Predictability: Does the instrument

Predictability: Does the instrument combine flexibility and predictability? Flexibility is critical for cost minimization, adjustment to varying conditions, locations, and changing circumstances, and for gradual implementation. Predictability is critical for dynamic efficiency both in terms of technological innovation and structural change. The effectiveness of any instrument depends critically on the perception of its permanency and direction of change. Only when the industry perceives that a standard, a tax or a charge is in place to stay (that its value will escalate over time towards full-cost pricing rather than be eroded by inflation) will it modify its long-term investment plans to reduce environmental costs. It is the instability and unpredictability of environmental policy rather than the costs of compliance that the industry finds disruptive and ultimately more costly. Therefore, when an instrument is introduced gradually, the compliance or escalation schedule must be pre-announced and adhered to.
Acceptability: Is the instrument understandable to the public, acceptable to the industry, and politically saleable? This is perhaps the most difficult criterion to meet and definitely one which puts economic instruments in a disadvantageous position. Unlike the hidden costs of command and control regulations, the costs of economic instruments such as product taxes, pollution charges, user fees, environmental bonds, and liability systems, are all too transparent. Taxes are generally unpopular and user charges are unwelcomed when the service is taken for granted or if it has been available at a subsidized cost for a long time. Underpricing and subsidies become capitalized into property values and their removal is seen as a net reduction in the owner's wealth. Market creation, such as tradeable pollution permits, is often resisted by environmental groups and the general public as a license to pollute. Polluters would resist economic instruments such as taxes and charges if they perceive unenforced command and control standards as a feasible alternative, if they see an easier opportunity for regulators' capture in non-economic instrument approaches to environmental management such as the process of negotiation between polluters and regulators practiced in England. Exploiters of open access resources would generally resist regulations or closure of the commons from fear that they might be the ones that are excluded. Finally, the public is likely to be receptive to charges that economic instruments for environmental management are just another form of taxation or license for big polluters to continue to pollute. They are also likely to be receptive to calls for “environmental justice” in the form of either equal pollution reduction (in absolute or percentage terms) by all sources or uniform emission standards.
Therefore, the promoters of economic instruments have a hard sell and a difficult marketing task. Without making it clear to the industry, to environmental groups, and the public, the benefits and costs of the available options (including that of no action), the chances of acceptance and successful implementation are severely limited. Selecting simple and easily understood instruments makes the marketing task easier and the likelihood of acceptance greater. In addition, a number of mitigatory and compensatory measures can be introduced to lessen both the transitional and long-term cost.
One such measure is revenue neutrality (i.e., reduction of other taxes such as income taxes which reduce the incentive for work or sales taxes and import tariffs that distort consumption decisions). Other mitigation measures include gradual implementation and grandfathering of existing producers. The support of environmental groups and the industry can often be secured through greater communication and participation in the selection and implementation of economic instruments.
Institutional and Human Resource Requirements
Economic instruments as a group tend to have lower institutional and human resource requirements
than command and control regulations, because they operate through incentives rather than through coercion. First, it is far easier to implement an instrument that makes compliance in the best interest of the economic agent than an instrument which forces compliance through enforcement. Second, economic instruments make maximum use of the superior and privileged information that the polluters and resource users have on their own pollution control and resource conservation cost without attempting to find out what that information is. This contrasts with the considerable informational demands of command and control regulations which include intimate knowledge by the regulators of the production and pollution control technologies of a multitude of production processes. The informational parsimony of economic or market-based instruments can be compared to the informational advantage of market economies over those of centrally planned economies. Nevertheless, the informational requirements of economic instruments are not insignificant, especially when one attempts to introduce them at the optimal level (i.e., at the point where the marginal control cost equals the marginal damage cost). This presumes knowledge of pollution control (or conservation), cost function, and environmental damage functions, none of which are readily available. These informational requirements are considerably reduced if we only seek to attain costeffectiveness (i.e., the environmental objective is set through some other means such as the political process or at scientifically-established ecological thresholds), and if the economic instrument only attempts to achieve this objective at minimum cost. Then experimentation with pilot projects or trial and error would help reveal the needed information for determining the optimal level of the instrument.Since gradual introduction is often preferable, the instrument can first be introduced at a very low level and progressively escalated, gaining information in the process until the optimal level is
approximated.