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Nonpoint Pollution Control: Inducing First-best Outcomes through the Use of Threats

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Author Info

  • Kathleen Segerson

    (University of Connecticut)

  • JunJie Wu

    (Oregon State University)

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

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2003-03.

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Length: 34 pages
Date of creation: Jan 2003
Date of revision: Aug 2004
Handle: RePEc:uct:uconnp:2003-03

Note: We thank two anonymous referees for their invaluable comments and suggestions.
Contact details of provider:
Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/
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Related research

Keywords: ambient taxes; nonpoint-source pollution control; cost-minimizing abatement; voluntary approach;

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References

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  1. 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.
  2. 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.
  3. Anastasios Xepapadeas, . "Observability And Choice Of Instrument Mix In The Control Of Externalities," Working Papers 9401, University of Crete, Department of Economics.
  4. Joseph A. Herriges & Ramu Govindasamy & Jason F. Shogren, 1992. "Budget Balancing Incentive Mechanisms," Center for Agricultural and Rural Development (CARD) Publications 92-wp100, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  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. 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.
  7. Na Li Dawson & Kathleen Segerson, 2008. "Voluntary Agreements with Industries: Participation Incentives with Industry-Wide Targets," Land Economics, University of Wisconsin Press, vol. 84(1), pages 97-114.
  8. JunJie Wu & Bruce A. Babcock, 1996. "Contract Design for the Purchase of Environmental Goods from Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 935-945.
  9. McAfee, R Preston & McMillan, John, 1991. "Optimal Contracts for Teams," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 561-77, August.
  10. Steven Shavell, 2003. "Economic Analysis of Accident Law," NBER Working Papers 9694, National Bureau of Economic Research, Inc.
  11. 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.
  12. John Spraggon, 1998. "Exogenous Targeting Instruments as a Solution to Group Moral Hazards," Department of Economics Working Papers 1998-01, McMaster University.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. Nalbantian, Haig R & Schotter, Andrew, 1997. "Productivity under Group Incentives: An Experimental Study," American Economic Review, American Economic Association, vol. 87(3), pages 314-41, June.
  18. 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.
  19. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  20. Babcock, Bruce A. & Lakshminarayan, P. G. & Wu, JunJie & Zilberman, David, 1996. "Economics of a Public Fund for Environmental Amenities (The)," Staff General Research Papers 1065, Iowa State University, Department of Economics.
  21. 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.
  22. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
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Citations

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Cited by:
  1. 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.
  2. Mourad Ali & Patrick Rio, 2009. "Deterrence vs. Efficiency To Regulate Nonpoint Source Pollution," Working Papers 09-22, LAMETA, Universtiy of Montpellier, revised Dec 2009.
  3. 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.
  4. 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).
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. Anastasios Xepapadeas, 2011. "The Economics of Non-Point-Source Pollution," Annual Review of Resource Economics, Annual Reviews, vol. 3(1), pages 355-373, October.
  10. 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.
  11. 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.
  12. 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).
  13. 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.
  14. 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.
  15. Ahmed, Rasha & Segerson, Kathleen, 2011. "Collective voluntary agreements to eliminate polluting products," Resource and Energy Economics, Elsevier, vol. 33(3), pages 572-588, September.
  16. 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.
  17. 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.
  18. 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.
  19. 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.
  20. 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.

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