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Nonpoint pollution control: Inducing first-best outcomes through the use of threats

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  • Segerson, Kathleen
  • Wu, JunJie

Abstract

In this paper we develop a simple economic model to analyze the use of a policy that combines a voluntary approach to controlling nonpoint-source pollution with a background threat of an ambient tax if the voluntary approach is unsuccessful in meeting a pre-specified environmental goal. We first consider the case where the policy is applied to a single farmer, and then extend the analysis to the case where the policy is applied to a group of farmers. We show that in either case such a policy can induce cost-minimizing abatement without the need for farm-specific information. In this sense, the combined policy approach is not only more effective in protecting environmental quality than a pure voluntary approach (which does not ensure that water quality goals are met) but also less costly than a pure ambient tax approach (since it entails lower information costs). However, when the policy is applied to a group of farmers, we show that there is a potential tradeoff in the design of the policy. In this context, lowering the cutoff level of pollution used for determining total tax payments increases the likely effectiveness of the combined approach but also increases the potential for free riding. By setting the cutoff level equal to the target level of pollution, the regulator can eliminate free riding and ensure that cost-minimizing abatement is the unique Nash equilibrium under which the target is met voluntarily. However, this cutoff level also ensures that zero voluntary abatement is a Nash equilibrium. In addition, with this cutoff level the equilibrium under which the target is met voluntarily will not strictly dominate the equilibrium under which it is not. We show that all results still hold if the background threat instead takes the form of reducing government subsidies if a pre-specified environmental goal is not met.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 51 (2006)
Issue (Month): 2 (March)
Pages: 165-184

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Handle: RePEc:eee:jeeman:v:51:y:2006:i:2:p:165-184

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Web page: http://www.elsevier.com/locate/inca/622870

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References

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  1. Na Li Dawson & Kathleen Segerson, 2003. "Voluntary Agreements with Industries: Participation Incentives with Industry-wide Targets," Working papers 2004-06, University of Connecticut, Department of Economics.
  2. Spraggon, John, 2002. "Exogenous targeting instruments as a solution to group moral hazards," Journal of Public Economics, Elsevier, vol. 84(3), pages 427-456, June.
  3. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
  4. Luanne Lohr & Timothy A. Park, 1995. "Utility-Consistent Discrete-Continuous Choices in Soil Conservation," Land Economics, University of Wisconsin Press, vol. 71(4), pages 474-490.
  5. Wu, JunJie & Babcock, Bruce A., 1999. "The Relative Efficiency of Voluntary vs Mandatory Environmental Regulations," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 158-175, September.
  6. Nalbantian, Haig & Schotter, Andrew, 1994. "Productivity Under Group Incentives: An Experimental Study," Working Papers 94-04, C.V. Starr Center for Applied Economics, New York University.
  7. Segerson, Kathleen & Miceli, Thomas J., 1998. "Voluntary Environmental Agreements: Good or Bad News for Environmental Protection?," Journal of Environmental Economics and Management, Elsevier, vol. 36(2), pages 109-130, September.
  8. David Zilberman, 1996. "The Economics of a Public Fund for Environmental Amenities: A Study of CRP Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 961-971.
  9. Nancy Anders Norton & Tim T. Phipps & Jerald J. Fletcher, 1994. "Role Of Voluntary Programs In Agricultural Nonpoint Pollution Policy," Contemporary Economic Policy, Western Economic Association International, vol. 12(1), pages 113-121, 01.
  10. JunJie Wu & Bruce A. Babcock, 1995. "Optimal Design of a Voluntary Green Payment Program Under Asymmetric Information," Center for Agricultural and Rural Development (CARD) Publications 95-wp131, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  11. Wu, JunJie & Teague, Mark L. & Mapp, Harry P. & Bernardo, Daniel J., 1995. "An Empirical Analysis of the Relative Efficiency of Policy Instruments to Reduce Nitrate Water Pollution in the U.S. Southern High Plains," Staff General Research Papers 921, Iowa State University, Department of Economics.
  12. Anastasios Xepapadeas, . "Observability And Choice Of Instrument Mix In The Control Of Externalities," Working Papers 9401, University of Crete, Department of Economics.
  13. Xepapadeas, A. P., 1992. "Environmental policy design and dynamic nonpoint-source pollution," Journal of Environmental Economics and Management, Elsevier, vol. 23(1), pages 22-39, July.
  14. Wu, JunJie & Babcock, Bruce A., 1996. "Contract Design for the Purchase of Environmental Goods from Agriculture," Staff General Research Papers 1050, Iowa State University, Department of Economics.
  15. Joseph C. Cooper & Russ W. Keim, 1996. "Incentive Payments to Encourage Farmer Adoption of Water Quality Protection Practices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(1), pages 54-64.
  16. Xepapadeas, A. P., 1991. "Environmental policy under imperfect information: Incentives and moral hazard," Journal of Environmental Economics and Management, Elsevier, vol. 20(2), pages 113-126, March.
  17. Cabe, Richard & Herriges, Joseph A., 1992. "The regulation of non-point-source pollution under imperfect and asymmetric information," Journal of Environmental Economics and Management, Elsevier, vol. 22(2), pages 134-146, March.
  18. Steven Shavell, 2003. "Economic Analysis of Accident Law," NBER Working Papers 9483, National Bureau of Economic Research, Inc.
  19. Herriges, Joseph A. & Shogren, Jason F. & Govindasamy, R., 1994. "Budget Balancing Incentive Mechanisms," Staff General Research Papers 1503, Iowa State University, Department of Economics.
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Citations

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Cited by:
  1. Mourad Ali & Patrick Rio, 2009. "Deterrence vs. Efficiency To Regulate Nonpoint Source Pollution," Working Papers 09-22, LAMETA, Universtiy of Montpellier, revised Dec 2009.
  2. Brouhle, Keith & Griffiths, Charles & Wolverton, Ann, 2009. "Evaluating the role of EPA policy levers: An examination of a voluntary program and regulatory threat in the metal-finishing industry," Journal of Environmental Economics and Management, Elsevier, vol. 57(2), pages 166-181, March.
  3. Rasha Ahmed, 2012. "Promoting energy-efficient products: voluntary or regulatory approaches?," Environmental Economics and Policy Studies, Society for Environmental Economics and Policy Studies - SEEPS, vol. 14(3), pages 303-321, July.
  4. Athanasios Kampas & Katerina Melfou & Ashar Aftab, 2012. "Designing Regulatory Policies for Complex Externalities: The Case of Agricultural Pollution," Working Papers 2012-6, Agricultural University of Athens, Department Of Agricultural Economics.
  5. Suter, Jordan F. & Vossler, Christian A. & Poe, Gregory L. & Schulze, William D. & Segerson, Kathleen, 2006. "An Experimental Exploration of a Voluntary Mechanism to Reduce Nonpoint Source Water Pollution with a Background Threat of Regulation," 2006 Annual meeting, July 23-26, Long Beach, CA 21416, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  6. François Cochard & Anne Rozan, 2010. "Taxe ambiante : un outil adapté à la lutte contre les coulées de boue ? Une étude expérimentale," Review of Agricultural and Environmental Studies - Revue d'Etudes en Agriculture et Environnement, INRA Department of Economics, vol. 91(3), pages 296-326.
  7. James Shortle & Richard D. Horan, 2013. "Policy Instruments for Water Quality Protection," Annual Review of Resource Economics, Annual Reviews, vol. 5(1), pages 111-138, June.
  8. Anastasios Xepapadeas, . "The Economics of Nonpoint Source Pollution," DEOS Working Papers 1233, Athens University of Economics and Business.
  9. Jordan F. Suter & Christian A. Vossler & Gregory L. Poe & Kathleen Segerson, 2008. "Experiments on Damage-Based Ambient Taxes for Nonpoint Source Polluters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(1), pages 86-102.
  10. Ali, M. & Le Grusse, P. & Rio, Patrick, 2008. "Tradable Permits Under Threat to Manage Nonpoint Source Pollution," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44414, European Association of Agricultural Economists.
  11. Gregory L. Poe & William D. Schulze & Kathleen Segerson & Jordan F. Suter & Christian A. Vossler, 2004. "Exploring the Performance of Ambient-Based Policy Instruments When Nonpoint Source Polluters Can Cooperate," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(5), pages 1203-1210.
  12. Paragahawewa, Upananda Herath, 2006. "Market-Based Approaches to Pollution Control in the Lake Taupo Catchment in New Zealand," 2006 Conference, August 24-25, 2006, Nelson, New Zealand 31975, New Zealand Agricultural and Resource Economics Society.
  13. Ahmed, Rasha & Segerson, Kathleen, 2011. "Collective voluntary agreements to eliminate polluting products," Resource and Energy Economics, Elsevier, vol. 33(3), pages 572-588, September.
  14. Paragahawewa, Upananda Herath, 2006. "Market-Based Approaches to Pollution Control in the Lake Taupo Catchment in New Zealand," 2006 Conference, August 24-25, 2006, Nelson, New Zealand 31975, New Zealand Agricultural and Resource Economics Society.
  15. Suter, Jordan F. & Vossler, Christian A. & Poe, Gregory L., 2009. "Ambient-based pollution mechanisms: A comparison of homogeneous and heterogeneous groups of emitters," Ecological Economics, Elsevier, vol. 68(6), pages 1883-1892, April.
  16. Collins, Alan R. & Maille, Peter, 2008. "Farmers as Producers of Clean Water: Getting Incentive Payments Right and Encouraging Farmer Participation," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6342, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  17. Mourad Ali & Patrick Rio, 2009. "Tradable Permits under Threat to Manage Nonpoint Source Pollution," Working Papers 09-21, LAMETA, Universtiy of Montpellier, revised Dec 2009.
  18. Line Block Hansen & Lars Gårn Hansen, 2012. "Can Non-point Phosphorus Emissions from Agriculture be Regulated efficiently using Input-Output Taxes?," IFRO Working Paper 2012/4, University of Copenhagen, Department of Food and Resource Economics.
  19. Karen Fisher-Vanden & Sheila Olmstead, 2013. "Moving Pollution Trading from Air to Water: Potential, Problems, and Prognosis," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 147-72, Winter.
  20. Carmen Marchiori & Susan Sayre & Leo Simon, 2012. "Bargaining and Devolution in the Upper Guadiana Basin," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 51(3), pages 453-470, March.

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