The Demise of Effects-based Resource Management

what went wrong with internalising the externality?

Abstract

A core principle underlying the Resource Management Act 1991 (RMA) is that of effects based resource management: managing the effects of activities on the environment, rather than the activities themselves. In economics parlance, this has strong links to the concept of internalising the externality, where the costs or benefits of activities are borne by those undertaking the activities, rather than by third parties. When externalities are internalised, society’s wellbeing is improved. However, the widely held view is that the RMA has not made society any better off. A contributor to this was the poor implementation of the internalisation principle in the RMA, particularly the limited use of price signals, high transaction costs, and the poor application of cost–benefit analysis. The replacement for the RMA, the Natural and Built Environment Act (NBEA), proposes to shift the focus away from an effects based approach to an outcomes-based one. While the NBEA could be used to better implement an internalisation principle, its proposed drafting does not always attempt to do so, and its explicit shift to an outcomes-based approach is likely to make it even more difficult for externalities to be internalised.