An Experimental Economics Examination of Incentive Mechanisms for Reducing Ambient Water Pollution Levels from Agricultural Non-Point Source PollutionEPA Grant Number: R830989
Title: An Experimental Economics Examination of Incentive Mechanisms for Reducing Ambient Water Pollution Levels from Agricultural Non-Point Source Pollution
Investigators: Poe, Gregory , Schulze, William
Institution: Cornell University
EPA Project Officer: Hahn, Intaek
Project Period: June 1, 2003 through May 31, 2006 (Extended to May 31, 2008)
Project Amount: $279,999
RFA: Market Mechanisms and Incentives for Environmental Management (2002) RFA Text | Recipients Lists
Research Category: Economics and Decision Sciences
With the success of end of pipe, point source water pollution control, the largest remaining reason that the U.S. are not meeting the "fishable/swimmable" objectives of the 1972 "Clean Water Act" are non-point sources, particularly agriculture (USEPA 1998). Data from the National Water Quality Inventory in 1998 indicates that about 40 percent of U.S. streams, lakes and estuaries are presently "impaired", meaning that they are not clean enough to support their designated uses. According to these data, agricultural pollution contributes to 59% and 31% of the reported water quality impairments of rivers and lakes respectively. Whereas the regulation and use of incentives to address point source pollution are well established in the theoretical environmental economics literature and in actual policy initiatives, extending these ideas to non-point source pollution is problematic for a number of reasons. First, the very definition of non-point sources of pollution implies that these sources are diffuse and emissions difficult to measure. This is especially true when there are a large number of non-point sources in a watershed. In such conditions, regulating, monitoring and enforcement approaches are prohibitively expensive. Second, because of complex fate and transport mechanisms across an entire watershed with multiple polluters, the relationship between run-off at a particular site and ambient water pollution levels is poorly understood and stochastic. Rather than regulating based on emissions proxies or attempting to establish standards when enforcement is nearly impossible, an innovative paper by Segerson (1988) draws on the principal-agent literature (Holmström 1982) to suggest that all polluters be charged or subsidized based on ambient concentrations. Efficiency, however, requires that each polluter, rather than the enforcement agency, knows their own effluent levels, abatement cost functions, and the fate and transport relationship of their effluent on ambient water quality. Hence, the information burden shifts from the agency to the polluter.
The objective of this research is to use established experimental economics methods to test the variety of intriguing ambient-based incentive programs that build upon Segerson's novel insight (Xepapadeas 1991; Cabe and Herriges 1992; Herriges, Govindasamy and Shogren 1994; Hansen 1998, 2002; Horan, Shortle, and Abler 1998). We will also conduct experiments testing Segerson's recent extension of her analysis of voluntary pollution control to the multi-firm case for non-point source pollution. Although there has been a substantial experimental economics literature on permit trading markets, very little attention has been given in the experimental economics literature to ambient-based pollution mechanisms and non-point source pollution control mechanisms.
The results of these tests should be of substantial use to environmental managers because many of the practical issues and problems of implementing a new mechanism in the field can be discovered in the relatively low cost environment of the experimental economics laboratory.