Abatement-Cost Heterogeneity and Anticipated Savings from Market-Based Environmental Policies

Abstract

Policy makers and policy analysts in the environmental realm are frequently faced with situations where it is unclear whether market-based instruments hold real promise of reducing costs, relative to conventional command-and-control approaches. We develop some simple rules-of-thumb that can be employed with minimal amounts of information to estimate the potential cost savings that can be anticipated from designing and implementing market-based policy instruments. Because our analytical models are simple, yet capture key properties of pollution abatement cost functions, they can be used to predict potential cost savings through simple formulae. Our hope is that these simple formulae can aid policy analysts and policy makers in the early stages of exploring alternative policy instruments by helping them identify approaches that merit greater attention and more detailed analysis.

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