lack of markets may be the result of poorly defined property rights that prevent

    individuals from investing and trading. Therefore, policymakers may redress these failures by

    establishing property rights legislation, enforcing these rights, and allowing trading, which may

    result in improved resource use efficiency. (Trading can occur on a global, regional, or local

    level, depending upon the scope of the problem. Water trading occurs in the state of California.

    Globally, it has been proposed, though not yet implemented, that countries trade their allocations

    of rights to carbon emissions. This would be of particular benefit to developing countries, who

    have higher allocations than their actual production of emissions. Locally, policymakers may

    establish overall policy targets for pollution and distribute firms pollution rights that are

    proportional to their historical share in aggregate pollution. Then the firms could be allowed to

    trade.

  • 2 1

    Trading in pollution rights may result in the same overall pollution level as a tax or

    subsidy, but the distributional effect will be quite different. In particular, polluters will lose less

    under transferable rights, but will not gain as much as with subsidies. On the other hand, a

    tradable pollution right will not cost taxpayers, one reason why this solution may be politically

    acceptable.

    3. Education, Information, and Communication

    Many behavior patterns result from lack of information. People who are aware of the

    consequences of activities such as smoking or unprotected sex are likely to modify their behavior,

    and education can serve to inform the agents of consequences of their activities. For example,

    farmers may modify waste management practices if they discover that these practices may

    contaminate a lake they use for recreational activities. They might change soil conservation or

    pest management activities if extension programs promote more effective and inexpensive

    alternatives.

    Education, however, can also serve to modify preferences and, thus, leads to change in

    behavior. The right educational program may induce people to appreciate the environment, value

    the preservation of natural resources, and thus behave in a more environmentally friendly way.

    Policymakers or environmental groups may provide information about activities of certain groups

    in society to generate negative publicity that will lead to a change in behavior. Publishing a list

    or establishing a website with the names of the firms that generate the most pollution may induce

    some of these firms to change their practices because this information may reduce the demand for

    their product. Indeed, this sort of behavior by advocates is an integral part of good governance,

    which will be discussed below.

    4. Improvements in governance

    As discussed previously, weak governance is often at the root of environmental problems.

    Breaking the hold of interest groups on the legislative process involves the participation of civil

    society. Much of the most forward-looking laws implemented in Europe and the United States

    began not within parliamentary walls but rather in outside non-governmental activists and

    organizations. One of the elements most important to a governments efficiency is the ability to

    develop mechanisms and institutions to address problems as they are discovered. Responsiveness

    requires all the components of good governance: transparency, representativeness, and efficiency.

    The role of civil society in encouraging responsiveness cannot be underestimated. Pesticide

    policy did not exist in the United States until the publication of Rachel Carsons Silent Spring,

  • 2 2

    which detailed the dangers of chemical exposure. Organizations like the Nature Conservancy and

    Rainforest Action Network are important players both in pressuring government and in providing

    funding to finance the purchase of environmental services in many countries. To fulfill the

    responsibilities associated with the latter role, they must be allowed to operate in cooperation, not

    against, national governments. The repression or under-funding of many of these groups in

    developing countries often removes this source of pressure. Support for such activities is

    beneficial not only for the environment but also for government accountability in many sectors.

    Increased involvement of communities, an integral component of good governance, is

    particularly important for the poor, who often find no outlet for their voice in government affairs.

    Indeed, UNDP documents on governance include components fundamental to good management

    of natural resources: educating young people, indigenous peoples and their communities,

    strengthening the role of non-governmental organizations, educating farmers and providing them

    with incentives to conserve the environment, and regulating business and industry. In addition,

    developing reasonable monitoring and enforcement schemes requires institutions that are trusted

    by the population. If officials are suspected of corruption or payment schemes are unclear,

    policies may have detrimental and unexpected consequences. The role of civil society returns

    again in the context of forcing government accountability. There is often a great discrepancy

    between laws passed in parliament and those actually enforced on the ground. Non-governmental

    organizations often take on the responsibility of pointing out government corruption or

    inconsistencies in the application of policies.

    A fascinating case study of successful use of local communities and information

    dissemination in controlling firm and government activities is Indonesias PROPER PAKASIH

    public disclosure program. The system continuously monitors and makes public environmental

    ratings of manufacturers, and by doing so educates both employees and neighbors of the firms

    regarding pollution standards. The program has been quite successful in moving firms towards

    compliance, with some even seeking to reach abatement goals lower than those legally mandated

    (see Afsah, S., et al). Bangladesh also provides a useful example of community involvement in

    pollution abatement. Although environmental regulations are non-existent or unenforced in

    Bangladesh, community complaints to polluting companies resulted in impressively effective

    clean-up efforts and monetary compensation for lost crops and other food sources (see Wheeler).

    Taking account of the architecture of a government is also essential to designing effective

    policies. Policymakers must work within existing structures, and often choices need to be made

    regarding whether to create new institutions for policy implementation or make use of existing

    ones. One of the best examples of this is water allocation. While some countries, such as India

  • 2 3

    take advantage of existing centralized systems, other allow for the development of regional water

    management authorities. At a local level, institutions may be developed to manage village and

    regional level problems. Water users associations, sewage districts, and community cooperation

    for mosquito and pest management are examples of local solutions to environmental adversities.

    National level umbrella organizations might be public health, environment, and the national park

    service. These management systems require different tradeoffs between efficiency and equity,

    and optimal arrangements will vary given the context of different countries.

    5. A few words on public goods

    As we established above, public goods have two defining propert ies:

    nonrivalry , i.e., it can be utilized by many people simultaneously, a n d

    nonexcludabil i ty, i.e., there are no barriers to utilizing these public goods.

    Like many other goods, production of public goods may be costly.

    Markets left on their own tend to underinvest in public goods because

    each individual has a tendency to free ride, i.e., he expects others to p a y

    for the public good so he can benefit from it for free.

    At the national level, the national defense is used as an example of a public good. Within

    a city, environmental quality (clean air) is a public good. However, even this simple example

    illustrates the problematic features of this notion, since some neighborhoods have cleaner air than

    others. In the case of the ozone layer, the holes seem to occur in isolated areas around the globe,

    for example, over Maine in the United States and La Paz in Bolivia. Global climate, biodiversity

    of resources, and human knowledge are all goods with public goods properties. All of mankind

    benefits from the ozone layer and from moderate climate. However, some groups can benefit or

    be harmed more than others; furthermore, the cost of providing this public good may vary across

    groups. The debate on policies that deal with climate change, ozone depletion or biodiversity

    addresses these issues. Some northern countries may benefit more from preservation of

    biodiversity (e.g. pharmaceuticals, improved crop varieties, ecotourism) than southern countries

    that may have to bear much of the cost to maintain global biodiversity while not gaining access to

    all of its benefits. For this reason, establishment of compensation schemes (debt for forests, etc.)

    is very important.

    When there is differentiated access to a good that has nonrivalry of consumption, then

    there are differences in private benefits, and people may pay for the access. When the access to a

    good with nonrivalry of consumption is blocked, the private sector will have the incentive to

    provide this access. In the case of biodiversity, this might take the form of a park where an entry

  • 2 4

    fee is charged to users who wish to enter. The fact that some people can be excluded makes this a

    semi-public good. On a local level, when there is heterogeneity in benefits derived from goods

    with nonrivalry of consumption, the resource owner who charges an entry fee may underprovide

    the good, unless he charges a differentiated price that will reflect an individuals willingness to

    pay for access to the good. Without the ability to charge differentiated prices, the owner may

    build a smaller facility and charge a higher price to tap the richer members of the community. In

    this case, there will be little access to the poor of goods with nonrivalry of consumption. In many

    cases there are differentiated prices (e.g., between tourists and locals) to allow access to different

    members of society as well as to increase the profit of the owner of the property.

    When there is nonrivalry of consumption but ability to control access and heterogeneity

    in benefits, private sector control of a good may be suboptimal. In many cases the government

    either controls or interferes in management and provision of such goods. . Development of

    environmental amenities in many cases follows a similar pattern. A developer obtains the right to

    develop a property and part of it will be developed exclusively to capture benefits from rich

    people who are able to pay. Another other part of the property may be provided cheaply for

    members of the public. In this case, part of the area that is developed (be it parks, beaches, etc.)

    may be allocated by queuing with a lower access fee.

    In addition to such government subsidy schemes or payment for access strategies,

    specialized organizations play an important role in the provision of public goods. One common

    method is to provide storehouses for information which is of benefit to the public. This

    approach is manifested in the construction of seed and gene banks, public libraries and other

    storehouses of information.

    CONSTRAINTS ON POLICY MAKING AND IMPLEMENTATION

    Rarely are policymakers given free hand to pursue their objectives. One of the most

    challenging elements of policymaking is to achieve one of several goals subject to a variety of

    constraints. These constraints may include:

    1. Budget and resource availability

    The budget constraint includes not only an upper bound on spending but it also

    limitations of personnel and equipment available for a task. For example untrained staff or a lack

    of computers and other equipment may limit the capacity to implement a complex policy. The

    current efforts to rebuild the Afghani government epitomize this constraint - new ministers have

  • 2 5

    complained of deficits of elements as simple as paper, pencils, and telephones. Staff limitations

    as well as the limitations of the regulated population set a premium on simplicity of policies. It is

    easier to implement a uniform taxation scheme or one dependent on clearly observable

    parameters than a complex non-linear tax formula that requires difficult to undertake

    measurements.

    2. Knowledge

    Policy design is as good as the information upon which it is based. Policymakers need

    two types of information. First, scientific information on relationships between key physical

    variables is essential. For example, pesticide control policy needs to be based on knowledge of

    the relationship between exposure to toxic material and health situation. It also requires

    understanding of the factors that determine the effectiveness of pesticides and their impact on

    productivity. In the pollution example given above, the marginal externality cost must be

    determined by a combination of scientific and economic information, as the relationship depends

    both on the interaction between the production process and the level of pollution, as well as the

    correlation between the level of pollution and difficult to quantify costs.

    Another set of knowledge, understanding human behavior and responses to incentives,

    may even be more important. In many cases, this is even more ambiguous than the knowledge

    required to set policy targets. It requires understanding how people might compensate for

    limitations in some area of their lives by changing other behaviors. As we mentioned before, the

    Endangered Species Act in the United States, which requires the preservation of special habitats

    for certain animals and plants, has caused many landowners to exterminate these species when

    they discover them on their land in hopes of avoiding the stringent management practices

    required by the Act. Mexico Citys No circula policy, which places restrictions on the days

    during which cars with certain license plate numbers can be driven, is another example of

    miscalculating behavioral responses. The implementation of the policy actually increased the

    number of cars in the city, as people purchased second vehicles in order to be able to drive every

    day of the week. This reaction clearly undercut the intention of the policy, which was to

    ameliorate the severe air quality problems of the city.

    3. Ability to enforce and monitor

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    Policy design must recognize to what extent policymakers are able to monitor performance and

    enforce regulations. A recent study of East Asian countries, which have been quite fast in

    adopting strict pollution standards, describes the following problem:

    In several of the countries studied here,[Note 4] the monitoring problem is compounded by weakenforcement. In short, when violators of standards are detected, if penalised at all they often face only weaksanctions. (...) polluters are exempted from fines either on grounds of financial hardship or because theviolators wield undue political influence. Perhaps the most pervasive problem is that, even when fines arelevied, they are frequently so low in real terms that they have little if any deterrent value. (OConnor inAfsah et al, 1997)

    In many situations, we encounter asymmetric information, i.e., where the regulated

    population has knowledge that is not available to policymakers. Policymakers therefore must

    operate based on the information they have or may provide extra incentives that will induce

    decision-makers to reveal some of their knowledge. For example, policymakers may not be able

    to easily identify the poor populations that they wish to target. Therefore, programs targeting the

    poor often include a work or waiting requirement unappealing to the untargeted population.

    Control of runoff in storm situations may depend on preventive activities taken by producers, but

    not all of this effort is observable. The amount of pollution may be affected both by farmer

    efforts and technology. When effort is unobservable, policies may be dependent on choice of

    technology.

    One element of policy implementation is design of mechanisms to monitor that may

    include both procedures and technologies. Monitoring by itself is not sufficient. It is crucial to be

    able to enforce a policy and the ability of the regulator to punish determines policy choices. In

    many cases, environmental agencies lack political will and power to enforce punishment and may

    resort to subsidization and voluntary cooperation to achieve policy objectives.

    To some extent, the ability to monitor and enforce depends on the agencys budget. In

    some cases, agencies may use fines and penalties to finance their activities. This obviously

    creates perverse incentives and penalties will be based both on severity of the offense as well as

    ability to pay and resources needed by the agency. Frequently, part of monitoring effort should

    be directed at the bureaucracy that enforces the policy. When policies are complex and

    ambiguous there is room for error and misinterpretation that may breed corruption. The

    advantage of simplicity and transparency is that they reduce opportunities to abuse the system.

    Dynamic ConsiderationsSocieties and economies are evolving systems and policy design must take dynamic

    processes into account.

    1. Adaptive Learning

  • 2 7

    Since some of the key relationships that determine response to policy are uncertain, policy

    design should be flexible and contain mechanisms to collect information, learn and adjust. In

    some situations in early stages of policy implementation, it may be worthwhile to experiment

    with alternative mechanisms in order to increase the information availability to allow for future

    adaptations. Policy design entails a trade-off between desire to change policy parameter as

    information becomes available and the desire to maintain stable regulatory environment.

    Most policy analysis is done prior to the implementation of the project (ex ante), but it is

    also essential to analyze project impact ex post. To conduct this ex post analysis, one has to

    develop data collection efforts that will record impacts on alternative groups. This analysis

    should contrast ex ante conditions and predictions with the actual outcome to identify sources of

    deviation from the desired outcome. This type of analysis is fundamental to the adaptive learning

    process and therefore to the successful implementation of environmental policy. Policies often

    have unexpected consequences that have to be recognized and understood in order to improve

    decision-making in the future.

    2. Irreversibility

    Some projects such as dams and large infrastructure projects may modify the

    environment in a way that is either irreversible or very costly to reverse. Design of these projects

    requires extra care and learning especially when there is uncertainty regarding future scenarios.

    For example, a water project may be less valuable if a new water conserving technology is

    introduced. The decision to implement the project may be delayed until more information about

    new technologies is available rather than implemented at the moment where the expected benefit

    of the project is greater than the expected cost. When assessing projects, it is not sufficient to

    determine whether the expected net benefits are positive, its also important to know whether the

    timing is right.

    HeterogeneityTheoretical and conceptual analysis frequently simplifies systems by assuming that

    agents are similar or homogeneous. Policymakers must make certain simplifications in order that

    their strategies be implementable in a transparent and effective fashion, however, assuming that

    all members of a regulated part of society or beneficiaries or an educational program are the same

    can undermine their success. Homogeneity may lead to uniform treatment that may not take into

    account variability in behavior and circumstances of different agents. Appropriate recognition of

    sources of heterogeneity is essential for effective policy design and while simplicity in design is a

    virtue, adjustment of policy parameters to account for differences in circumstances is also very

    valuable. When firms are heterogeneous and differ in their ability to abate, or cut back,

  • 2 8

    their pollution, it is necessary to determine both the efficient amount of total emissions and the

    efficient mix of pollution among alternative sources. The efficient mix of pollution is simply the

    combination of controls that generates the efficient amount of total pollution at the lowest cost.

    This may require that all polluting firms in a given location cut back pollution to the same level,

    or it could mean that only one of many firms should abate.

    Heterogeneity can also be caused by differences in location. The potential damage of a

    chemical companies located in an isolated rural area is much less than that of a company built

    next to a densely populated urban area. A tragic example of this was the chemical company in

    Bhopal, where faulty production practices allowed 40 tons of methyl isocynanate to be released

    into the environment. Over 4,000 died as they slept. Had this company been farther away from

    the city limits and had regulations been effectively enforced, this disaster could have been

    averted. When resources for regulation are limited, they should be concentrated in areas where

    the potential for damage is greater. In the Bhopal case, regulations should have been more

    strictly enforced nearer to urban centers, or, alternatively, a minimum distance between such

    plants and local population must be established and enforced.

    The market approach, or transferable permit system, is another possible mechanism to

    correct negative externalities that may also increase efficiency. It attempts to establish markets

    for pollution. The approach utilizes economic incentives found in conventional markets to

    allocate pollution abatement between firms in the most cost-effective manner. In this example,

    we assume there are 2 polluters whose production affects the quality of an airshed or lake. For

    simplicity, we assume that their pollution only hurts the airshed or lake and not any other local

    resources.

    In the figure below, the curve MSC is the marginal social cost of pollution, referring to

    the amount of money the damage caused by the pollution costs society. The two curves labeled

    MB1 and MB2 are the benefits that accrue to the two polluters for producing their waste. Polluter

    1 benefits more than polluter 2 at a given level of production. This might be because person 1 is

    producing a higher value product than person 2, or because person 2 has a more efficient

    production process.

    Heterogeneity: The Case of Two Polluters

  • 2 9

    The line ABC is the sum of the two marginal benefits curves, or the aggregate demand for

    pollution by the polluters. The optimal levels of pollution, where the marginal social cost are

    equal to the benefits to each polluter, are given by X , X1*

    2* , X*. Because there is no charge for

    pollution, the initial unregulated levels of pollution are simply X , X ,X20

    10 0 .

    Recall that to achieve X* using a pollution tax, we could set a per unit tax on pollutionequal to the MSC at X* = l. In this case, each individual producer will equate their MB to the

    tax and will produce the socially optimal level of pollution

    With tradable pollution permits, each polluter is assigned X*/2 pollution coupons. Theyare traded at an equilibrium price of l. Polluter 1 buys X X * /21

    * - from polluter 2. These are

    gains from trade. Using the concepts of surplus discussed previously, we can see that welfare is

    smaller if each polluter is restricted to X*/2 pollution units and trade is disallowed. Seller Gains from trade = revenue received - total benefits of lost pollution

    where:

    total benefits of lost pollution = area under MB curve for units traded Buyer Gains from trade = total benefits of gained pollution - cost of pollution permits

    KNT = gains from trade of polluter 1 = KTX1* X*/2 - NTX1* X*/2.

    MNL = gains from trade of polluter 2 = NMX2* X*/2 - LMX2* X*/2.

  • 3 0

    Note that the larger the heterogeneity (the larger the difference between MB1 and MB2),

    the more likely trade is to occur and the larger the volume of trade in pollution permits.

    Political economyAs we have alluded to throughout this reading, policy-making is not conducted in a

    vacuum. While analysts may give equal weight to different groups or may emphasize certain

    groups like the poor, the political process often results in a different agenda. Policy analysis may

    consist of understanding and quantifying the impact of this agenda over time in order to design a

    policy that can be feasibly implemented. In other words, design of policy has to take into account

    political reality; policymaking is a process of negotiation and interaction with interest groups.

    Policy analysis shouldnt only look at total impact, but instead provide estimates of impacts of a

    proposal on various groups. The concept of changes in surplus for effected groups can be very

    useful in this regard. If this analysis is not undertaken, unforeseen opposition may dilute a

    policys effects or prohibit it from being implemented at all.

    This brief paper has touched on many facets of environmental policymaking and policymaking in

    general. Its intention has not been to be an exhaustive guide to policy analysis, but rather an

    introduction that attempts to put some order into the complicated process that is policymaking.

    Many of the topics here are complex in their own right and merit more extensive consideration.

    To this end, we have complied the following (by no means exhaustive) list of references that you

    might find useful in expanding your understanding of the topics discussed here:

    Rural Poverty & Poverty in General:

    International Fund for Agricultural Development (IFAD) Rural Poverty Report 2000/2001http://www.ifad.org/media/pack/rpr/overview.htm

    Poverty-Environment Linkages:

    Arnold, J.E.M. and Bird, P. Forests and the Poverty-Environment Nexus Prepared for theUNDP/EC Expert Workshop on Poverty and the Environment, Brussels, Belgium, January 20-211999 http://www.undp.org/seed/pei/

    Dasgupta, P., Folke, C. and Maler, K. (1994) The Environmental Resource Base and HumanWelfare in Population, Economic Development and the Environment eds. K. Lindahl-Kiesslingand Hans Landberg. Oxford University Press, Oxford.

    IFAD (2002) Combating Environmental Degradation Conference on Hunger and Poverty.http://www.ifad.org/events/past/hunger/envir.html

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    Reardon, T. and Vosti, S. (1997) Poverty-Environment Links in Rural Areas of DevelopingCountries in Sustainability, Growth, and Poverty Alleviation: A Policy and AgroecologicalPerspective eds. S. Vosti and T. Reardon. Johns Hopkins University Press, Baltimore.

    Marcoux, Alain (1999) Poverty and Environmental Change: from linkages to policy issuesSddimensions, Food and Agriculture Organizationhttp://www.fao.org/sd/WPdirect/WPre0089.htm

    **Pillai, P. (2001) Poverty, Environment and Sustainable Development: A ThematicBibliography http://www.worldbank.org/wbi/wbien/nrrp/publications/bibliography.pdfthis is a remarkable bibliography.

    Scherr, S. Poverty-Environment Interactions in Agriculture: Key Factors and PolicyImplications Paper prepared for the United Nations Development Programme (UNDP) and theEuropean Commission (EC) expert workshop on Poverty and the Environment, Brussels,Belgium, January 20-21, 1999 http://www.undp.org/seed/pei/

    Externalities:

    Dasgupta, S. (1999) Opportunities for Improving Environmental Compliance in MexicoWorld Bank Working Paper No. 2245http://econ.worldbank.org/view.php?topic=11&type=5&id=979

    Eskel, G. (2001) Externalities and Production Efficiency World Bank Working Paper No.2319 http://econ.worldbank.org/view.php?topic=11&type=5&id=1074

    Zilberman, D. (2001) Negative Externalities and Policy Notes for ARE 298/PP 290.Department of Agricultural and Resource Economics, University of California at Berkeley.http://are.berkeley.edu/~zilber/EEP101/revised2001/Chapter4.pdf

    International Treaties:

    An excellent source for finding summaries and texts of international treaties is theFletcher School Multilaterals project:http://fletcher.tufts.edu/multilaterals.html

    Fish:FAO The State of the World Fisheries and Aquaculture 2000.http://www.fao.org/docrep/003/x8002e/x8002e00.htm

    Governance:

    The World Bank has a useful web site on governance and anti-corruption:http://www.worldbank.org/wbi/governance/

    Kaufmann, D., Kraay, A. and Zoido-Lobaton, P. (1999) Governance Matters WorldBank Policy Research Paper 2196.http://www.worldbank.org/wbi/governance/pdf/govmatrs.pdf

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    UNDP (1997) Governance for Sustainable Human Developmenthttp://magnet.undp.org/policy/default.htm

    Good WHO document on environmental health in developing countries:Bulletin of the World Health Organization, 2000. Special Theme: Environment andHealth: Roundtable. Environmental Health: For the Rich or for all?http://ehs.sph.berkeley.edu/krsmith/Publications/round_env_health_rich.pdf

    Standards vs. TaxesHelfand, G. (1999) Standards vs Taxes in Pollution Control in Handbook ofEnvironmental and Resource Economics, ed. J. van den Bergh. Massachusetts: EdwardElgar Publishing: 223-234.

    Governance and Environmental Compliance:Afsah, S, Laplante, Benoit, and Wheeler, D. (1997) Regulation in the Information Age:Indonesian Public Information Program for Environmental Compliance World Bankweb Page: Incentives and Behavior. Multiple Actors, Multiple Incentives.http://www.worldbank.org/nipr/newappr.htm

    Wheeler, D. and Huq, M. (1993) Pollution reduction without Formal Regulation:Evidence from Bangladesh same source as above.