Comparing Policies to Improve Water Quality when Dischargers of Pollutants are Strategic

Abstract

Market-based instruments such as fees or tradable permits can be used to simultaneously regulate point and nonpoint sources of pollution discharge into a river. However, sources of pollution discharge often have more information about their own costs of pollution abatement than do regulators. This information asymmetry may lead to strategic behavior, which can lead to different outcomes under different policies. This paper estimates a Nash payoff of a two-period strategic game using econometrically estimated abatement costs for point and nonpoint source phosphorus discharges in the Minnesota River Basin. Results show that when dischargers of pollutants are strategic, discharge permits may yield lower deadweight losses than discharge fees.