Regulation, Tax Policies, Subsidies as Remedies

Standard environmental and resource policy tools—regulations, taxes, and subsidies—are widely used to correct market failures like overuse, pollution, and underinvestment in public goods. These tools originate in classical welfare economics and typically rely on central authorities to enforce behavior change by raising the cost of harmful activities or lowering the cost of desirable ones. Yet these interventions often fail to reflect the knowledge, incentives, and constraints of actual resource users. Political processes, driven by interest groups and bureaucratic incentives, tend to produce inefficient, one-size-fits-all policies. Regulators rarely possess accurate information on optimal pollution levels or resource use, and their decisions often overlook local governance solutions already in place.

Two illustrative failures are discussed. In the U.S., sulfur dioxide emissions were targeted through a uniform mandate for costly scrubbers on all power plants, regardless of their actual pollution levels—resulting in over $100 billion annually in compliance costs without achieving emissions goals. In Canada, halibut fisheries saw severe overcapitalization and stock depletion as short, competitive seasons were imposed, pushing fishers to invest heavily in vessels for brief, wasteful harvests. In both cases, policies generated unintended consequences, high enforcement costs, and weak environmental outcomes.

Underlying these failures is the exclusion of users from governance, the absence of property rights or incentive-compatible frameworks, and a neglect of transaction costs. Effective environmental governance requires moving beyond adversarial state-user dynamics and instead aligning institutional design with user incentives, local knowledge, and enforcement capabilities.

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