Differences in Social and Public Risk Perceptions and Conflicting Impacts on Point/Nonpoint Trading Ratios
8 Pages Posted: 24 Mar 2020
Date Written: November 2001
If stochastic nonpoint pollution loads create socially costly risk, then an economically optimal point/nonpoint trading ratio—the rate point source controls trade for nonpoint controls—is adjusted downward (a risk reward for nonpoint controls), encouraging more nonpoint controls. However, in actual trading programs, ratios are adjusted upward in response to nonpoint uncertainties (a risk premium for nonpoint controls). This contradiction is explained using a public choice model in which regulators focus on encouraging abatement instead of reducing damages. The result is a divergence of public and social risk perceptions, and a trading market that encourages economically suboptimal nonpoint controls.
Keywords: nonpoint source pollution, pollution trading, public choice, water quality, Q250, Q280
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