Abstract

This paper examines normative and positive aspects of environmental regulation. It also discusses the properties of several environmental instruments such as emissions taxes, tradable emission permits, and command-and-control regulation. The main theoretical foundations of environmental regulation are also emphasized although references on contemporary issues related to the discussion of the possibility of having a practice-oriented profile is treated. Beyond brief introduction, the second section defines the externality problem and makes a taxonomy of externalities. The third section deals with externalities and the First-Welfare Theorem, i.e., in a perfect competitive market without government intervention except to keep a Pareto-optimal situation. Other functional concepts such as missing markets and Coase’s theorem are also addressed. The fourth section covers optimal environmental regulation through means such as taxes, emission-trading-system, and standards all these in a Second-Best World. The fifth section treats emission reduction policy by analysing carbon pricing alternatives and other solutions. The sixth section delineates a frame of reference to evaluate the relative effectiveness of taxes in emissions abatement. The seventh section rises discussion about diverse instruments to lower emissions. In the eight section some concluding remarks stemming from the tried analysis are drawn.

Keywords:Externality problem; First-best theorem; Second-best approach; Carbon pricing; Optimal policy; JEL: Q11