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  • Print publication year: 1988
  • Online publication date: June 2012

11 - Efficiency without optimality: the charges and standards approach


The results arrived at in Chapter 8 may seem to constitute insuperable barriers to a rational environmental policy. The very presence of externalities is likely to produce a large number of local maxima among which, in practice, it seems impossible to choose with any degree of confidence; we may not even know in which direction to modify the level of an externality-generating activity if we want to move toward an optimum. It should be emphasized that these problems beset equally all attempts to achieve optimality by any of the means usually proposed – direct controls and centralized decision-making at one extreme and pricing schemes, such as the Pigouvian taxes and subsidies, at the other.

Nevertheless, we believe that it is possible to design policies for the control of externalities that are reasonably efficient. The approach that we will propose in this and the next chapter consists of the use of a set of standards that serve as targets for environmental quality coupled with fiscal measures and other complementary instruments used as means to attain these standards. The standards, while admittedly somewhat arbitrary, are, in principle, not unlike the growth or employment goals that have guided governmental macroeconomic policies. In both cases, employment and environmental policy, the approach is, in practice, basically of the “satisficing” variety, with acceptability standards based on individual judgments and, often, compromise. Yet, in both cases, the choice of effective means to achieve the established goals has been facilitated by a substantial body of economic theory. This theory suggests that fiscal measures can contribute to the efficiency of a program to control externalities. Moreover, the use of these fiscal measures in combination with standards for acceptable environmental quality, avoids, at least in part, the policy problems that have been raised in Chapters 7 and 8.