Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 29/2004: A Whiter Shade of Pale: on the Political Economy of Regulatory Instruments

Fridrik M Baldursson () and Nils-Henrik M von der Fehr ()
Additional contact information
Fridrik M Baldursson: University of Iceland
Nils-Henrik M von der Fehr: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Abstract: We consider an intertemporal policy game between changing governments that differ in their attitudes towards a particular feature of market outcomes, exemplified with environmental pollution. When in power, a government will choose policy instruments and set strictness of regulation with a view to influencing the policy of future, possibly different, governments. We demonstrate that a ‘brown’ government favours emission quotas over effluent taxes, as quotas establish property rights that are costly to reverse. Conversely, a ‘green’ government prefers to regulate by taxes, in order to limit the incentives of future ‘brown’ governments to ease regulations. Strategic behaviour tends to exaggerate policy differences (making ‘green’ governments ‘greener’ and ‘brown’ governments ‘browner’) compared to when such strategic considerations were not an issue.

Keywords: regulation; political economy; effluent taxes; tradable quotas; property rights; commitment; environmental management

JEL-codes: D81; H23; L51; Q28; Q38

31 pages, December 4, 2004

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