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When the “environmental revolution” arrived in the 1960s, economists were ready and waiting. The economic literature contained an apparently coherent view of the nature of the pollution problem together with a compelling set of implications for public policy. In short, economists saw the problem of environmental degradation as one in which economic agents imposed external costs upon society at large in the form of pollution. With no “prices” to provide the proper incentives for reduction of polluting activities, the inevitable result was excessive demands on the assimilative capacity of the environment. The obvious solution to the problem was to place an appropriate “price,” in this case a tax, on polluting activities so as to internalize the social costs. Marshall and Pigou had suggested such measures many decades earlier. Moreover, pollution and its control through so-called Pigouvian taxes had become a standard text-book case of the application of the principles of microeconomic theory. Economists were thus ready to provide counsel to policy makers on the design of environmental policy.
However, things have proved not quite so simple as this. First, at the policy level, environmental economists have Been dismayed at their modest impact on the design of environmental measures. Rather than introducing the economist's taxes or “effluent fees” on polluting activities, policy makers have generally opted for the more traditional “command-and-control” instruments involving explicit limitations on allowable levels of emissions and the use of specified abatement techniques. Pricing measures for the regulation of pollution have been rare.