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Direct vs Indirect Payments for Environmental Services: The Role of Relaxing Market Constraints

  • Ben Groom

    ()

    (Department of Economics, School of Oriental and African Studies)

  • Charles Palmer

    ()

    (Institute for Environmental Decisions, ETH Zurich)

Ferraro and Simpson (2002) argue that when markets are competitive, direct payments for environmental services are more cost effective in achieving environmental goals than indirect payments, say, for capital. However, when eco-entrepreneurs face non-price rationing in input or output markets, as is typical for e.g. credit in developing countries for, we show that interventions which relax constraints can be more cost-effective than direct payments. One corollary of this is that such indirect payments can be preferred to direct payments by interveners (e.g. NGOs) and eco-entrepreneurs alike. Both of these outcomes are more likely when constraints are severe.

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Paper provided by University of Cambridge, Department of Land Economics in its series Environmental Economy and Policy Research Working Papers with number 36.2008.

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Date of creation: 2008
Date of revision: 2008
Handle: RePEc:lnd:wpaper:200836
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