HOW APPLICABLE IS TRANSACTION COST ECONOMICS TO ENVIRONMENTAL POLICY?
Professor Richards’ most provocative argument is that transaction cost economics offers important lessons for instrument choice in environmental policy.26 After reviewing the theory of contractual arrangements laid out largely by Oliver Williamson,27 Professor Richards concludes that this theory is relevant to the choice of environmental policy instruments.28 In particular, he argues that instruments (such as taxes or tradeable permits) that offer private parties more discretion over investments in pollution control also give rise to the possibility of regulatory opportunism. Fears that regulators might expropriate the gains from cost-reducing investments (e.g., by confiscating tradeable permits) may lead firms to under-invest in abatement activities.29 Richards describes such distortions in firms’ decision-making as “governance costs.”30 Since these costs are generated by allocating discretion to private parties, he argues, they provide poten-tial grounds for preferring direct command
