Explaining Market Mechanisms

In recent years, environmental regulation has seen a debate between supporters of traditional command-and-control regulation – a system of uniform pollution control standards – and proponents of a system of fees or permits for individual polluters known as market mechanisms. In this article, Professor Merrill considers two theories, wealth-maximization theory and distributional theory, that have been used to explain the emergence of market mechanisms in American environmental policy. He notes that (1) relatively few American environmental-enforcement programs have adopted market mechanisms; (2) those that exist overwhelmingly use grandfathered transferable permits instead of pollution taxes or auctioned permits; and (3) they are always based on pollution control standards that have been established before the market mechanisms are put in place. Professor Merrill finds that the distributional theory best explains why grandfathered permits are used most often and why, more generally, adoption of market mechanisms is not more widespread. Finally, noting that no inherent conflict exists between the wealth maximization and distributional theories, Professor Merrill concludes that a framework building upon both theories may lead to a better understanding of the debate between command and control and market mechanisms