More positively, the instrument must help improve the efficiency of resource use, increase
productivity, and economize on scarce resources (e.g., capital, skills, and management). It is also desirable that the instrument promotes the search, development and adoption of more efficient, less wasteful production technologies. Clearly, the development priority of developing countries favors the efficiency, cost-effectiveness, and flexibility of economic instruments over the rigidity and costinsensitivity of command and control. Moreover, it has clear implications for the choice of economic instruments and the mode and speed of their introduction. Clearly, secure property rights, efficient taxation of natural resources, and gradually phased-in pollution charges are favored by the high priority that developing countries attach to their growth objectives.
At the same time, poverty alleviation and improved income distribution are also among the top
objectives of developing country governments. Therefore, the distributional implication of economic instruments is also of primary concern. It is not sufficient that secure property rights to open access resources are assigned; it matters who gets them. If the poor who depend on these resources for survival are assigned the property rights, both efficiency and distribution improve, otherwise efficiency is gained at the expense of equity. Similarly, the incidence of pollution or product charges may by regressive if they raise the price of goods that account for a higher percentage of poor people's expenditure, or if the environmental improvement so attained benefits mainly the rich. Distributional concerns may disqualify certain instruments (e.g., bidding for open access resources), favor differential rate structure (e.g., lower charge rates for basic necessities), or suggest mitigation measures (e.g., offsetting the regressivity of tax charge incidence by the progressivity of spending charge revenues). Of course, the ultimate choice of the appropriate instruments would also be influenced by other features of developing countries, to which we now turn.
Low Willingness to Pay for Environmental Amenities
The lower per capita incomes of developing countries imply higher marginal utility of income and
lower willingness to pay for environmental improvements and amenities. Whenever a development
opportunity and environmental protection are in conflict (or in a tradeoff relationship), the choice between the two would be influenced by existing levels of income, as well as by other factors such as preferences, environmental awareness, etc. Other things constant, low income people would assign a relatively higher value to each additional dollar of income (from the development opportunity) than rich people, because of the higher marginal utility of income at low-income levels. At the same time, poor people have a lower willingness to pay for environmental quality or amenities because environmental services are income elastic (i.e., their demand is low at low income levels but rises more than proportionately with income growth). Both these factors would result in individuals assigning higher priority to development than environmental protection (unless of course, the latter is an input into the former).
Thus, economic instruments set according to estimates of marginal damages or marginal benefits
derived from estimates of people's willingness to pay for a benefit (or accept compensation for a damage) better accommodate the significant differences in willingness to pay and marginal valuations of income between developed and developing countries than do command and control regulations. This is particularly important at low levels of income, where survival can be threatened by a small change in prices or a reduction in income. Therefore, the developed country regulations and standards (or level of pollution charges) are not suitable for poor countries and if enforced, can in fact lower welfare and even threaten survival. Developed country environmental standards (not consumption patterns) can only serve as long-term targets or aspirations, just as developed country living standards can.
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