NIFK14003U  Incentives and Regulation

Volume 2017/2018

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


The central themes in the course are problems caused by externalities and the regulatory response to correct these externalities.  The main components of the course are:

  1. 1. Several kinds of externalities (pollution) will be defined and the implications of this pollution for the welfare in a society will be discussed. The externalities defined include uniform mixed pollution, non-uniform mixed pollution, public good externalities, private good externalities, point source pollution, non-point source pollution, flow externalities and stock externalities.

  2. 2. Design of policy instruments to correct the above mentioned externalities from an economic point of view is discussed. Here we mainly focus on economic incentives represented by taxes, subsidies and tradeable permit schemes and these incentive schemes are evaluated by using theoretical models. The economic incentives are discussed under both certainty and uncertainty and the implications of the various instruments for the tax revenue generated in a society are discussed.

  3. 3. Regulatory recommendations according to non-economic objectives including the firm´s response to environmental regulation are discussed. One issue investigated is here where regulation exists because the regulated agents benefits from this and here rent-seeking behaviour to obtain a gain from regulation is discussed.

Learning Outcome

The objective of the course is to provide a comprehensive overview over literature applying economic theory to environmental problems. By obtaining this knowledge it becomes possible for the students to evaluate the economic efficiency of various environmental regulations.


  • Define various negative externalities

  • Define damage costs and abatement costs by using concepts from welfare economics.

  • Describe the consequences of using taxes, subsidies and tradable permit schemes as regulatory instruments under both certainty and uncertainty

  • Describe the consequences of non-economic objectives for regulation with rent-seeking behaviour as an example.


  • Analyze various externality problems from an economic point of view with the purpose of discussing regulation

  • Analyze the implications of non-economic objectives with regulation.


  • Apply economic theory to a discussion of regulation of externalities

  • Evaluate the economic consequences of imposing regulation on an environmental problem.

The mandatory literature consists of lecture notes constructed by the course responsible. These notes will be uploaded in Absalon before the course starts.

Furthermore, a number of background papers and book chapters will be uploaded in Absalon as supplementary reading.





This course requires a solid and formal mathematical understanding of microeconomics that could be obtained from a bachelor in economics, agricultural economics, mathematical economics or at least 30 ECTS of relevant microeconomic courses like microeconomics, environmental economics, ressource economics, game theory, production economics.
Lectures and exercises
7,5 ECTS
Type of assessment
Written examination, 4 hours under invigilation
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

If 10 or fewer register for the reexamination the examination form will be oral. Otherwise like the ordinary exam.

Criteria for exam assesment

See learning outcome.

  • Category
  • Hours
  • Lectures
  • 40
  • Theory exercises
  • 20
  • Exam
  • 4
  • Preparation
  • 142
  • Total
  • 206