lic officials to make and defend judgments about the motives, technology, and economic situation of each individual pollution source, these market systems could substantially ease the administrative burden and help improve the effectiveness, efficiency and equity of pollution control programs.

The history of environmental policy at the federal level in the U.S. is reviewed. This history suggests that efforts to make regulatory systems of environmental management successful have made them less flexible, more demanding, less able to make cost-effective distinctions, and more arbitrary in their definitions and deadlines. It is suggested that the 1970 Clean Air Act (CAA) and 1972 Federal Water Pollution Control Act (FWPCA) pushed this trend about as far as it is possible to go. As these Acts are revised in the light of reality, they can only revert toward the traditional pattern of regulatory discretion and bureaucratic complexity-unless fundamentally different approaches are tried.

The implementation of the 1970 CAA and 1972 FWPCA as they have been amended through 1977, and the prognosis for the future if no significant changes are made, are discussed. It is shown that the elaborate regulatory procedures of both programs have not worked as planned. In effect, both programs have become little more than massive negotiating operations, in which any polluting act can be defined to be legal or illegal, depending on many complex factors, and the regulatory agencies and the polluters try to work out a modus vivendi on a case-by-case basis. Although some short-term progress is being made, the situation does not suggest that sound programs for managing environmental resources in the long run are being put in place.

On the basis of experience with these programs to date and other information, some lessons with important policy implications can be learned. Among these is that, for most pollutants, it is unlikely that any curve relating discharges to damages in a real region of the world will exhibit any "thresholds" or "jumps" which can be used as an objective policy goal; a "linear assumption" of a constant rate of increase of damage with pollution is probably as good as any other, within the limits of uncertainty and variability. In other words, particular quantitative pollution goals and timetables cannot be given much sanctity. The control cost curve, on the other hand, typically will be steep at the high levels of control being demanded, and the attainable degree of control will be uncertain and variable for each source, making quantitative discharge limitations difficult to set. Taken together, these generalizations about control cost and environmental damage curves suggest that the best policies are those which let technology and economics, rather than some preselected environmental goal and deadline, determine the rate and extent of discharge reductions-discharge prices are better than marketable discharge rights, and best-technology regulations are better than inflexible ambient standards. Although there surely are exceptions to this generalization, it is particularly valid in the early stages of an environmental program, when little is known about the best ultimate solution and the immediate need is to begin making progress toward lower discharges in a cost-effective manner over time.

Unfortunately, most of the enacted and proposed modifications in the CAA and the FWPCA are in the wrong direction. Arbitrary am

bient indices are being increasingly relied upon in some cases. Where greater discretion and flexbility is being given to the regulatory agencies, few innovative implementation devices are being provided to help maintain the effectiveness of the programs. Where market-like devices have been suggested, such as bridge tolls or parking surcharges for transportation controls. Congress has acted explicitly to prevent their implementation at the federal level.

This experience and more general observations suggest that market systems have far to go to overcome the political opposition to them. Neither the most avid advocates of pollution control nor the polluters themselves are anxious to trade administrative processes-which they both expect to use to their advantage, the former to punish the evil polluters, the latter to obtain protection-for the impersonal working of market forces. Nevertheless, in the last section some suggestions are offered for steps which could be taken within the context of current programs to implement environmental markets.

FEDERAL ENVIRONMENTAL REGULATION

(By LARRY E. RUFF)

THE ENVIRONMENT, THE REGULATORY PROCESS AND THE MARKET

The policy response to the emergence of environmental problems in the U.S. has been straightforward: the traditional processes of regulation have been applied with a minimum of modification. But there are significant differences between environmental problems and the economic difficulties which have led to economic regulation in the past. These differences and their implications for traditional regulation are discussed in general in this section. Then the ways in which market forces might be used to help overcome these difficulties are outlined.

ENVIRONMENTAL VS. "ECONOMIC" REGULATION

In the U.S., it has traditionally been accepted that market forces of competition, supply and demand, profit and loss are effective and powerful devices for stimulating and guiding economic activity. When it has been perceived that these forces were not working properly, or were producing unacceptable results, public policy has typically tried to make them work better rather than to get along without them, and has taken the form of "regulating" the existing markets so that they perform more like markets should perform. For environmental problems, however, this approach may be less appropriate and less effective than in other areas. The reasons for this and the policy implications are discussed here, and then the general process of environmental regulation is outlined.

The Nonexistence of Environmental Markets

Economic regulation is a well-developed process which attempts to improve the functioning of existing markets in the economy. Thus, price and service regulation has been imposed on natural monopolies in an effort to get them to act like competitive firms; price and entry regulation has been imposed on industries such as transportation for purposes including eliminating destructive competition; licensing and minimum-standard regulations have been instituted where it is difficult for buyers to become adequately informed; tax and subsidy devices have been used where it was felt necessary to modify market forces; and anti-trust laws have attempted to foster competition-all in an effort to make existing markets function more like they should. For our purposes, the critical feature of those situations in which economic regulation has traditionally been attempted is that a market already exists, and continues to play a central role, so that the regulator need only worry about things at the margin. The CAB may have a legal mandate to promote and regulate commercial aviation; but it is the power of economic forces, more than the managerial genius and

regulatory power of the CAB, which gets aircraft built, keeps supply in line with demand, decides what service should be offered, and the like. The Consumer Product Safety Commission may be responsible for keeping dangerous products off the market; but it is the fact that consumers themselves prefer safety to danger and act in the market. (and the courts) accordingly, more than the diligence and omniscience of the CPSC, which prevents major carnage. Similarly with the FDA, the ICC, the FCC, and other regulatory agencies: the positive and dynamic features of the industry, the generally-satisfactory nature of transactions in it, come about because market forces push in that direction; successful economic regulation tries to provide some stability, prevent some mistakes, and take care of some marginal inefficiencies and inequities, without interfering too much with the normal workings of the market.

Environmental problems, however, are quite different in form. The "market failure" which causes an environmental problem is not between buyers and sellers in the market for pollution control equipment, or between buyers and sellers of the steel or paper which comes from the polluting mills; rather, it is between the "buyers" and "sellers" of the environmental resources themselves. Clean air, clean water, wilderness areas, and the earth's ozone layer are resources which provide nature and human society with a whole array of indispensable services, in support of recreation, industry, agriculture, health, and the very life-sustaining processes of the earth. When human society puts few demands on these resources, the supply is adequate for all. But as human numbers, concentrations and activities grow, the demands on environmental resources begin to compete and interfere with one another: the demand for air to carry away wastes can no longer be met without impairing scenic vistas, the health of breathers, or the lifeprotecting functions of the upper atmosphere; the demand for water to carry away heat or wastes becomes such that demands for swimming, fishing and drinking cannot be met simultaneously. In short, the environmental resources become subject to more competing and important demands than they can meet.

The "normal" process by which such competing and conflicting demands on a resource are mediated is supply and demand in a market: those who own or control the resource let others use it only on terms acceptable to the owners, which usually means the users pay for the privilege; and the owner, in seeking to maximize the return he gets, sells the resource or its services to those offering to pay the most for it, and then only if he himself has no more valuable use for it. The result is that users of the resource are continually seeking ways to conserve it, and only those uses for which the resource is most valuable-as determined by the tastes and income distribution of the society-succeed in getting access to the resource. Even such natural resources as plants, animals, land and minerals have undergone the historical transformation from free and abundant gifts of nature to scarce and valuble resources, and have become accepted parts of the market economy. Public policy could and should seek to create some market-type institutions for managing environmental resources but (at least in the U.S.) has not yet done so. Thus, environmental regulation must cope with a situation fundamentally different from that in which most