Are Economic Tools Preferable to Direct Regulatory Measures in Achieving Environmental Goals?

Abstract

Regulators around the world are dealing with a fundamental dilemma. Clearly, modern economic activity raises the standard of living but, on the other hand, it creates many environmental hazards that harm our quality of life. To balance these conflicting effects, they are interested in bringing about social equilibrium and for the value of marginal damage to be equal to the cost of reducing it. Excessive investment will result in too much damage to the standard of living, while under-investment carries with it excessive risks. There are two primary ways to approach these concerns regulatorily: through direct command-and-control regulation or through the development and promotion of market-based economic tools (other essential components, such as education and information, will not be covered in this article). Over the years, in many Organisation for Economic Co-operation and Development countries, the use of economic tools increased at the expense of direct regulation but, in Israel, there is still a tendency to use direct regulation. Since the beginning of the 21st century, however, Israel too has seen an increase in the use of economic tools. The article considers whether it is better to increase the use of economic tools at the expense of direct regulation. Its examination is based on six case studies from various environmental fields in Israel. The results of the research reinforce the argument that economic tools can achieve policy objectives more effectively while driving the market toward environmental improvement. However, it is almost impossible to clearly attribute other achievements, such as the achievement of advanced environmental goals, the development of environmental awareness or the strengthening of environmental regulation, to a particular regulatory approach. Therefore, the results should be seen as supporting evidence and not as absolute proof of the value of economic instruments.