On the Design of Incentive Mechanisms in Environmental Policy

Abstract

The theory of incentives in environmental policy is concerned with the problem an environmental authority faces, when its own objectives do not coincide with those of the polluters. Negative externalities in production and consumption degrade the quality of the environment in an excessive way. The public goods property of natural resources, like air and water, is a standard example of the failure of markets and hence for the need of public regulation. It is the task of the environmental authority (the principal), to invent instruments for environmental policy in order to internalize the social cost of production and consumption caused by the polluters (the agents).