1 Economic Instruments and Clean Water : Why Institutions and Policy Design Matter

1 This paper analyses the use of economic instruments for control of water pollution in four OECD countries-Denmark, France, Germany and the Netherlands-from 1970-1990. While there is now a vast theoretical literature on the use of economic or market-like instruments, this study is the first empirical investigation of the use of such instruments in a comparative perspective. And although the specific policies discussed in this paper may now be out of date, the analysis remains valid today. The study confirms that economic instruments are indeed powerful instruments for the implementation of public policies. But the study also clearly shows that institutions matter. Neither market mechanisms nor market-like policy instruments operate in a vacuum. Regulatory reform does not mean leaving the market to itself. Formal and informal government institutions define and specify the conditions under which market mechanisms function. Since market-like policy instruments are usually applied within existing rules, institutions, and policy processes, the policy and administrative contexts in which they operate become important. These contexts are quite different from country to country, often more so than policymakers are aware of. The national style of policymaking depends on the constitutional framework, the infrastructure of public authorities as well as the historical and cultural heritage, which are basic institutional premises that vary tremendously even between neighbouring western european countries. The use of economic instruments in the Dutch water pollution control policy was especially successful, because it was combined with an exceptional infrastructure for water management, the Dutch Waterboards. In Germany and especially Denmark policies were less successful because local authorities were able to manipulate regulations in their favour, a consequence of their stronger position in these political systems. In France, the River Basin Agencies established in the 1960's provided an administrative structure on hydrological principles as the Dutch, but the policy was less successful due to interference from the Ministry of Finance, representing French centralism. Employing data from national and international sources, the study shows how the Dutch policy was most successful both with regard to pollution control and with regard to public spending and social costs. For governments keen to introduce more economic instruments for pollution control as well as for other public policies, the water pollution control study offers interesting implications to consider. Because the use of economic and market-oriented policy instruments has become fashionable, some administrations are eager to increase their use of these policy instruments, regardless of their …