Market and bargaining approaches to nonpoint source pollution abatement problems

Abstract

This research focuses upon the use of market incentives for environmental protection, with specific reference to nonpoint source pollution from agricultural land. The case when polluters contribute recursively rather than additively to environmental damages is investigated. While an optimal solution is theoretically possible, there exist opportunities for strategic behavior. Hence, bargaining solutions under imperfect information are analyzed. From this analysis, it is concluded that the presence of imperfect information will not distort the level of discharges from the socially desirable quantity provided contracts between landowners are correctly specified.

In addition to the theoretical work, our research proposes and empirically evaluates a transferable discharge permit system for sediment from agricultural land using data for a portion of the Long Creek watershed of Macon County, Illinois. This analysis is undertaken through the implementation of a market simulation program which allows us to calculate the quantity of sediment and the reduction in costs that would occur if bargaining and contracting is permitted between landowners restricted by regulations which reflect current national and state policies.

The results of this analysis point to the ability of a market type mechanism to significantly reduce the compliance costs of each of the regulations investigated. The ability of such an institution when applied to a recursively produced pollutant such as sediment from agricultural land is, however, found to be extremely sensitive to the order in which contracts are executed.