This chapter for the Handbook of Law and Economics provides an economic perspective of environmental law and policy. We examine the ends of environmental policy, that is, the setting of goals and targets, beginning with normative issues, notably the Kaldor-Hicks criterion and the related method of assessment known as benefit-cost analysis. We examine this analytical method in detail, including its theoretical foundations and empirical methods of estimation of compliance costs and environmental benefits. We review critiques of benefit-cost analysis, and examine alternative approaches to analyzing the goals of environmental policies.
We examine the means of environmental policy, that is, the choice of specific policy instruments, beginning with an examination of potential criteria for assessing alternative instruments, with particular focus on cost-effectiveness. The theoretical foundations and experiential highlights of individual instruments are reviewed, including conventional, command-and-control mechanisms, market-based instruments, and liability rules. Three cross-cutting issues receive attention: uncertainty; technological change; and distributional considerations. We identify normative lessons in regard to design, implementation, and the identification of new applications, and we examine positive issues: the historical dominance of command-and-control; the prevalence in new proposals of tradeable permits allocated without charge; and the relatively recent increase in attention given to market-based instruments.
We also examine the question of how environmental responsibility is and should be allocated among the various levels of government. We provide a positive review of the responsibilities of Federal, state, and local levels of government in the environmental realm, plus a normative assessment of this allocation of regulatory responsibility. We focus on three arguments that have been made for Federal environmental regulation: competition among political jurisdictions and the race to the bottom; transboundary environmental problems; and public choice and systematic bias.
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