ENFORCEMENT COSTS AND THE CHOICE OF POLICY INSTRUMENTS FOR CONTROLLING POLLUTION

Economic incentive based policies have long been advocated for controlling pollution because they can minimize firms' abatement costs. However, the social costs of controlling pollution consist not only of abatement costs but also enforcement costs. I show that the conditions for minimizing abatement costs and minimizing enforcement costs differ. As a result, enforcement costs can be higher for incentive based policies than for policies based on direct controls. A complete evaluation of alternative policies requires a comparison of both abatement and enforcement costs.