Incentives, precision technology and environmental protection

This paper calls for a reevaluation of the pollution problem in order to devise efficient strategies for its control. It contends that a fundamental cause of pollution is inefficiency in input-use during the production process. This inefficiency manifests itself as input-waste and polluting residues. Precision technologies can increase the effectiveness of inputs used in production and reduce pollution generation. Despite their potential economic and ecological benefits, adoption of precision technologies has been slow. This paper presents a conceptual framework to identify and analyze the specific factors that affect their diffusion among microunits. These include various heterogeneous characteristics of microunits, prices which do not reflect the relevant scarcities due to distortionary regulatory policies and lack of institutional mechanisms for efficient allocation of inputs and outputs. It rationalizes the observed variations in the appropriate choice of technology across microunits and argues for the need to broaden the range of incentive-based instruments for environmental protection beyond pollution taxes.