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Matching Traders in a Pollution Market: The Case of Cub River, Utah

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Abstract

This paper applies two recently developed trading algorithms to a water quality trading (WQT) market located in the Cub River sub-basin of Utah; a market that includes both point and nonpoint sources. The algorithms account for three complications that naturally arise in WQT markets: (1) combinatorial matching of traders, (2) trader heterogeneity, and (3) discreteness in abatement technology. The algorithms enable a full characterization of the market’s performance by distinguishing a specific pattern of trade among market participants, which in turn results in as detailed a reduced- cost trading benchmark as possible for the basin. Contrary to the commonly held belief that relatively high point-source abatement costs necessitate nonpoint-source abatement effort, we find that in a WQT market where each source is required to reduce its pollution loadings it may be cheaper for point sources to sell abatement credits to nonpoint sources.

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File URL: ftp://repec.bus.usu.edu/RePEc/usu/pdf/eri2009-08.pdf
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Bibliographic Info

Paper provided by Utah State University, Department of Economics in its series Working Papers with number 2009-08.

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Length: 30 pages
Date of creation: 01 Aug 2009
Date of revision:
Handle: RePEc:usu:wpaper:2009-08

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Keywords: advancement algorithm; retreat algorithm; water quality trading;

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  1. McGartland, Albert M. & Oates, Wallace E., 1985. "Marketable permits for the prevention of environmental deterioration," Journal of Environmental Economics and Management, Elsevier, vol. 12(3), pages 207-228, September.
  2. Atkinson, Scott E. & Lewis, Donald H., 1974. "A cost-effectiveness analysis of alternative air quality control strategies," Journal of Environmental Economics and Management, Elsevier, vol. 1(3), pages 237-250, November.
  3. King, Dennis M., 2005. "Crunch Time for Water Quality Trading," Choices, Agricultural and Applied Economics Association, vol. 20(1).
  4. Kling, Catherine L., 1994. "Environmental benefits from marketable discharge permits or an ecological vs. economical perspective on marketable permits," Ecological Economics, Elsevier, vol. 11(1), pages 57-64, September.
  5. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  6. 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.
  7. Atkinson, Scott E. & Tietenberg, T. H., 1982. "The empirical properties of two classes of designs for transferable discharge permit markets," Journal of Environmental Economics and Management, Elsevier, vol. 9(2), pages 101-121, June.
  8. Freeman, Jody & Kolstad, Charles D., 2006. "Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience," OUP Catalogue, Oxford University Press, number 9780195189650, Octomber.
  9. Seskin, Eugene P. & Anderson, Robert Jr. & Reid, Robert O., 1983. "An empirical analysis of economic strategies for controlling air pollution," Journal of Environmental Economics and Management, Elsevier, vol. 10(2), pages 112-124, June.
  10. Yuya Sasaki & Arthur Caplan, 2008. "Matching Heterogeneous Traders in Quantity-Regulated Markets," Computational Economics, Society for Computational Economics, vol. 31(4), pages 341-362, May.
  11. O'Ryan, Raul E., 1996. "Cost-Effective Policies to Improve Urban Air Quality in Santiago, Chile," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 302-313, November.
  12. A. Myrick Freeman III, 2002. "Environmental Policy Since Earth Day I: What Have We Gained?," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 125-146, Winter.
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