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2. Economic Opportunities

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Savings from Economic Incentives

The primary purpose of this report is to estimate the potential economic savings that are available from using economic incentives more widely to control environmental pollution. Economic theory as well as practical experience argue that economic incentives will stimulate sources to make changes in inputs, changes in production processes and modifications to pollution control equipment to lower the cost of controlling pollution relative to a command- and-control regulatory approach.

Incentive mechanisms have several properties that should make them especially well suited to contemporary environmental problems. First, relative to traditional forms of direct regulation, incentive approaches should be more effective in dealing with pollution from diverse sources, an increasingly important problem. Second, incentive mechanisms are inherently more economically efficient; that is, they achieve environmental goals at lower cost than direct regulation. Third, incentive mechanisms provide a greater stimulus for innovation and technical change in pollution control than does a direct regulatory approach. These properties are discussed in the first three subsections. The fourth subsection summarizes what is known concerning the environmental effects of incentive systems.

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