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4.1 The political decision-making process

The traditional view of the role of government in a market economy is that the government is attempting to maximise social welfare. It is an exogenous agent acting to correct market failures and its role is to provide a legal, regulatory and institutional framework. To do this, it defines: the political rules needed for decision-making; the economic rules, such as those concerning property rights and the rules for contracts, enabling exchanges to take place. However, there are now many theories which have been put forward to explain how political and economic decisions are actually taken and you may come across these in the literature, so we will mention some of them briefly.

In these new theories, government is not taken to be a single, exogenous entity, but is viewed as a collective form of a number of legislative and institutional groups, such as bureaucrats and political parties, each of which has its own set of objectives.

These theories may help us understand why certain policies are in place, and why others, which are more desirable from an economic point of view, are not attractive to policy-makers.

One of the main models is the rational choice model, which is based on the idea that the individual actors in the decision-making process act rationally and are trying to achieve their own aims in competition with one another. We will concentrate on this model later in this section.

At the other end of the spectrum is the systems model, which treats the whole social system as the basic unit for analysis and is concerned with how the component parts of the system respond to the constraints of the system.

One example of this is the neo-Marxist approach where the state and the economy are viewed as a system of relationships. The state is in a contradictory position as it needs both to spend to achieve its aims and to control its spending. In this model there may be close links between the state bureaucracy and the industries needing regulating, which may be reflected in the choice of policy instruments. State subsidies may well be chosen as the appropriate instrument, as these will not cause conflicts between the bureaucracy and the regulated industry.

In between the rational choice and the systems models is the institutions model. Here the emphasis is placed on the institutions in place in the society and their influence on the groups pursuing environmental aims. The institutions in society affect which policies are likely to be implemented. One example of an institution is the capitalist corporation, and in the institutions approach, the modern corporation may have different long-term aims from the neoclassical profit-maximising firm of the rational choice model. It may prefer certainty of future operations to profit maximisation and therefore prefer command-and-control instruments which are more likely to stabilise the market. In other words, the institutional factors affect the objectives of polluters. These factors vary between countries and may help to explain why different instruments are favoured by different countries.

We now concentrate on the rational choice model and see how it can be applied to environmental policy. To do this we can begin by making a list of groups of people who are affected by, or have an interest in, the choice of an environmental policy and its associated policy instrument:

All of these groups are acting in a political market which is similar to and linked to the economic market. The political market can redistribute wealth and wealth leads to economic power. The economic market can create wealth, which can then enhance political power.

Each of these groups will have different objectives and will try to influence the decision-making process so that the decision finally taken enables them to achieve their objectives.

The rational choice model has led to other rational actor models which attempt to explain how decisions are made. Two of these which you may find in the literature are the clearing house model and the politician voter model, both of which try to explain agricultural policy decisions.

Clearing house model - this concentrates on the interaction between pressure groups, who are well informed, and voters, who are assumed to be ill-informed. The pressure groups seek to achieve their own objectives, but face costs of organisation and communication, which may lead to free-rider problems if the group becomes too large and dispersed. The government's role is as a clearing house for the various pressure groups, and it is assumed to act in such a way as to maximise the probability of its re-election.

Politician voter model (Downs 1957) - this model assumes that the influence of pressure groups is not great, and concentrates on the link between politicians and voters. Active politicians supply intervention as demanded by voters, who supply political support to the politicians. The model assumes that voters have perfect information.

We will now take each of the groups in the rational choice model in turn and try to see what their objectives are and how they affect decisions.

Political parties

The aim of politicians is to win office, so they may support issues not for the sake of the issue itself, but in order to win votes. That is, political parties will tend to pursue policies that guarantee the maximum number of votes. Parties will be responsive to changes in public opinion, and may be reluctant to commit themselves too strongly to a particular policy, in case public opinion changes.

There have recently been examples of political parties founded specifically to support environmental issues, for instance, the Green Party in the United Kingdom, but these have not won wide support from the voters. To win support, a party usually needs policies on a wide range of issues as voters have a wide range of concerns.

Political parties may try to compensate those sectors of the economy whose relative incomes fall, and they will try to avoid decreases in real incomes for sectors whose representatives have strong political power. Thus, there may be political resistance to drastic changes in policy, once a policy has been put in place.

Polluters and polluters' organisations

We assume that the aim of polluters and their organisations is to maximise their profits etc. They, like any other interest group, expend large amounts of money on rent seeking, that is, on efforts to influence the outcomes of the legislative process in a way that yields the highest possible benefits for them. Arguments have been put forward that they will thus prefer subsidies to standards, and standards to emission taxes, as these result in lower profit losses.

Most polluters' interest groups acknowledge the polluter pays principle, but reject its application in their own country until it is also applied in other countries. Polluters are likely to be relatively few in number, so will be more capable of taking effective collective action than will the larger, more dispersed groups of actors - voters, for instance. They may therefore have a significant influence on the choice of policy instrument. This could be one reason for the widespread use of standards as an instrument of environmental policy.

Regulators and other bureaucrats

The preferences of polluters may influence bureaucrats and politicians in their choice of instrument, depending on the power that the groups of polluters can exert. There may be collusion between the regulator and the regulated as these groups have to work together and this will be easier with harmonious working relationships. This is described in the literature as 'regulatory capture'.

But bureaucrats may also have their own objectives when deciding on policy instruments and will be trying to achieve these objectives. These may include the maximisation of their own power, prestige, influence, involvement and room for manoeuvre. These variables depend mainly upon the amount of the appropriated budget and the scope of their responsibilities. Bureaucrats control much of the relevant information on policies and also on their own activities, and may be able to use this in a way to achieve their own objectives. The bureaucracy is supposed to be scrutinised by the political decision-makers (the parliament), but this monitoring is usually imperfect, given the informational deficiencies and asymmetries involved.

On this basis, the bureaucrats may also prefer standards to the other policy instruments as standards involve the highest degree of administrative involvement and give them more direct control over polluters than do subsidies, taxes or permits. Bureaucrats would probably prefer subsidies to taxes because the former involve less potential for conflict and possibly higher administrative involvement. They would probably rate permit systems last because this would imply handing over the responsibility for the instrument to the market mechanism.

Environmentalists

Environmentalists focus on the impact of environmental policy on the environment. Environmental interest groups, like other interest groups, are rent seeking and are trying to maximise benefits by influencing the outcome of legislation. There are many influential interest groups in the environmental field, including Greenpeace and Friends of the Earth. In the past, they have often disapproved of incentive-based instruments such as subsidies and marketable permits, as these infer that the polluter has some right to pollute. Permit systems, in particular, have often been regarded as a 'sell-out' of the environment.

Although there is now a growing feeling that incentive-based instruments are acceptable, the preferred policy instrument is still standards. This is because standards offer the highest certainty that the environmental policy goal will actually be achieved.

Voters

Voters, in the rational choice model, are considered to be rationally-acting individuals who aim to maximise their utility. They have concerns about many issues and decide to vote for the party whose 'package' gives them maximum utility. Environmental concerns may not feature highly in these packages, and voters may be more likely to concentrate on economic, health or education issues when choosing the package.

Although the individual voters may not see themselves as having much influence over national environmental policies they are more likely to get involved in local issues, where the local benefits and costs are more apparent.

They may want environmental improvements in theory, but be reluctant to pay the associated costs. In this respect, it is important to note that voters are usually also taxpayers. However, as a country's income rises, its voters are more likely to demand higher environmental quality. It has been suggested in the literature that voters will tend to prefer standards to other instruments for the same reason as environmentalists, that is, the higher certainty of achieving the environmental policy goals.