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Tradable Permits Under Threat to Manage Nonpoint Source Pollution

Congress: 2008
Author(s): Philippe Le Grusse, Patrick Rio
ali@supagro.inra.fr legrusse@iamm.fr rio@supagro.inra.fr

Keyword(s): water quality, tradable permits market, nonpoint source pollution, ambient pollution
AbstractNonpoint source pollution is characterized by the inobservability of individual emissions at a reasonable cost. Hence the failure of traditional economic policies (tax, standard, tradable permits market) to solve alone this kind of problem. The economic literature then turned to instruments based on the collective performance (ambient pollution) to manage this type of pollution. However, the heterogeneity of the agents involved in nonpoint source pollution deteriorates the effectiveness of ambient mechanisms. Indeed the distribution of the effort of abatement among these agents cannot be identified. Indeed, in the case of nonpoint source pollution, the asymmetry of information between the regulator and the farmer is the main problem. One of the possible solutions to control this type of pollution is thus the implementation of a decentralized economic instrument. Instead of seeking information, the regulator lets the farmer reveal it through the exchange of tradable permits. The advantage of this solution compared to the standard appears when the regulator does not have sufficient information on individual emissions. In this case, the regulator sets a total standard of ambient pollution and lets the market fix the levels of individual emissions. This corresponds to a transfer of strategy from the regulator towards the polluters. However, remains the problem of free-riding. Indeed, the impossibility of controlling individual emissions could encourage opportunist economic agents to free-ride. In order to solve this problem we call upon ambient taxes (Meran and Schwalbe, 1987 ; Segerson, 1988) as mechanisms of sanction in case of nonconformity of the agents with the ambient standard. Indeed, in order to avoid the problem of moral hazard resulting from nonpoint source pollution, Meran and Schwalbe (1987) and Segerson (1988) were the first to propose a system of collective penalties based on the difference between the level of ambient pollution measured on a given site and the ambient standard fixed in advance. These ambient mechanisms were supported by several experimental studies (Spraggon, 2004 ; Cochard et al. 2005 ; Vossler et al. 2006) which showed the effectiveness of such approaches to avoid the problem of moral hazard. In this paper, we design a tradable permits market between nonpoint source polluters. We consider a collective performance based mechanism as a threat in order to avoid any attempt to cheat by purchasing inputs through non conventional market. This sanction mechanism is activated if the collective fails to meet the ambient standard.
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