Economic Incentive Policies under Uncertainty: The Case of Vehicle Emission Fees

Abstract

Although economists have been recommending more reliance on economic incentive policies for reducing pollution for years, it is only recently that these policies have gained serious attention by policy makers. Economic incentive policies currently in use include marketable permits for electric utility emissions, some deposit refund recycling systems and the low emission vehicle programme in California. Cost savings from the use of incentive-based policies have been well-documented, but there may be many obstacles in practice to the implementation of such fees. In this paper, we examine a proposed new economic incentive policy, emissions fees on motor vehicles, which can be considered as a substitute for the current regulatory policy of vehicle inspection and maintenance. Although emissions fees for vehicles have been suggested in the literature (see Harrington et al., 1995; Kessler and Schroeer, 1993; White, 1982), some practical issues may prevent fees from having large advantages over more traditional regulations. Using a simulation model based on empirical evidence about vehicle emissions and repair effectiveness, we compare the net welfare impacts of emissions fees to a strict regulatory policy under which all polluting vehicles must be fixed.

An earlier draft of this paper was given at the Southern Economics Association Meetings, New Orleans, Louisiana, November 18–20, 1995. The authors would like to thank Trellis Green, Alan Krupnick, Robert Slott, Erik Verhoef and Margaret Walls for helpful comments on early drafts of this paper.