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When Two Wrongs Make a Right: Second-Best Point-Nonpoint Trading Ratios

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  • Richard D. Horan
  • James S. Shortle

Abstract

Most research on point-nonpoint trading focuses on the choice of trading ratio (the rate point source controls trade for nonpoint controls), although the first-best ratio is jointly determined with the optimal number of permits. In practice, program managers often do not have control over the number of permits—only the trading ratio. The trading ratio in this case can only be second-best. We derive the second-best trading ratio and, using a numerical example of trading in the Susquehanna River Basin, we find the values are in line with current ratios, but for different reasons than those that are normally provided. Copyright 2005, 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): 87 (2005)
Issue (Month): 2 ()
Pages: 340-352

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Handle: RePEc:oup:ajagec:v:87:y:2005:i:2:p:340-352

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Cited by:
  1. 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.
  2. Rabotyagov, Sergey S. & Feng, Hongli & Kling, Catherine L., 2006. "Optimal Design of Permit Markets with an ex ante Pollution Target," 2006 Annual meeting, July 23-26, Long Beach, CA 21312, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  3. Arthur Caplan, 2008. "Incremental and Average Control Costs in a Model of Water Quality Trading with Discrete Abatement Units," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 41(3), pages 419-435, November.
  4. Heberling, Matthew T. & García, Jorge H. & Thurston, Hale W., 2010. "Does encouraging the use of wetlands in water quality trading programs make economic sense?," Ecological Economics, Elsevier, vol. 69(10), pages 1988-1994, August.
  5. 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.
  6. Doyle, Martin W. & Yates, Andrew J., 2010. "Stream ecosystem service markets under no-net-loss regulation," Ecological Economics, Elsevier, vol. 69(4), pages 820-827, February.
  7. Meredith Fowlie & Nicholas Muller, 2013. "Market-based Emissions Regulation When Damages Vary Across Sources: What Are the Gains from Differentiation?," NBER Working Papers 18801, National Bureau of Economic Research, Inc.
  8. Arthur J. Caplan & Yuya Sasaki, 2009. "Sharing the Surplus Generated from Noncooperative Cost Sharing: The Case of Nonpoint Associations and Water Quality Trading," Working Papers 2009-09, Utah State University, Department of Economics.
  9. Yates, Andrew J. & Doyle, Martin W. & Rigby, J.R. & Schnier, Kurt E., 2013. "Market power, private information, and the optimal scale of pollution permit markets with application to North Carolina's Neuse River," Resource and Energy Economics, Elsevier, vol. 35(3), pages 256-276.
  10. 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).
  11. 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.
  12. Khatri-Chhetri, Arun & Collins, Alan R, 2013. "Reducing Phosphorus Impairments with Nutrient Trading," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149686, Agricultural and Applied Economics Association.
  13. Suzi Kerr, 2013. "Managing Risks and Tradeoffs Using Water Markets," Working Papers 13_13, Motu Economic and Public Policy Research.
  14. Nguyen, Nga & Shortle, James S., 2006. "Transactions Costs and Point-Nonpoint Source Water Pollution Trading," 2006 Annual meeting, July 23-26, Long Beach, CA 21096, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  15. Ghosh, Gaurav & Kwasnica, Anthony & Shortle, James, 2010. "A Laboratory Experiment to Compare Two Market Institutions for Emissions Trading," FCN Working Papers 18/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  16. 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.
  17. 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).

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