Green Payment Programs for Nonpoint Source Pollution Control: How Important Is Targeting for Cost-Effectiveness?

Beginning of article

Mechanism design theory is used to examine the case of a cost-minimizing regulator who uses input-reduction subsidies to meet an exogenously imposed ambient standard for nonpoint source pollution. A general result claimed for a welfare-maximizing regulator is clarified to show that an optimal contract scheme may involve a pooling equilibrium. Numerical results suggest the ability to directly target contracts reduces costs significantly for the regulator. But in the absence of this ability, indirect targeting reduces costs only slightly.

Key words: ambient standard, cost minimization, input-reduction subsidy, mechanism design, nonpoint source pollution, targeting …