Tradable permit systems for a spatially heterogeneous externality: A microparameter approach

Young, Richael

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https://hdl.handle.net/2142/50622 Copy

Description

Title

Tradable permit systems for a spatially heterogeneous externality: A microparameter approach

Author(s)

Young, Richael

Issue Date

2014-09-16

Director of Research (if dissertation) or Advisor (if thesis)

Brozović, Nicholas

Department of Study

Agr & Consumer Economics

Discipline

Agricultural & Applied Econ

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

M.S.

Degree Level

Thesis

Keyword(s)

• Groundwater management
• environmental markets
• tradable permits
• environmental economics

Abstract

The reduction of surface water flows by adjacent groundwater pumping is an externality caused by agricultural producers. Previous studies have analyzed management policies for such externalities, but these have assumed that the ability to monitor stream depletion is perfect and the ability to regulate it is continuous. In practice, the ability to monitor either stream depletion or groundwater pumping is limited as it is often politically or financially infeasible to do so. Consequently, real-world management strategies result in reductions in farm size rather than in groundwater pumping, an adjustment at the extensive rather than the intensive margin. To reflect real-world conditions, I consider alternative policies when the ability to monitor is imperfect. The purpose of this analysis is to understand the relative performance of tax, zoning, and trading policies to meet reductions in stream depletion in terms of aggregate costs and changes in industry size. To accomplish this, I develop a microparameter model that considers policies based on easily observable field characteristics, and make a methodological contribution by introducing tradable permit systems into the microparameter framework. Using a Monte Carlo simulation, I derive general results regarding aggregate abatement, industry size, and costs. I then apply this model to a specific case study of a resource district in western Nebraska. Results show that the welfare loss of imperfect monitoring of groundwater pumping may be small. The relative cost-savings of alternative policies depend largely on the joint distribution of field profitability and marginal damage, but the ranking of policies in terms of cost-effectiveness is fairly robust.

Graduation Semester

2014-08

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http://hdl.handle.net/2142/50622

Copyright and License Information

Copyright 2014 Richael Kentlee Young

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