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A Simulation of Factors Impeding Water Quality Trading

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Author Info

  • Smith, Craig M.
  • Peterson, Jeffrey M.
  • Leatherman, John C.
  • Williams, Jeffery R.

Abstract

While there is substantial evidence that nonpoint sources have lower nutrient reduction costs than point sources, experience with water quality trading (WQT) reveals a common theme: little or no trading activity. The success of WQT seems, in part, to depend on the structure of the market created to bring buyers and sellers together to transact exchanges. To examine the ways that various market imperfections may affect the performance of a WQT market, a model is constructed which simulates a hypothetical point-nonpoint market. This paper focuses on answering the following question: How can WQT programs be designed in ways that take into account factors that result in non-optimal contracting and what are the implications (if there are any) for determining trading ratios? Here, we find that apart from any implications for environmental risk or political-economic factors, there is an economic welfare justification for high trading ratios in certain situations with limited trading information and/or other barriers to trade. Limited information and other barriers to trade which inhibit the optimal contracting of trades introduces a random element to market participation, creating a risk that high-cost sellers (low-value buyers) will transact to displace low-cost sellers (high-value buyers) who could have traded for greater gain.

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File URL: http://purl.umn.edu/143777
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Bibliographic Info

Article provided by Mid-Continent Regional Science Association in its journal Journal of Regional Analysis and Policy.

Volume (Year): 42 (2012)
Issue (Month): 2 ()
Pages:

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Handle: RePEc:ags:jrapmc:143777

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Web page: http://jrap-journal.org/index.htm
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Related research

Keywords: Environmental Economics and Policy; Resource /Energy Economics and Policy;

References

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  1. David A. Hennessy & Hongli Feng, 2008. "When Should Uncertain Nonpoint Emissions Be Penalized in a Trading Program?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(1), pages 249-255.
  2. Richard D. Horan & James S. Shortle, 2005. "When Two Wrongs Make a Right: Second-Best Point-Nonpoint Trading Ratios," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(2), pages 340-352.
  3. Atkinson, Scott & Tietenberg, Tom, 1991. "Market failure in incentive-based regulation: The case of emissions trading," Journal of Environmental Economics and Management, Elsevier, vol. 21(1), pages 17-31, July.
  4. Richard D. Horan, 2001. "Differences in Social and Public Risk Perceptions and Conflicting Impacts on Point/Nonpoint Trading Ratios," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 934-941.
  5. Hahn, Robert W, 1989. "Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 95-114, Spring.
  6. Robert J. Johnston & Joshua M. Duke, 2007. "Willingness to Pay for Agricultural Land Preservation and Policy Process Attributes: Does the Method Matter?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(4), pages 1098-1115.
  7. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
  8. Ron Johnston, 2005. "On journals," Environment and Planning A, Pion Ltd, London, vol. 37(1), pages 2-8, January.
  9. Y. Ermoliev & M. Michalevich & A. Nentjes, 2000. "Markets for Tradeable Emission and Ambient Permits: A Dynamic Approach," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 15(1), pages 39-56, January.
  10. Richard T. Woodward & Ronald A. Kaiser, 2002. "Market Structures for U.S. Water Quality Trading," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 24(2), pages 366-383.
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