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Abstract

Government agencies increasingly base the structure and approval of environmental regulations on a benefit-cost test. For regulations that pass this test, total benefits exceed total costs. Under a benefit-cost framework, the degree of regulatory stringency is set at an economically efficient level whereby the tightness of the regulation is increased up to the point where the incremental benefits equal the incremental costs. Setting regulatory standards to achieve the efficient degree of pollution control does not fully discourage entry into polluting industries, provide compensation to those harmed by pollution, or establish meaningful incentives for effective enforcement. This article proposes that the benefit-cost approach be retained as the guiding principle for regulatory policy, but that sanctions for regulatory violations be greatly enhanced. A different, more ambitious proposal by Elliott and Esty advocates pollution control to the lowest level that is technologically feasible, coupled with compensation for those injured by pollution. The unbounded regulatory framework advocated by Elliott and Esty sets aside benefit-cost balancing, generating the prospect of inordinate costs with few environmental dividends from the highest levels of stringency. Their more promising proposal is to establish a compensation system for environmental harms. Compensation for those harmed by pollution has some parallels with successful workers’ compensation programs, but to be successful it must address challenges not faced in the employment context. More stringent regulation of long-term risks may be more welfare-enhancing for future generations than their proposed environmental damages compensation fund. Protection may yield greater dividends for more affluent future generations than compensation.

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