Explaining Market Mechanisms

In recent years, environmental regulation has seen a debate be-tween supporters of traditional command-and-control regulation-a system of uniform pollution control standards-and proponents of a system of fees or permits for individual polluters known as market mechanisms. In this article, Professor Merrill considers two theories, wealth-maximization theory and distributional theory, that have been used to explain the emergence of market mechanisms in American environmental policy. He notes that (1) relatively few American envi-ronmental-enforcement programs have adopted market mechanisms; (2) those that exist overwhelmingly use grandfathered transferable permits instead of pollution taxes or auctioned permits; and (3) they are always based on pollution control standards that have been estab-lished before the market mechanisms are put in place. Professor Merrill finds that the distributional theory best explains why grand-fathered permits are used most often and why, more generally, adop-tion of market mechanisms is not more widespread. Finally, noting that no inherent conflict exists between the wealth maximization and distributional theories, Professor Merrill concludes that a framework building upon both theories may lead to a better understanding of the debate between command and control and market mechanisms.* John Paul Stevens Professor of Law, Northwestern University. The author is grateful for suggestions provided by David A. Dana, William H. Rodgers, Jr., and Henry E. Smith.

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