Multi-Pollutant Point-Nonpoint Trading with Participation Decisions: The Role of Transaction Costs

38 Pages Posted: 21 Sep 2018

See all articles by Carson Reeling

Carson Reeling

Purdue University

Richard D. Horan

Michigan State University - Department of Agricultural Economics

Cloe Garnache

Michigan State University - Department of Agricultural, Food and Resource Economics

Date Written: July 16, 2018

Abstract

High transaction costs and thin participation plague water quality trading and prevent markets from delivering expected efficiency gains. Point sources generate a single pollutant, while nonpoint sources generate multiple, complementary pollutants. We develop a dynamic search model of point-nonpoint trading that includes transactions costs. These costs affect participation decisions and generate strategic complementarities with multiple large or small market participation levels equilibria. Integrated markets—with trading across pollutants—lead to lower transactions costs for both sources and a larger basin of attraction around the full-participation equilibrium, and thus may improve pollution trading efficiency relative to distinct markets.

Keywords: credit stacking, multi-pollutant trading, participation, strategic complementarities, transactions costs

JEL Classification: D470, Q530, Q580

Suggested Citation

Reeling, Carson and Horan, Richard D. and Garnache, Cloe, Multi-Pollutant Point-Nonpoint Trading with Participation Decisions: The Role of Transaction Costs (July 16, 2018). CESifo Working Paper Series No. 7152, Available at SSRN: https://ssrn.com/abstract=3250728 or http://dx.doi.org/10.2139/ssrn.3250728

Carson Reeling (Contact Author)

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

Richard D. Horan

Michigan State University - Department of Agricultural Economics ( email )

303A Agriculture Hall
East Lansing, MI 48824
United States
517-355-1301 (Phone)
517-432-1800 (Fax)

Cloe Garnache

Michigan State University - Department of Agricultural, Food and Resource Economics ( email )

MI
United States

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