Coase-Sandor Working Paper Series in Law and Economics

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Working Paper

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Regulatory trading systems, such as the SO2 cap and trade system, are ubiquitous in environmental and natural resources law. In addition to cap and trade systems for pollutants such as SO2, NOx and CO2 , environmental and natural resources law uses trading in areas such as endangered species, water quality, wetlands, vehicle mileage, and forestry and farming practices. Trading, however, is rarely used as a regulatory approach in other areas of law. This paper seeks to identify the reasons for this dichotomy. To understand the dichotomy, the paper examines the uses of trading in environmental and natural resources law, where it has been successful, and where problems have arisen, including problems such as hotspots, environmental justice, measurement problems, and moral problems with the use of markets. It then considers the possibility of trading in six non-environmental areas of law to see whether trading can be helpful and if not, why not. The analysis suggests a number of reasons for the dichotomy including that (1) environmental problems tend to have larger costs and benefits, making it worthwhile to incur the costs of a trading regime in environmental contexts than elsewhere; (2) trading may not work well because of hotspots, measurement, or other problems, (3) trading may be inconsistent with the underlying premises of a regulatory system, and finally (4) in some cases, there is no good reason for the dichotomy other than institutional inertia and should be considered as a supplement or replacement for existing regulatory approaches in those cases.

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