Public Policy: Using Market-Based Approaches - Department for ...

SUBSIDIES
In some cases, instead of taxing pollution, governments have introduced
subsidies for pollution abatement. This can include subsidies for using lowemissions
technology. However, the long-term effects of such subsidies have
been poor. In some cases, the subsidy may induce so much entry that in the long
run there is an increase the total amount of pollutant emitted. 238 For this reason,
taxes on the emission of pollution are often preferable to subsidies for lowpollution
technology.
Opening access to natural monopolies
UNDUE GOVERNMENT INTERVENTION
As we noted in Part III, regulated access is only likely to be appropriate in a very
limited number of cases. In practice, the majority of cases of regulated access
have been in previously nationalised monopolies. There are good reasons for
this. The provision of access at a regulated price necessarily involves an
appropriation by government of some of the assets of a private firm. If the firm
has acquired these assets through legitimate investment in the market, then the
use of regulated access can deter investment. Any short-term benefit in terms of
price, will likely be more than out-weighed by the long-term effects on firms’
incentives for investment.
ASYMMETRIC INFORMATION
If regulated access is, however, deemed appropriate, then it should be granted
at an appropriate level. This will normally be at a level that bears some relation
to cost. In setting this level, the regulator is at a disadvantage compared with the
regulated firm. The regulated firm will have more information about its own
costs than an external regulator possess. Moreover, it faces an obvious incentive
to have the access charge as high as possible. The result can be an incentive for
the regulated firm to inflate its costs, with the consequence of an inefficiently
high access charge. Moreover, even if a correct access charge were set, the
process for acquiring and analysing the necessary information can be costly.
COST OF REGULATION
Section 12 – Issues in the implementation of market mechanisms
In the case of natural monopoly, the efficiency losses from allowing one private
firm to supply the market and extract monopoly rent may be less than the cost
of regulation. This is suggested by Harberger’s empirical estimates of the cost of
monopoly in the US, which suggests the deadweight loss from monopoly is of
a relatively small magnitude.
238 Baumol, W. and W. Oates, (1988), The Theory of Environmental Policy, Second Edition, Cambridge, England:
Cambridge University Press.
Kohn, R. (1985) ‘A General Equilibrium Analysis of the Optimal Number of Firms in a Polluting Industry,’
Canadian Journal of Economics 18(2).
193