Grantee Research Project Results
2003 Progress Report: An Experimental Economics Examination of Incentive Mechanisms for Reducing Ambient Water Pollution Levels from Agricultural Non-Point Source Pollution
EPA Grant Number: R830989Title: 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 Period Covered by this Report: June 1, 2003 through May 31, 2004
Project Amount: $279,999
RFA: Market Mechanisms and Incentives for Environmental Management (2002) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The broad objective of this research project is to use established experimental economics methods to test the variety of ambient-based incentive programs that have been suggested in the theoretical environmental economics literature on non-point source pollution. Such incentive programs may involve fixed penalties for all sources of emissions if ambient pollution levels exceed a specified level. Alternatively taxes (subsidies) may be levied for each unit of pollution exceeding (falling below) the ambient pollution standard. It also is possible to combine the fixed penalty and the marginal tax/subsidy approaches. Because of stochastic bio-physical relationships, the relation between aggregate emissions and ambient pollution levels has a random element.
Within this broad objective and framework, the four specific objectives of this research project are to:
- examine the efficiency of tax/subsidy/fixed penalty and combined approaches under non-cooperative and cooperative settings under conditions in which pollution, damages, and marginal penalties are assumed to be linear functions of output plus or minus the random element;
- examine viability of alternative approaches suggested in the literature when damages are not linear and sources of non-point pollution are able to choose to reduce emissions through reducing output, investing in abatement management options, or both reduced output and increased abatement;
- build on Objectives one and two to identify effective ambient-based policies and explore the use of voluntary programs with the threat of imposing an ambient tax/subsidy scheme if ambient targets are not met, as such an approach has desirable policy features and has been demonstrated theoretically to provide efficient outcomes;
- and build on all three prior objectives, which involve low stakes experiments with student subjects and evaluating the most efficient outcome under high-stakes farm population settings.
The results of these four objectives 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.
Progress Summary:
We completed the first objective and reported our findings in the agricultural/environmental economics literature. Work is in progress on the second and third objectives identified above. Overall, the project objectives have not changed from the original proposal.
Our research has centered on experiments replicating conditions that policy economists have identified as most conducive to successful implementation of ambient-based pollution control incentive programs: small watersheds with limited numbers of farmers, homogeneous operations, readily monitored water quality, and short time lags between emissions and ambient pollution levels. We examine the efficacy of the various fixed penalty and marginal pollution control incentive mechanisms under conditions in which pollution sources do not act cooperatively (consistent with theoretical presentations) and an alternative policy relevant situation where communication and cooperation are permitted.
Under these conditions, we find that the tax/subsidy and tax only incentive mechanisms achieve desired pollution levels in non-cooperative settings. Fixed penalty and combined approaches are not successful in reducing pollution to desired ambient target levels.
When communication and cooperation are allowed, the results and policy implications are dramatically different. Under these conditions, policies involving subsidies lead to overabatement. In other words, participants realize that as a group it is more profitable to reduce pollution below target levels because of the positive financial returns associated with marginal subsidies. In contrast, mechanisms such as the fixed penalty and the tax only mechanisms that do not involve subsidies approximate optimal levels.
The mechanism that appears to be most successful in both cooperative and non-cooperative settings is the tax only mechanism that requires non-point sources to pay a per unit of pollution tax on each unit of pollution exceeding the ambient standards. Economic theoretical arguments as presented in a working paper by Segerson and Wu (2004) would suggest that instead of taxes an equivalent result would be reached by a reduction of subsidies.
In addition to these experimental results, we made two fundamental advances:
- We developed cross sectional econometric techniques that enable us to compare baseline no-policy settings with mechanism policy settings. In conjunction with our previous focus on within subject comparisons, this allows us to better identify the effects of implementing a policy relative to no-policy situations.
- We moved our research platform from Web-based programming to a Virtual Basic, Excel program. In the long run, the latter approach is more cost-effective as only a high threshold level of programming ability is needed to implement research design changes.
The Web-based program requires a Web-programming expert with specific experience with the Cornell GreenWeb programming platform.
Although cost-effective, moving our research platform delayed our research by approximately one semester. We presently expect that this delay will lead us to request a no-cost extension at the calendar end of the 2-year project, in part because of limited numbers of student subjects that preclude catching up during the school semester and summer. The shift in platforms has also led to some shifting of funds from the designated Web programmer to postdoctoral fellows and graduate research assistants. Total personnel costs and total project costs, however, remain consistent with the original proposal.
Future Activities:
In the upcoming year, we anticipate major progress toward the second and third objectives indicated above. Specifically, we will continue implementing an experimental design that allows for production and abatement choices and focusing on the tax only (and/or subsidy reduction) mechanisms to be implemented if ambient levels are exceeded. Our current design will be expanded to allow for heterogeneity of agents. We also will accommodate non-linear damage functions (i.e., those in which damages increase with ambient pollution levels) and investigate pertinent pollution control mechanisms.
As suggested above, our shift in experimental economics platforms from Web-based to Virtual Basic Excel has caused a delay in experimental implementation. We anticipate that we will need to request a no-cost extension to complete the fourth objective.
References:
Segerson S, Wu JJ. Nonpoint pollution control: inducing first-best outcomes through the use of threat. Working paper. Department of Economics, University of Connecticut, Storrs, CT, 2003, revised Aug 2004.
Journal Articles on this Report : 2 Displayed | Download in RIS Format
Other project views: | All 16 publications | 4 publications in selected types | All 4 journal articles |
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Type | Citation | ||
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Poe GL, Schulze WD, Segerson K, Suter JF, Vossler CA. Exploring the performance of ambient-based policy instruments when nonpoint source polluters can cooperate. American Journal of Agricultural Economics 2004;86(5):1203-1210. |
R830989 (2003) R830989 (2006) R830989 (Final) |
Exit |
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Vossler CA, Poe GL, Schulze WD, Segerson K. Communication and incentive mechanisms based on group performance: an experimental study of nonpoint pollution control. Economic Inquiry 2006;44(4):599-613. (Awarded Editor's Choice Article-Economic Inquiry 2006). |
R830989 (2003) R830989 (2006) R830989 (Final) |
Exit |
Supplemental Keywords:
public policy, decision making, non-point source pollution prevention, water, agriculture, e xperimental economics, Environmental Protection Agency, Economic, Social, & Behavioral Science Research Program, Ecology and Ecosystems, Economics, Economics & Decision Making, Reinvention, Social Science, decision-making, Clean Water Act, agriculture, decision making, economic incentives, economic research, environmental policy, incentives, nonpoint source pollution, nonpoint source pollution, NPSP, policy incentives, policy making, water quality model,, RFA, ENVIRONMENTAL PROTECTION AGENCY, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Reinvention, Economics, decision-making, Ecological Risk Assessment, Ecology and Ecosystems, Economics & Decision Making, Market mechanisms, Social Science, compliance behavior, effects of policy instruments, market-based mechanisms, nonpoint source pollution trading, nonpoint source pollution, impact of federal policy instruments, policy making, economic research, policy incentives, watershed, decision making, Clean Water Act, incentives, economic incentives, environmental Compliance, environmental policy, water pollution, agriculture, nonpoint source pollution (NPSP), voluntary programsProgress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.