Regulations, Standards and Legal Controls
- The government use other methods to correct market failure that doesn’t involve the direct use of the price mechanism
- These take the form of regulations, standards and legal controls
- All such controls are used by the government to combat market failure
- If it was left to the free market, undesirable outcomes would occur
- The purpose of such controls is to override the workings of the market mechanisms
- Action by the government on someone breaking the legislature can range from a written warning, to a fine, to a closure of a business
- In theory, the standards set should achieve what the legislation see as an optimum scale of activity or use
- If, for example, standards are too low, the polluter receives benefits that are greater than the external costs of the pollution caused
- If standards are too severe, the polluter might be tempted to emit pollutants into the air or water, particularly if risk of detection is low.
- To set standards, one needs accurate information, which is often hard to get
- For example, it is difficult to identify the source of some pollution
- Once standards have been set, there is no incentive to work in a more environmentally friendly way
- Nevertheless, regulations and standards are a very important way of reducing many forms of environmental pollution that would otherwise have been unavoidable.