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United States Experience with Economic Incentives for Pollution Control

For the purposes of this chapter, information approaches to environmental protection may be defined as policy instruments that influence the behavior of firms and individuals through the dissemination of information on inputs, production processes, and the environmental consequences of final products. Some information approaches rely purely on voluntary reporting, while others have mandatory reporting.

The environmental information embodied in these approaches has economic value to consumers, individuals, scientists, academics, and state and local government officials even in the absence of any changes in emissions by firms. For example, information on the use of hazardous materials may reduce the uncertainty faced by local officials in planning for emergency preparedness. Regulators can use the information to monitor the progress of voluntary efforts to control pollution. Consumers may gain utility from assurances that products are manufactured in ways approved by the federal government. Individuals can make more informed decisions about where to live and work. And scientists and academics gain new sources of data that can be used in research on health, business management, and the environment.

Information disclosure rules may have ancillary economic effects that stem from the incentives they create for change in producer or consumer behavior. For example, information disclosure approaches are an increasingly popular method of encouraging companies to voluntarily prevent pollution. In contrast to end-of-pipe traditional approaches or technological mandates, pollution prevention can be achieved through a much wider array of actions: changes in input use, technologies, processes, management, and other parameters. Because the full range of these parameters and possibilities cannot be well-known to regulatory agencies, governments try to stimulate firms to engage in pollution prevention by mobilizing workers, financial markets, and the community through the provision of information.

When a rule is promulgated, ancillary changes are hard to specify. The economic analyses of information rules often ignore these changes and consider the benefits and costs of environmental information as a good itself, one with independent production and consumption considerations. This chapter complements the partial equilibrium analysis of information embodied in many economic analyses by considering the incentives created by disclosure and the subsequent use of that information.

This chapter reviews many of the United States’ unique experiences with information disclosure methods. Available evidence, some of it conjectural in nature, suggests that at least two factors are important in evaluating the incentive structure of information disclosure rules. First, the information should be accurate and credible. Perhaps the best information would be based on measured data and standardized criteria and provided or verified by an independent source, but few programs meet these ideals. Second, the information must be made available to the right people, at the right time, and in a format accessible to participants in an economic transaction. Unfortunately, not all information policies take note of these considerations.

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