Legal Mandates
How It Works
The government passes a law limiting certain levels of emissions or certain production methods. In order to enforce the law, the government fines individual or industry violators.
Incarceration is typically seen as too extreme for a pollution enforcement mechanism. Therefore, the government uses fees as an enforcement mechanism, making this system similar to increasing taxes to change consumer and industry behavior.
The differences lie in the fact that violators of legal mandates are determined to have broken the law and taxes and fees apply to all individuals in a market while a legal mandate only applies to a specific individual violator who fails to meet an arbitrary standard (Baumol and Oates, 1988). Examples of legal mandates are the Corporate Average Fuel Efficiency Standards (CAFE) that set higher miles per gallon requirements and the newer requirement for automotive fuels to contain a certain amount of ethanol.
Cost of Implementation 7
Surprisingly, mandates can be quite expensive as industries struggle to meet the requirements. Also, externalities cause the price of other products to increase.
Environmental Impact 1
Legal mandates are currently implemented for the specific purpose of benefitting the economy and our environment. The impact is direct and immediate and is ideal for emergencies.
Foreign Energy Useage 5
Mandates can be made to forbid importation of foreign energy but this has not been done historically. Technology is the key to reducing foreign energy imports but you can not mandate innovation.
Implementation 1
Ironically, the world’s most notable capitalist economy has extensive experience with government mandated energy policies and they are very easy to implement.
Political Toxicity 3
Public opinion is very favorable in regards to legal mandates such as CAFE standards. The opposition comes from industry lobby.
Barriers to Future Use
- Public opinion favors mandating higher fuel efficiency standards (WPO, 2006). However, the auto industry still has a strong lobby that can prevent raising CAFE standards. As US automakers shrink in size and power public opinion may rule the day (Perl, 2007). Additionally, the media is catching onto the fact that food prices are increasing due to ethanol production mandates (Wald, 2006), which may eventually sway public opinion if inflation occurs.
Pros of Use
- Market-based approaches such as taxes and cap and trade systems may never be able stop fossil fuel consumption. In such cases a government mandate is needed (Brown, 2002).
- In cases of emergency, such as excessive deaths from pollution, market based incentives are too little too late when the government needs to take legal action and mandate change.
- CAFE requirements have been successful in creating a more efficient vehicle fleet in the past (Golberg, 1998).
Cons of Use
- Government interference in markets results in many negative externalities. For instance, ethanol mandates have recently led to much higher food prices because corn is being used for fuels while the supply of corn for food products has decreased (Lieberman, 2007).
- Large amounts of accurate information are needed for policy makers to determine the efficient levels of energy usage (Baumol and Oats, 1988). Estimates of the costs of pollution are difficult to obtain and can result in a CAFE standard that is too high (Kleit, 2004).
- Legal mandates are difficult to adjust once implemented, so when errors are made they compound over time.
- CAFE standards are successful at making it cheaper to drive which means people will drive more and perhaps increase costs associated with accidents, maintenance, and highway construction (Kleit, 2004).
Most Important Fact
Legal mandates are laws that influence public behavior. They are a non-market means to reducing consumption of certain fuels and force consumption of renewable resources. The operation of these policies is therefore much easier to understand than market incentives but they may have many unintended consequences.
Bottom Line
Choosing legal mandates is analogous to choosing a command economy over a market economy and the problems that arise are the same (Baumol and Oates, 1988). Mandating change in consumption and production has immediate results but there is a tradeoff. If there are immediate unanticipated results once a law has been passed, another must be passed to fix policies gone awry. This means that policy makers need to gather and understand large amounts of information in order for such a policy to be successful.
