Green preferences as regulatory policy instrument

We examine here the suggestion that if consumers in sufficient numbers are willing to pay the premium to have power generated using low-emission technologies, tax or permit policies become less necessary or stringent. While there are implementation difficulties with this proposal, our purpose is more fundamental: Can economics make sense of using preferences as a regulatory instrument? If "green" preferences are exogenously given, to what extent can or should they be regarded as a substitute for other policies? Even with "green" preferences, production and consumption of polluting goods continue to impose social costs not home in the market. Moreover, if green preferences are regarded as a policy instrument, the "no policy" baseline would require a problematic specification of counterfactual "non-green" preferences. Viewing green preferences as a regulatory policy instrument is conceptually sensible if the benchmark for optimal emissions is based on value judgments apart from the preferences consumers happen to have. If so, optimal environmental protection would be defined by reference to ethical theory, or, even less favorably, by prescriptions from policy advocates who give their own preferences great weight while giving those of the public at large (and the costs they bear) very little consideration. (c) 2005 Elsevier B.V. All rights reserved.