Abstract
Environmental policies are significantly affected by political, administrative, and legal institutions. These institutions also have very substantial transaction costs associated with them. Benefit-Cost Analysis, as traditionally practiced, pays little attention to these transaction costs. This article presents a cost-effectiveness framework for carefully considering the institutional transaction costs of policies. This article then performs a comparison of two water quality policies: a non-tradeable effluent limit permit policy and an effluent charges policy. This comparison demonstrates that these institutional transaction costs indeed are significant. However, while it is important to consider these costs, they remain very difficult to estimate, and additional refinements are necessary.