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

Posted: 15 Dec 2005

See all articles by Richard D. Horan

Richard D. Horan

Michigan State University - Department of Agricultural Economics

James S. Shortle

Pennsylvania State University - College of Agricultural Sciences - Department of Agricultural Economics and Rural Sociology

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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.

Suggested Citation

Horan, Richard D. and Shortle, James S., When Two Wrongs Make a Right: Second-Best Point-Nonpoint Trading Ratios. American Journal of Agricultural Economics, Vol. 87, No. 2, pp. 340-352, May 2005, Available at SSRN: https://ssrn.com/abstract=856496 or http://dx.doi.org/10.1111/j.1467-8276.2005.00726.x

Richard D. Horan (Contact Author)

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)

James S. Shortle

Pennsylvania State University - College of Agricultural Sciences - Department of Agricultural Economics and Rural Sociology ( email )

University Park, PA 16802-3306
United States

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