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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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  • Arthur J. Caplan & Yuya Sasaki, 2009. "Matching Traders in a Pollution Market: The Case of Cub River, Utah," Working Papers 2009-08, Utah State University, Department of Economics.
  • Handle: RePEc:usu:wpaper:2009-08
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    1. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. King, Dennis M., 2005. "Crunch Time for Water Quality Trading," Choices, Agricultural and Applied Economics Association, vol. 20(1).
    10. 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.
    11. Yuya Sasaki & Arthur Caplan, 2008. "Matching Heterogeneous Traders in Quantity-Regulated Markets," Computational Economics, Springer;Society for Computational Economics, vol. 31(4), pages 341-362, May.
    12. Arthur Caplan, 2008. "Incremental and Average Control Costs in a Model of Water Quality Trading with Discrete Abatement Units," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 41(3), pages 419-435, November.
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    More about this item

    Keywords

    advancement algorithm; retreat algorithm; water quality trading;

    JEL classification:

    • Q24 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Land
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q19 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Other

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