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Parametric and Non-Parametric Tests for Economies-of-Scale in Nonpoint Pollution Control: The Case of Bear River Basin, Utah

This paper provides examples of both parametric and non-parametric tests for economies of scale in the control of non-point pollution. Because field-level control costs and control effectiveness are uncertain from the regulator's perspective (due to the existence of asymmetric information), we test for economies of scale in the correlations between control costs per unit abated (i.e., average control cost), on the one hand, and field size, estimated delivered phosphorous (TP) load per field, and estimated delivered TP load per acre, respectively, on the other. Our dataset consists of loading and delivery ratio estimates for over 12,000 fields owned by 5,900 farmers located in the Bear River Basin, Utah. The estimates - derived from a newly developed hydrologic model of the basin - are then combined with control cost and best management practice (BMP) effectiveness estimates to create a basin-wide profile. We find statistical evidence of a negative relationship between average control cost and both delivered TP load per field and per acre, i.e., larger TP loads per field and per acre are associated with lower average control costs. This suggests that ranking fields according to delivered TP loads per field and per acre are, all else equal, consistent with prioritizing BMP subsidies in a cost effective manner. Evidence is mixed regarding the statistical relationship between average control cost and field size, which is the traditional way in which economies of scale are assessed. Implications of our findings for the management of BMP subsidy programs such as the Environmental Quality Incentives Program (EQIP) are discussed.

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Paper provided by Utah State University, Department of Economics in its series Working Papers with number 2009-01.

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Length: 18 pages
Date of creation: 26 May 2009
Date of revision: 26 May 2009
Handle: RePEc:usu:wpaper:2009-01
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  1. Cornwell, Christopher & Schmidt, Peter & Wyhowski, Donald, 1992. "Simultaneous equations and panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 151-181.
  2. Arun S. Malik & David Letson & Stephen R. Crutchfield, 1993. "Point/Nonpoint Source Trading of Pollution Abatement: Choosing the Right Trading Ratio," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(4), pages 959-967.
  3. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 112-134.
  4. Shortle, James S & Horan, Richard D, 2001. " The Economics of Nonprofit Pollution Control," Journal of Economic Surveys, Wiley Blackwell, vol. 15(3), pages 255-289, July.
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