Comparing the Net Benefits of Incentive Based and Command and Control Regulations in a Developing Context: the Case of Santiago, Chile

There are numerous studies that establish the magnitude of the static efficiency gains made possible through the use of a cost effective ambient permit system (APS) compared to command and control (CAC) or other suboptimal instruments such as an emission permit system (EPS). However the cost effectiveness of APS rests both on the efficiency gains related to equalizing marginal costs of reduction and a lower degree of required control. As a result of this latter factor, CAC and EPS generally impose concentration reductions higher than required by the target air quality standard and also by APS. In developing contexts, as a result of high levels of pollution and only recent introduction of control policies, health benefits of reducing pollution significantly can be expected to be high whereas the costs may still be relatively low. Consequently the excess reductions may produce net benefits -benefits of improved air quality minus compliance costs-. This paper evaluates for Santiago whether reduced concentrations below the level of the standard as a result of suboptimal policies result in health improvements that produce greater net benefits than incentive based approaches. The results show that considering uniform air quality targets and for the range of technologically plausible control options in Santiago, suboptimal CAC and EPS policies result in higher net benefits than APS.