When Two Wrongs Make a Right: Second‐Best Point‐Nonpoint Trading Ratios

Abstract

Most research on point‐nonpoint trading focuses on the choice of trading ratio (the rate point source controls trade for nonpoint controls), although the first‐best ratio is jointly determined with the optimal number of permits. In practice, program managers often do not have control over the number of permits—only the trading ratio. The trading ratio in this case can only be second‐best. We derive the second‐best trading ratio and, using a numerical example of trading in the Susquehanna River Basin, we find the values are in line with current ratios, but for different reasons than those that are normally provided.

Keywords: agricultural pollution, environmental policy, permit trading, water quality