E C O N O M I C R E P O R T O F T H E P R E S I D E N T

Box 7-2.—continuedproviding useful information. In addition, and in light of the currentstate of knowledge and preliminary nature of the data and methodologiesinvolved, developing satellite accounts allows experimentationand encourages the testing of a wide variety of approaches.adopt less polluting technologies from the start. Because knowledge andtechnology developed in one country can diffuse itself worldwide, economicdevelopment does not have to result in the same stream of environmentalproblems that the United States and other industrial countries have sufferedsince 1900.Designing Policies to AddressEnvironmental PollutionPrivate markets by themselves usually do not provide the needed incentivefor producers and consumers to take into account the costs of the environmentalpollution they impose on others. For example, a pulp-and-paper millwill aim to minimize all the inputs it must buy in the market, such as laborand capital, in the production of a unit of fiber product. But if it is unregulated,the mill has no economic incentive to minimize its water pollution,because it does not have to pay for the damage that its pollution causes.Absent appropriate policies that provide an incentive for producers toaccount for pollution costs, economic activity produces too much pollution.Lacking this incentive, the mill also lacks the incentive to invest in researchand development (R&D) into pollution-reducing technologies. Welldesignedpolicies that create such an incentive in private markets could makesociety better off. Of course, an excessively stringent policy might impose a highcost on society, with little benefit at the margin. The costs of eliminating allpollution, for example, could be so exorbitant that society would suffer fromhaving to forgo using those resources on other valuable endeavors, such as education,health care, or product R&D. The task that falls on policymakers, then,is twofold: they must first set acceptable levels of pollution, and they must thenselect and use policy instruments that will achieve these levels efficiently.Economists have long argued that environmental goals should be set sothat the benefit from the last unit of pollution abatement is equal to the costof abating that last unit of pollution. However, environmental goals inpractice do not usually reflect such an explicit weighting of benefits andcosts. Consequently, some environmental policies may have gone too far,246 | Economic Report of the President