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Differences in Social and Public Risk Perceptions and Conflicting Impacts on Point/Nonpoint Trading Ratios

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  • Richard D. Horan

Abstract

If stochastic nonpoint pollution loads create socially costly risk, then an economically optimal point/nonpoint trading ratio—the rate point source controls trade for nonpoint controls—is adjusted downward (a risk reward for nonpoint controls), encouraging more nonpoint controls. However, in actual trading programs, ratios are adjusted upward in response to nonpoint uncertainties (a risk premium for nonpoint controls). This contradiction is explained using a public choice model in which regulators focus on encouraging abatement instead of reducing damages. The result is a divergence of public and social risk perceptions, and a trading market that encourages economically suboptimal nonpoint controls. Copyright 2001, Oxford University Press.

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Bibliographic Info

Article provided by Agricultural and Applied Economics Association in its journal American Journal of Agricultural Economics.

Volume (Year): 83 (2001)
Issue (Month): 4 ()
Pages: 934-941

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Handle: RePEc:oup:ajagec:v:83:y:2001:i:4:p:934-941

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Cited by:
  1. Hanson, James C. & McConnell, Kenneth E., 2008. "Simulated Trading for Maryland's Nitrogen Loadings in the Chesapeake Bay," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 37(2), October.
  2. 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.
  3. Sergey Rabotyagov & Hongli Feng & Catherine L. Kling, 2006. "Optimal Design of Permit Markets with an Ex Ante Pollution Target," Center for Agricultural and Rural Development (CARD) Publications 06-wp430, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  4. Amy W. Ando & Shibashis Mukherjee, 2012. "Benefits of pollution monitoring technology for greenhouse gas offset markets," Economics Bulletin, AccessEcon, vol. 32(1), pages 122-136.
  5. Nguyen, N.P. & Shortle, J.S. & Reed, P.M. & Nguyen, T.T., 2013. "Water quality trading with asymmetric information, uncertainty and transaction costs: A stochastic agent-based simulation," Resource and Energy Economics, Elsevier, vol. 35(1), pages 60-90.
  6. Horan, Richard D. & Shortle, James S. & Abler, David G. & Ribaudo, Marc, 2001. "The Design And Comparative Economic Performance Of Alternative Second-Best Point/Nonpoint Trading Markets," Staff Papers 11595, Michigan State University, Department of Agricultural, Food, and Resource Economics.
  7. Woodward, Richard T., 2001. "The Environmentally Optimal Trading Ratio," 2001 Annual meeting, August 5-8, Chicago, IL 20491, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  8. Shortle, James, 2013. "Economics and Environmental Markets: Lessons from Water-Quality Trading," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 42(1), April.
  9. O'Hara, Jeffrey K. & Walsh, Michael J. & Marchetti, Paul K., 2012. "Establishing a Clearinghouse to Reduce Impediments to Water Quality Trading," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 42(2).
  10. Hanson, James C. & McConnell, Kenneth E., 2007. "Nutrient Trading, the Flush Tax, and Maryland's Nitrogen Emissions to the Chesapeake Bay," Working Papers 7343, University of Maryland, Department of Agricultural and Resource Economics.
  11. Ghosh, Gaurav & Shortle, James, 2012. "Managing Pollution Risk through Emissions Trading," FCN Working Papers 1/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  12. John Spraggon, 2007. "Exogenous Targeting Instruments under Differing Information Conditions," Working Papers 2007-10, University of Massachusetts Amherst, Department of Resource Economics.
  13. Sheila M. Olmstead, 2010. "The Economics of Water Quality," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 4(1), pages 44-62, Winter.
  14. Keiser, David A. & Mullen, Jeffrey D. & Bergstrom, John C. & Smith, Nathan B. & Radcliffe, David E. & Risse, Mark L. & Fowler, Laurie A., 2009. "Examining the Effects of Ecological and Political Boundaries on the Potential for Water Quality Trading: Lessons from a Southeastern Trading Framework," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49323, Agricultural and Applied Economics Association.
  15. 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.
  16. Smith, Craig M. & Peterson, Jeffrey M. & Leatherman, John C. & Williams, Jeffery R., 2012. "A Simulation of Factors Impeding Water Quality Trading," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 42(2).
  17. Lupi, Frank & Horan, Richard D., 2005. "Economic Incentives for Controlling Trade-Related Biological Invasions in the Great Lakes," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 34(1), April.
  18. Zhao, Xiaobing & Fletcher, Jerald J., 2005. "Examining Point-Nonpoint Trading Ratios for Acid Mine Drainage Remediation with a Spatial-Temporal Optimization Model," 2005 Annual meeting, July 24-27, Providence, RI 19231, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  19. Zhao, Xiaobing & Fletcher, Jerald J., 2004. "An Optimal Control Approach To Water Quality Trading: Cost-Effective Point/Nonpoint Management In A Watershed Framework," 2004 Annual meeting, August 1-4, Denver, CO 20195, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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