Externalities and the Matching Principle: The Case for Reallocating Environmental Regulatory Authority

The extreme centralization of environmental regulation is the result of interest group politics and dramatic political developments rather than a sober analysis of the major trade-offs involved in moving to federal domination of environmental protection. During the late 1960s and early 1970s, many environmental concerns that had previously been thought of as purely local issues, such as solid waste disposal, became federal issues. Although there is little doubt that national politicians were ahead of the curve in terms of responding to environmental concerns, one must not then assume that state and local politicians would have continued to be unresponsive to environmental issues arising in their own backyards. Nevertheless, there appears to be a oneway ratchet in the federal system—once a federal issue, always a federal issue. Moreover, among many environmentalists, there remains a deep distrust of state and local control of environmental quality. An analysis of the incentives of state and local politicians suggests that this distrust may not be justified.<br><br>This study considers whether environmental policy can be improved by reallocating authority for environmental regulation within our federal system. Our primary focus is on the institutional setting in which environmental policies are adopted. A fundamental issue is how to allocate regulatory authority so that political institutions and processes will yield policies that achieve the optimal or efficient level of pollution without imposing unnecessary costs on productive economic activity. Because there is no known answer to the critical question, “What is the optimal level of pollution?,” policy analysts often assert that the determination of the tolerated amount of pollution is a political question. Although “invocations of the superiority of political processes for resolving issues of social and economic policy” are commonplace, the assertion that a policy issue is a political problem does not solve the policy issue because alternative political institutions are likely to yield different answers.<br><br>Alternative political policymaking institutions, such as state and national legislatures, can be analyzed to determine which institutions are best suited to weighing costs and benefits in the determination of the optimal level of pollution. To the extent that all relevant costs and benefits are taken into account in the political decision-making process, “better” policies should emerge. In this regard, we develop the Matching Principle as a guide to determining the most efficient governmental level for regulation of different types of environmental concerns. The Matching Principle suggests that, in general, the size of the geographic area affected by a specific pollution source should determine the appropriate governmental level for responding to the pollution. There is no need for the regulating jurisdiction to be larger than the regulated activity. In other words, when a particular polluting activity is limited to a particular locality or state, there is very little justification for federal environmental regulation. When a federal government response is justified, it should be the most limited response possible.<br><br>Although the Matching Principle may seem radical to some environmentalists, this idea has a long history in American constitutional law and theory. As James Wilson explained at the Pennsylvania ratifying convention, “Whatever object of government is confined in its operation and effect, within the bounds of a particular State, should be considered as belonging to the government of that State.” As Professor McConnell has observed, Wilson’s view, which was the dominant perspective in the debates of the period, “stands in marked contrast to the modem tendency to resolve all doubts in favor of federal control.” And, as we will show, many important environmental problems are problems of purely local concern, and should be regulated at the local level. In particular, many of the sites targeted by Superfund are contained within the confines of a single state. The cleanup of these sites presents issues of purely local concern, and the economic theory of federalism articulated in this paper, which is entirely consistent with the Framers’ design, would confine authority over these issues to local regulators. Under our Matching Principle, if the federal government wants to intrude on local decision-making authority over the cleanup of local sites, it should confine itself to lending expertise and providing funding. It should refrain from imposing substantive standards or imposing legal liability.