Point/Nonpoint Effluent Trading with Spatial Heterogeneity

Potential earnings from permits sales may provide an incentive for farmers to accept water quality regulation. We derive optimal adjustments of point/nonpoint effluent trading ratios for heterogeneity in marginal environmental damage and degradation/retention of the pollutant across locations in a watershed. A simulation based on data from the Kymi River Valley, Finland, indicates that farmers are the greatest suppliers of permits, as expected, but that gains from trading vary substantially. Some farmers may become net buyers of permits and thus net losers from regulation. The benefits of effluent trading are distributed unevenly among point sources as well. Copyright 2008, Oxford University Press.

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