Policy objectives & targets Pollutants - (negative) externalities: “exist when some of the consequences of production (pollution’s imposing costs on others) are not considered when production decisions are made.” resource misallocation Pollution control policy goals: Ideal – maximise expected net economic benefits to society (economically efficient or first-best outcome) Second-best / cost-efficient – achieve specific environmental objectives at least cost given circumstances (i.e. available policy instruments, transaction costs, political, legal or informational costs) Alternative policy targets: Performance-based measures Design-based measures

Evaluation criteria Economic performance: ability to achieve objectives at minimal cost Administration and enforcement costs Flexibility: effectiveness of control in the context of changing environmental and economic conditions Incentives for innovation Political feasibility (interest groups, path dependency, etc.)

Economic incentives Realign private & social costs Performance-based (i.e. taxes on water quality) Monitoring runoff prohibitively costly High levels of information needed by both parties Uncertainty makes compliance unattractive to risk-averse producers Design-based (i.e. taxes/subsidies on inputs/technology) Expected runoff-based instruments more costly than those based on input and technology use directly Market-based (i.e. emissions trading) Requires that activities can be regulated effectively: binding constraints, enforceable system, etc.

Standards Legally require producers to behave in a specified manner Performance (not feasible) Runoff - cannot observe if compliant Ambient - predicting how actions will affect pollution levels difficult Need homogeneity of producer expectations Natural variability of effects – must set limits Design Inputs / technologies - only moderate welfare loss from uniform application Expected runoff - higher administration costs

Liability While imposed ex-post, serve as ex-ante incentive to account for externalities Strict liability vs. negligence (based on performance or actions) Unilateral vs. bilateral care Feasibility of efficient control limited: Inability to trace pollution back to source Require knowledge of how choices affect performance measures to be effective Negligence rules also require site-specific information Litigation process expensive

The Nitrates Directive Standards approach Performance-based definition of vulnerable zones – appropriate? Voluntary code of good practice Binding action plans for vulnerable areas Design-based: must ensure fixed limit on amount of manure spread per unit of area not exceeded