Water pollution and abstraction and economic instruments

The paper assesses the potential role for economic instruments in the regulation of water pollution and abstraction in the light of the UK government's discussion documents. Economic instruments offer the potential for greater cost efficiency in achieving environmental targets than existing command-and-control methods. Applying economic instruments in the water context, however, is complex, because the location of pollution sources is critical and because of the interactions between pollutants and between effluent and abstraction. Schemes for recycling tax revenue to polluters in ways which preserve the appropriate marginal incentives are examined, and the possibility of combining the existing quantitative controls with a tax scheme is explored.