Incentives and Regulation

Course content

The central themes of the course are the economic problems caused by market failures (e.g. externalities such as pollution) and the design of policy instruments to address these problems. The main components of the course are:

1) Market failure as the economic problem caused by e.g. pollution. Here several cases of market failure will be analyzed. Examples are externalities, common property goods and public goods.

2) The design of policy instruments to alleviate market failure caused by environmental problems. Here the emphasis will be on instruments that set incentives to reduce emissions such as taxes, subsidies, tradable permit schemes and liability rules. Issues covered are the regulation of point and non-point pollution, emissions and ambient regulation, optimal regulation under uncertainty, uniformly and non-uniformly mixed pollutants and the political economy of instrument choice. Furthermore, in connection with taxes we will discuss the existence of a double dividend and under tradable permits the issue of market power and transaction costs.

3) The design of policy instruments to alleviate other types of market failure. Here we will draw on examples from other relevant areas (e.g development economics, industrial organization etc.).


MSc Programme in Environmental and Natural Resource Economics
MSc Programme in Agricultural Economics
MSc Programme in Agriculture

Learning outcome

It is the objective of this course to provide a comprehensive presentation of the theoretical and methodological aspects of the economic theory of environmental economics, especially of environmental policy in order to enable students to evaluate the economic efficiency of environmental policies.

- Describe the meaning in Welfare Economics of Economic Efficiency and Market Imperfections
- Describe the use of Pigouvian Taxes and Quota Regulation
and Regulation.
- Define Damage Cost and Abatement Cost describe the terms in a Welfare Economics set-up.
- Describe Liabiliby
- Describe Political Economy

- Explain the effects of regulating a market
- Analyse externality problems to identify suitable economic instruments
- Compare effectiveness and efficiency of environmental and other regulation

- Apply economic regulation to environmental and other problems.
- Evaluate the welfare economic consequenses of applying economic regulation to environmental and other problems

Lectures and exercises



The literature will be announced at Absalon when the course begins. The literature could as an example consist of the below mentioned textbooks and on journal articles.

Hanley, N., Shogren, J.F. and White, B.: Environmental Economics in Theory and Practice, Macmillan Press, 2006.

Baumol, W.J., Oates, W.E.: The Theory of Environmental Policy, 2nd Edition, 1988.



Competences that equals
LOJB10259 Micro Economics
Applied Game Theory or equivalent
LOJF10218 Consumer Economics and Policy

7,5 ECTS
Type of assessment
Written examination, 4 timer under invigilation
The course has been selected for ITX exam at Peter Bangs Vej.
All aids allowed

NB: If the exam is held at the ITX, the ITX will provide you a computer. Private computer, tablet or mobile phone CANNOT be brought along to the exam. Books and notes should be brought on paper or saved on a USB key.

Marking scale
7-point grading scale
Censorship form
External censorship
Criteria for exam assessment

See learning outcome

Single subject courses (day)

  • Category
  • Hours
  • Lectures
  • 36
  • Theory exercises
  • 24
  • Exam
  • 4
  • Preparation
  • 142
  • English
  • 206