Money, Banks and Finance in Economic Thought

Environmental economics and the 'least-cost theorems' in the late 1960s

Berta Nathalie, Reims university

This is in the 1960s, a rich decade of environmental revolution that new proposals of environmental policies emerge, based on what we today call the least-cost theorems. These new solutions attempt to minimize the total cost of achieving some given environmental standards: first a political standard of pollution is set by public authorities; second a pollution pricing procedure is set to achieve this predetermined standard. Pollution pricing can rest on two different procedures, each belonging to its own theoretical tradition: a market pricing procedure which, following Coase (1960), requires the creation of property rights and tradable permit markets (Dales 1968); or an administered pricing procedure which, following the Pigovian tradition, requires the creation of uniform taxes, as first suggested by Kneese and Bower (1968), and Baumol and Oates (1971). The cost-effectiveness of both solutions is quickly established by Baumol and Oates (1971) for the tax, and Montgomery (1972) for the tradable permits system. This paper provides an early history of these two new policies since no contribution, in a history of economic thought perspective, has been dedicated to this issue. It focuses on their historical and theoretical context and on the reasons that have led to their emergence. It does not study its reception among economists, neither their comparison: they will give rise to a rich discussion, the today famous ‘price versus quantity’ debate that confronts the two pricing procedures (see e.g., Weitzman 1974 for a first discussion) but this last issue would deserve an entire paper. On the contrary, this paper rather focuses on the similarities of the two solutions: although they belong to different traditions, Coasean versus Pigovian, and are today usually contrasted within the price versus quantity debate, they emerge exactly at the same time and for the same reasons, while rather independently. Finally, this paper also shows that these least-cost solutions are both a means to address the twofold issue raised by some new environmental economists at that time: on the one hand, the latter want to promote incentives-based policies against the usual regulation based on standards and direct controls which is largely favored by policy markers; on the other hand, they want to find alternatives to the Pigovian tax which is dominant in the economic literature, but that they start to consider unworkable.

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Keywords: environmental economics, emission trading, Pigovian tax, John Dales, cost effectiveness