Study of market based instruments for controlling air pollution in India

Abstract

In the sphere of public policy and regulations, economic instruments can be defined as a set of policy tools that use economic incentives to control the external costs of production in a market. These external costs are generally in the form of air, land or water pollution, and can include the depletion of valuable natural resources at an unjustified rate. Governments worldwide have try to keep the pollution levels in check using basically two types of instruments. The first is Command and Control instruments. This is more of a prescriptive approach where governments try to directly limit the emission levels, specify equipments to be used in processes, controlling input/output levels, information disclosures etc. On the other hand, Market based policy instruments are directives and regulations that signal to markets to behave in a particular manner rather than explicitly directing it in the usual command and control regulations. The latter restricts each firm to a certain level, irrespective of its capacities and capabilities to deal with pollution. Because of the different marginal costs involved for different firms, these command and control processes generally lead to an inefficient outcome and leaves no incentive for the firms to go beyond their specified targets. In contrast, the market based policy instruments, when applied correctly, lead to realization of the desired targets of pollution at the lowest costs.