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Published online by Cambridge University Press: 01 June 2011
A key distinction is often made between command-and-control and market-based instruments of policy. Command-and-control policies include government mandates regarding choices among technologies, processes, equipment, fuels, and standards. Government mandates and controls also include support for research, development, and demonstration of new technologies and could conceivably include major geo-engineering projects. Market-based policies, by contrast, seek to achieve public objectives by adjusting the price signals that are observed in the private sector, counting on individuals and business firms to find inventive low-cost ways of meeting those goals. The two major alternatives for market-based climate polices are carbon taxes and cap-and-trade programs.
GENERAL RATIONALES FOR POLICY MANDATES
In a pure command-and-control economy, government bureaucrats decide on the goods to be produced and the prices at which they will sell. History has shown that a market system generally delivers better economic performance. However, markets do not always achieve social objectives when left on their own. Incomplete information, diverging incentives between producers and consumers, coordination problems, and the presence of public goods can result in market failures. Command-and-control techniques can sometimes be used effectively in a targeted manner to overcome these problems. Indeed, some regulation of markets is needed to safeguard important social values aside from economic efficiency.
Coordination and information problems crop up in a variety of ways. For example, consider the differences in incentives between landlords and tenants. If a tenant is responsible for the costs of fuel and electricity, a landlord does not have an incentive to invest in improved insulation and weather-stripping.
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