Factory pipes with smoke. This represents discussing the command-and-control approach to reducing pollution

Economics

A Command-And-Control Approach To Reduce Pollution

07.13.2022 • 6 min read

Mendy Wolff

Subject Matter Expert

This article explains command-and-control of the regulation for pollution. Read about when, why, and where the regulation was created and its effectiveness.

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In This Article

  1. What Is the Focus of a Command-And-Control Approach To Reducing Pollution?

  2. What Is a Command-And-Control Regulation?

  3. 3 Weaknesses of Command-And-Control Regulation

  4. What Are Alternative Methods for Emission Reduction?

Have you ever thought about what the world would look like if there were no laws to protect the environment? Imagine if the “free market” meant that anybody can interact with nature completely unhinged. How would the world look? In this article, you will learn about the different legislations and economic approaches to protecting our environment from pollutants and over-production.

What Is the Focus of a Command-And-Control Approach To Reducing Pollution?

A command-and-control approach (CAC) is when the government sets up controls to reduce and limit pollution. Economists refer to this approach as command and control because that is precisely what happens. Policymakers and political authorities mandate or command companies to act in certain ways so that they can manage or control pollution. The government sets up different authorities to set fines and other punishments for companies that do not obey environmental laws.

What Is a Command-And-Control Regulation?

In the 1960s, the United States began passing legislation to control environmental pollution. For instance, the Clean Air Act and Clean Water Act were control policies for pollution reduction. In 1970 the Environmental Protection Agency (EPA) was established to oversee all environmental laws. In general, these laws were designed to limit the amount of pollution caused by the strong and growing post-war economy.

There were two main types of laws that congress passed to curb the level of pollution. One way was for a law to specify a permissible quantity of pollution allowed and then impose penalties on any company that exceeds those limits. For example, rules would specify how much pollution was allowed out of a smokestack or drainpipe in order to maintain good air quality.

Another type of environmental regulation is laws requiring the installation of pollution-reducing equipment in factories or in the machines they were manufacturing for wide use. One great example of this is the mandatory tailpipes that car manufacturers were required to install in cars to help reduce the air pollution from vehicles.

These types of regulatory laws—the ones that specify the permissible quantity and those that mandate the installation of pollution-reducing technology—are command-and-control approaches.

These laws push the cost of pollution onto the companies creating it. The input cost of production goes up when companies have to include the extra cost of penalties or the installation of pollution control technology. The increased cost of production is essentially a way of forcing companies to account for the social cost created by pollution.

These laws have been relatively instrumental in curbing pollution and helping America achieve clean water and better air quality. Policymakers made lots of amendments and updates to the environmental command-and-control regulations. However, economists have been critical of these regulatory approaches for three main reasons.

3 Weaknesses of Command-And-Control Regulation

Most economists agree on the goal of achieving optimal environmental standards. However, they disagree on whether these control systems can achieve economic efficiency. The main crux of their argument is that there are no economic incentives for improving environmental quality. They argue for a more market-based system in which the allocation of cost-effective and novel initiatives can reduce the level of pollution while also fostering economic growth.

Here are three main weaknesses economists see in command-and-control regulation:

1. Lack of Incentives

There is no incentive to improve the quality of the environment beyond what the law requires. This means that once a company has satisfied its command-and-control regulation, they have no incentive to do even better.

2. Inflexibility

Most command-and-control regulation is very inflexible. This means that the laws do not differentiate between the different types of companies causing pollution. In other words, because the law makes a minimal distinction between which companies or industries have to follow the regulation, the social cost of pollution ends up being distributed unequally since certain companies will find it very costly to conform to the rules. In contrast, other companies may find it to be very cheap. Further, because each company acts independently, the total cost of pollution grows, and the social benefit decreases.

3. Politics

Elected legislators and the Environmental Protection Agency write all laws. So they can be subject to compromise for political agendas. For example, existing firms will often argue—i.e., lobby—that they should not be subject to new laws congress is trying to pass; and only companies that want to start new production should have to adhere to those strict laws. Lobbying politicians to design regulations that fit specific interest groups ends up causing environmental laws in the real world to be full of different loopholes and exceptions.

What Are Alternative Methods for Emission Reduction?

Economists have proposed several alternatives to solve the market failure of negative externalities which are caused by pollution. They are critical of command-and-control regulations simply because they don’t facilitate enough economic incentives for companies to rethink the ways in which they produce goods.

Below are three alternative solutions that would help reduce pollution with more economic efficiency:

Incentive Approaches

Incentive approaches are different ideas that create a market system to facilitate decision-makers with their decisions' actual costs and benefits. These operate like traditional market exchanges; the price is determined by the demand and supply of that good. In such a system, all participants are incentivized to get the most utility at the least cost possible. The marginal cost will be equal to the marginal benefit. Environmental policies that create market-like exchanges create economic incentives for all participants in reducing pollution. Economists refer to these as incentive approaches.

Emissions Tax

A classic example of an incentive approach is an emissions tax. This is a tax imposed on every unit of pollutive emissions. Imposing a tax on each separate unit causes polluters to reduce their emissions until the marginal benefit gained from emissions is equal to the marginal cost of the emission tax. Such a mechanism produces a higher social benefit since the total cost of emissions will always be at least equal to the benefit received.

Marketable Pollution Permits

Another type of incentive approach is marketable pollution permits. Each permit allows its owner to produce a certain amount of pollution per month or year. You can think that the company has to buy a license to operate. Without the license, the production is illegal.

A market exchange for permits can then very effectively allocate the permits to the people who will benefit from them the most. This means that the bidder on the highest price for the permit can produce enough goods that will allow them to cover high license costs. In this sense, the market allocates the permits just like any financial asset. The permits incentivize owners to produce the most production possible for each permit they hold.

Subsidies

Subsidies are the inverse of pollution taxes. Instead of imposing a tax, the government offers subsidies to companies that reduce their pollution discharges. If a company can reduce its pollution discharge at a cost that is less than the amount it would receive from the subsidy, then it will probably do so. This also incentivizes companies to find novel approaches for pollution control.

This is similar to the system used for encouraging recycling which is one type of pollution abatement. The user pays a deposit on the recyclable bottle they purchase. If they return it, they get their money back. In this same way, polluters pay a surcharge for their negative externality—the social cost of pollution—and receive a refund if they can find ways to clean up some of their mess.

These alternatives are market-based reforms that economists are supportive of in addressing environmental issues. This type of regulatory framework tends to achieve a larger aggregate of pollution reduction with less economic cost. Such approaches also have positive externalities. They incentivize private companies to invent new technologies in which they can solve environmental problems like water pollution of excessive sulfur dioxide in the environment.

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