Ambient-Based Pollution Mechanisms: A Comparison of Homogeneous and Heterogeneous Groups of Emitters 1

Transcription

1 Amben-Based Polluon Mechansms: A Comparson of Homogeneous and Heerogeneous Groups of Emers 1 Jordan F. Suer a, Chrsan A. Vossler b and Gregory L. Poe c a. Deparmen of Economcs, Oberln College b. Deparmen of Economcs and Insue for a Secure and Susanable Envronmen, Unversy of Tennessee, Knoxvlle c. Deparmen of Appled Economcs and Managemen, Cornell Unversy 1 Correspondence should be dreced o Jordan.Suer@oberln.edu. Fundng for hs research was provded by USEPA gran R We graefully acknowledge, whou mplcaon, crcal npu by Kahy Segerson and Bll Schulze on relaed aspecs of hs projec. We also grealy apprecae ndusry specfc nsghs from Peer Wrgh (NRCS-NY), and Wayne Knoblauch, Karl Czymmek, and Qurne Keerngs, and useful feedback from parcpans a he 2007 NAREA conference.

2 Amben-Based Polluon Mechansms: A Comparson of Homogeneous and Heerogeneous Groups of Emers Absrac: Over he las wo decades, amben ax mechansms have been offered as a poenal soluon o he problem of non-pon source waer polluon. Prevous heorecal analyses sugges ha he performance of amben ax mechansms does no depend on frm characerscs, such as sze, whls polcy dscussons advocae ha such mechansms are bes sued for regulang relavely homogeneous frms. Usng conrolled laboraory expermens, we provde emprcal evdence ha he dsrbuon of frm szes does have a sgnfcan mpac on observed group decson makng and furher ha heerogeney has he poenal o generae some relavely desrable oucomes. These resuls sugges ha rcher heorecal models ha capure mporan sraegc neracons are needed o beer descrbe laboraory behavor and, by exenson, behavor n poenal polcy sengs. Key words: nonpon source polluon, amben axes, frm heerogeney, laboraory expermens, dary farms - 2 -

3 1. Inroducon Despe decades of polcy nervenon, accumulaed evdence ndcaes ha agrculural nonpon source polluon remans he larges obsacle o aanng he fshable-swmmable goals of he 1972 Clean Waer Ac (USEPA, 2002; Rboudo, 2003). Concdenly, has been argued ha he volunary, ncenve-based polluon abaemen programs of he Farm Bll s Conservaon Tle have largely been neffecve n mgang non-pon source polluon from agrculure (Shorle, Abler and Rbaudo, 2001). Movaed by he Toal Maxmum Daly Load (TMDL) provsons of he Clean Waer Ac (CWA) and he deermnaon ha hese waer qualy objecves may be mplemened hrough he use of ncenve-based, non-regulaory or regulaory approaches (US EPA, 2007), hs research uses expermenal economc echnques o evaluae an amben-based ax n homogeneous and heerogeneous frm sengs. The economc-heorec foundaons for such mechansms sem from Segerson s (1988) semnal paper on amben-based ncenve mechansms for conrollng non-pon source polluon, and subsequen heorecal developmens ncludng Xepapadeas (1991), Cabe and Herrges (1992), Hansen (1998), Horan, Shorle and Abler (1998), Karp (2005), and Segerson and Wu (2006). In recen years hese heorecal effors have been augmened by a se of expermenal exploraons of amben-based polluon polces (e.g., Spraggon, 2002, 2004; Alpzar, Requae and Schram, 2004; Poe e al., 2004; Cochard, Wllnger and Xapapadeas, 2005; Vossler e al., 2006; Suer e al., 2008). Our sudy s relaed o, bu dsnc from, pas expermenal economcs effors on amben-based polluon conrol mechansms. Pas sudes have largely been dreced oward comparng he performance of alernave amben polluon conrol mechansms, ncludng margnal axes and subsdes, fxed penaly mechansms, and combned fxed penaly and ax/subsdy mechansms. The work repored here s delberaely lmed o evaluang he - 3 -

4 amben ax mechansm, whereby each polluer pays a (consan) margnal ax on each un of polluon n excess of an exogenously specfed polluon sandard. Our aenon o hs parcular polcy nsrumen derves from lessons gleaned from recen expermenal research on amben polluon conrol mechansms. Specfcally, Spraggon (2002), Vossler (2003) and Vossler e al. (2006) demonsrae ha ncenve mechansms nvolvng subsdes lead o overabaemen n collusve sengs, and ha fxed penaly polces lead o underabaemen relave o he socal opmum n non-cooperave sengs. Subsequen research repored n Poe e al. (2004) and Suer e al. (2008) demonsraes ha appropraely desgned amben ax mechansms can, however, provde effcen oucomes n boh non-cooperave and collusve sengs. Wh he excepon of Spraggon (2004), he relevan expermenal economcs leraure has cenered on evaluang mechansms for a group of homogeneous frms, reflecng Weersnk e al. s (1998) suggeson ha waershed sengs conssng of small numbers of homogeneous farms would be mos conducve o he applcaon of amben-based mechansms. The nen of he presen research s o compare group performance and ndvdual decson makng n a homogeneous frm seng wh hose n a heerogeneous seng. In he homogeneous polluon seng sx frms have dencal prof and emsson funcons; n he heerogeneous seng here are hree small frms, wo medum frms, and one large frm, each wh sze-specfc prof and emssons funcons. As dscussed below, our expermenal desgn s based on characerscs of he New York (NY) dary ndusry. Our approach dffers from Spraggon s (2004) homogeneous-heerogeneous expermenal desgn n hree mporan ways. Frs, our expermenal nsrucons use assocave framng ha reflecs he waershed polluon seng we wsh o provde nsgh on, and desgn parameers calbraed o reflec he relave profably and sze dsrbuons of small (60 cows), - 4 -

5 medum (200 cows), and large (600 cows) dary farms n NY. Spraggon (2004), by comparson, nvesgaes a conex-free seng wh wo frm szes. Reflecng hs specfcy, we wll henceforh refer o farms n our dscusson and analyss. Second, our analyss specfcally nvesgaes he effec of heerogeney n farm-level abaemen cos funcons, whereas he abaemen cos funcon s held consan across frms n Spraggon (2004). Thrd, Spraggon s desgn ncludes a corner soluon n whch he opmal response for small frms s o abae o an emssons level of zero, hus precludng overabaemen. Our desgn allows boh over- and under- abaemen relave o he socal and prvae opma. In he expermens descrbed n hs paper, prof levels are desgned o correspond wh herd sze and reurns daa from he NY Dary Farm Busness Summary (Knoblauch, Punam and Karszes, ). Emssons and abaemen funcons across herd-sze groupngs are nformed by dscussons wh exenson personnel from NRCS-NY and Cornell Cooperave Exenson. Addonally, polluon arges are se o 40% below he zero-abaemen level, correspondng o he 40% nuren reducon goals called for n he orgnal Chesapeake Bay Agreemen (Chesapeake Bay Program, 2005). The remander of he paper s organzed as follows. In he followng secon we revew he heorecal foundaons of he amben-based ax mechansm n a non-cooperave seng. The hrd secon deals he expermenal desgn, and he expermenal resuls are presened n Secon 4. The las secon provdes a dscusson of he polcy mplcaons of hs research. 2. Theorecal Foundaons Our expermenal desgn s predcaed on he heorecal nonpon source polluon model of Segerson and Wu (2006). Specfcally, we assume ha abaemen and farm characerscs can - 5 -

6 each be represened by scalars and ha he polcy objecve s o acheve an amben waer qualy sandard on average, so ha sochasc elemens such as weaher are averaged ou. 2 Suppose here are n farms, ndexed by, n a gven waershed. The abaemen decson by farm s denoed by a and a a,..., a 1, 2 a n represens he vecor of abaemen decsons by each of he n farms. The abaemen cos funcon, C = C(a, θ) s allowed o vary by farm and θ represens farm-specfc characerscs relaed o he farm s locaon and sze. The vecor of characerscs of all farms n a gven waershed s denoed by θ,..., 1, 2 n. I s furher 2 2 assumed ha he abaemen cos funcon s srcly convex, so ha C a 0, C a 0 andc 0, 0. The abaemen decsons and farm characerscs of all farms jonly deermne amben polluon a a monorng pon, x, by he funcon x = x(a1,,an; θ1,, θn), wh 2 2 x a 0 and x a 0. In he absence of any polcy nervenon we expec ha farms wll engage n zero abaemen effor n equlbrum, snce he cos abaemen s srcly posve. Now suppose ha he objecve of he socal planner s o reduce amben polluon o an exogenously deermned waer qualy sandard, whch we denoe x s. Ths sandard could poenally be based on a Toal Maxmum Daly Load (TMDL) requremen or smply be he produc of polcal barganng. The socal planner s problem and correspondng Lagrangan, assumng an neror soluon, can hen be wren as n Mn a 1 C s a,θ s.. x a ; θ x a 0, (1) L n 1 C s a, λ x x a ;θ (2) 2 Evdence from Spraggon (2002) suggess ha he performance of amben mechansms does no depend on wheher or no amben polluon s assumed o be sochasc

7 The frs-order necessary condons ha resul from equaon (2) are solved wh each farm n he waershed makng abaemen decson a decsons gven bya a C / a funcons mply ha λ for all. x a a, whch mples a vecor of opmal abaemen. In addon, he curvaure of he farm-level cos and polluon Suppose furher ha he socal planner seeks o acheve he amben sandard a leas cos hrough he use of a polcy ha charges all farms n he waershed a margnal ax, τ, on uns of amben polluon above s x. Seng τ λ, he cos mnmzaon problem for farm, where he superscrp ndcaes abaemen decsons made under he ax, s Mn a, max0, τ x a ; θ C a s x. (3) Under he amben ax polcy a a s a Nash equlbrum, where a s he opmal abaemen level for farm as defned prevously. A formal proof s provded n Segerson and Wu (2006) and here we provde an nuve demonsraon of hs equlbrum. If he n 1 farms n he waershed abae opmally (.e., a a a a, a,..., - - 1,..., 1 1 an, hen amben polluon wll be equal o or less han he sandard f abaemen by farm s a a. Snce here s no margnal benef o reducng amben polluon below he sandard, a a can never be a bes response. Farm wll herefore choose a a and acheve he sandard wh equaly or a a and pay he amben ax. If a a, he margnal benef of abaemen by farm, n erms of ax paymens avoded, C / a s x a, where x a 0. Subsung x a, he margnal benef of abaemen C / a becomes x a x a. The src convexy of he abaemen cos funcon mples ha he - 7 -

8 margnal cos of abaemen by farm s C for / a C a a a and he concavy of he x / a polluon funcon mples 1 for x a a a. Therefore C / a C a x a x a for a a. Snce he margnal benef of abaemen s greaer han he margnal cos for all a a, abang less han o a a and a a s a NE. a s never a bes response. Thus, farm wll opmally abae Addonally, a a s a unque NE, snce he margnal benef of abaemen for abaemen levels below a s always greaer han he margnal cos, ndependen of he decsons of he oher farms n he waershed, no frm wll ever opmally choose a a. If no farm wll opmally underabae, hen s no raonal o choose a a, snce hs would resul n polluon beng srcly below he amben sandard. 3. Expermenal Desgn 3.1 Parcpan Pool and Procedures To es he relave performance of he amben ax polcy n homogeneous and heerogeneous sengs, a se of economcs expermens were conduced a Cornell Unversy. Expermen parcpans were requred o have aken a leas one class n economcs and he majory had parcpaed n a leas one pror, bu unrelaed, economcs expermen. The expermenal sessons lased one hour, on average, and parcpans earned expermenal okens based on her decsons n each round of he expermen. A he end of he sesson, okens were exchanged for dollars based on a known exchange rae. Overall, 72 parcpans ook par n he expermen and ndvdual earnngs averaged $

9 The expermenal reamens presened here nclude wo reamens wh a heerogeneous group srucure and one reamen wh a homogeneous group srucure. The wo heerogeneous reamens nvolve groups composed of hree farm szes ha dffer n assumed abaemen coss, as descrbed n more deal below. In each expermenal sesson, one group of sx parcpans plays he role of ndependen farm operaors and ake par n 24 decson rounds. There are four sessons (.e. replcaons) for each group srucure. Each group frs plays 5 regulaon-free rounds (hereafer referred o as Par A ) and hen faces an addonal 19 rounds wh he amben ax ( Par B ). Precedng Pars A and B, parcpans read hrough a se of wren nsrucons (see Appendx) and vew a Powerpon presenaon gven by he expermen admnsraor. The sole ask n each round s for parcpans o deermne her own emssons level. Alhough he choce varable n he heorecal model s abaemen, he erm abaemen generally mples a reducon n emssons from a prevous level and mgh herefore confuse parcpans. Each parcpan receves an Emssons Decson Shee ha lss he (pre-ax) earnngs assocaed wh all possble levels of emssons (see Appendx). The Emssons Decson Shee s specfc o farm sze, as dfferen farm szes have dfferen emssons ranges and dfferen abaemen cos srucures. In addon, all parcpans receve dencal Tax Calculaon Shees, whch provde he ax lably assocaed wh all possble group emssons levels. 3.2 Parameer Calbraon based on he NY Dary Indusry In he heerogeneous reamens, he objecve of he expermenal desgn s o mmc he ancpaed pyramdal srucure of NY dary farm szes. In 2005 approxmaely 80% of NY dary farms had herd szes of beween 1 and 99 cows, and hese farms accouned for fully 35% of all - 9 -

10 mlk cows. Anoher 16% of NY dary farms (31% of mlk cows) were ncluded n he herd sze caegory cows. The remanng 4% of NY dary farms (33% of mlk cows) had 400 or more anmals. These fgures represen a emporal snapsho of he ever-evolvng herd sze dsrbuon n NY: n 1985 farms wh 200 cows or more represened less han 2 percen of all farms; n 2005, farms wh 200 or more cows made up over nne percen of he oal number of dary farms. The average sze of herds was 57 cows n 1985 and 97 cows per farm n 2005 (Knoblauch, Conneman, and Punam, 2006). Our expermenal desgn for he heerogeneous sengs consss of hree herd sze groups: hree small, wo medum and one large farm, wh represenave herd szes of 80, 200, and 660 cows respecvely. As ndcaed n he expermenal nsrucons provded n he Appendx, hese farm sze caegores and dsrbuons were publc knowledge for all group members. The small and large farm szes were seleced o represen dsnc anmal housng, feedng and grazng characerscs, and manure sorage and handlng echnologes (see Table 1). There are no clear expecaons of relave emssons and abaemen coss for he medum szed farms, as farms n hs caegory end o selecvely ulze mehods from eher of he oher herd sze caegores dependng on he specfcs of he farm operaon. In he homogeneous seng, each sesson nvolved sx medum-szed farms. Prof funcons assocaed wh he zero abaemen (.e., pre-mechansm) opma were calbraed o he average ne ncome for each of he represenave herd szes usng daa from he Dary Farm Managemen Summary (Knoblauch, Punam and Karszes, ). Ths nformaon s presened n he op secon of Table 2. Whereas objecve daa exss for farm ncome, no such daa are presenly avalable for calbrang emssons abaemen funcons, C, across farm szes. Consulaon wh varous Cornell Unversy faculy faled o provde a

11 consensus as o relave magnudes of emssons arbued o each farm sze, and even less consensus abou relave abaemen coss across herd szes. Because of hs uncerany we endeavored o denfy a plausble se of assumpons correspondng o he range of expers percepons of relave magnudes. Normalzng o he medum-szed herd (whch s he herd sze used for all farms n he homogeneous seng) he baselne Emssons per Cow (EPC) for he small, medum and large farms were se a 0.125, 0.100, and 0.075, respecvely, a her correspondng herd-sze specfc opma. Ths ranslaes o 10 uns of emssons for he small farms, 20 uns of emssons for he medum farms, and 50 uns of emssons for he large farms, a her respecve baselnes. Such relave emssons per cow levels reflec daa on manure managemen pracces obaned from a survey of NY Dary Farms (Poe e al., 2002). Even assumng hese relave per cow and aggregae emssons levels, one can only speculae abou he relave shapes of he abaemen cos funcons for he small, medum, and large farms. Lackng gudance on hs maer, we nvesgae wo alernave scenaros. The frs, whch we call Heerogeneous Type 1, nvolves a relavely elasc abaemen cos funcon for he small farms compared o he large farms. In he Heerogeneous Type 2 seng, small farms have a relavely nelasc abaemen cos funcon. Under he amben ax, small farms wll opmally engage n proporonally more abaemen han medum and large farms n he Type 1 seng, whle n he Type 2 seng large farms opmally abae proporonally more han he small and medum farms. The emssons per cow and he oal cos funcons necessary o effecuae each permuaon are provded n Table 2, assumng an opmal amben ax. Fgures 1 and 2 provde he respecve emsson-ncome relaonshps

12 3.3 Theorecal Predcons In Par A of each reamen, each parcpan makes her emssons decson n an envronmen where amben polluon does no nfluence her earnngs n any way. As such, our expecaon n he homogeneous reamen s ha each parcpan wll choose an emssons level of 20, whch maxmzes her personal earnngs, n each of he fve Par A rounds. Therefore n Par A he expeced amben or group polluon level, gven ha each of he sx parcpans chooses an emssons level of 20, s 120. For he heerogeneous reamens, he expeced group emssons level also equals 120 n Par A of he expermen. However, hs level s an oucome of each of he hree small farms producng 10 emsson uns, each of he wo medum farms generang 20 emsson uns, and he large farm generang 50 emsson uns. In Par B, here s an amben-based ax polcy desgned o nduce a 40% reducon n amben (group) polluon levels, from an unconsraned polluon level of 120 o an amben sandard, s x, of 72. In he homogeneous seng, reachng he amben sandard of 72 a leas cos requres each parcpan o reduce her emssons o 12 uns, from he unconsraned opmum of 20. Seng τ =2500, an emssons level of 12 s a unque NE for all parcpans. For hs same margnal ax, he opmal emssons levels are 4, 12 and 36 for he small, medum, and large farms, respecvely n he Heerogeneous Type 1 case. For Heerogeneous Type 2, he respecve opmal emssons levels are 8, 12, and 24. Noe ha despe varaons n C and a, n boh he heerogeneous cases he group emssons sum o 72 uns. 4. Resuls The oucomes of he expermenal reamens generae hree prmary polcy resuls ha are oulned n deal n hs secon

13 Resul 1: The ax mechansm lowers emssons levels subsanally n boh he homogeneous and heerogeneous sengs. Furher, group emssons levels are sgnfcanly dfferen from he amben sandard n he homogeneous seng n all rounds, whle aggregae emssons n he heerogeneous seng are no sgnfcanly dfferen from he sandard n lae rounds of he expermen. We frs provde graphcal evdence of hs resul, and hen follow wh a formal sascal analyss. As demonsraed n Fgures 3, 4, and 5, farms operang under he polcy rounds of he expermen approxmae he prof maxmzng level of group emssons of 120. Furher, n all cases a subsanal drop n emssons s observed afer mplemenaon of he amben ax polcy, alhough he degree o whch group levels approxmae he amben sandard vares sgnfcanly across rounds and across reamens. Overall, group emssons levels end o be hgher han he amben sandard, wh he heerogeneous sengs appearng o beer approxmae he 40% desred reducon. To formally analyze he resuls for each expermenal reamen we evaluae reamenspecfc emssons a he group-level. For each reamen we have four groups and emssons for each group are observed n each of he 24 rounds. To faclae hypohess ess agans predced values from he avalable daa, we specfy a pooled me-seres cross-seconal model where he esmable coeffcens can smply be nerpreed as mean group emssons. As Par A of he expermen s dencal for all parcpans, we assume ha mean emssons for hese rounds are he same across reamens. For Par B of he expermen, we allow mean group emssons o dffer by group srucure and across wo aggregae round groupngs ha represen early (rounds 6 14) and lae (rounds 15 24) porons of he expermen. Formally, he model s gven by x j 3 2 m, r m, r 1 5,j β Tj εj m 1 r 1 αr (4)

14 where x j s he observed emssons for group j n round ; R1-5 s an ndcaor varable ha akes a value of 1 for round 1 o round 5 decsons; he T m,r are group srucure-specfc ndcaor varables ha equal 1 f he decson corresponds o srucure m and round groupng r, and he m,r and are esmable parameers. We assume ha he model errors ( j ) are correlaed across me (rounds) and follow a common frs-order auoregressve (AR(1)) process arbuable o facors such as learnng. To correc for auocorrelaon, he model parameers are esmaed usng he Pras-Wnsen FGLS esmaon procedure for panel daa. Errors are furher assumed heeroscedasc and conemporaneously correlaed across groups. To accommodae hs covarance srucure, he FGLS parameer esmaes are accompaned by robus panel-correced sandard errors (Beck and Kaz 1995). The model esmaon resuls are presened n Table 3 and ndcae ha n he regulaonfree rounds, he average emssons level of s no sgnfcanly dfferen from 120, lendng suppor o he prevous observaon ha groups ended owards he prof maxmzng level of producon n he absence of any publc ncenves o abae. The average level of group emssons n he homogeneous seng when he ax polcy s mplemened s n he early round groupng and n he lae round groupng, boh of whch are sgnfcanly dfferen from he amben sandard of 72. These resuls are no surprsng as has been observed elsewhere (Spraggon, 2002; Suer e al., 2008) ha group emssons levels end o be percen hgher han he amben sandard when he hreshold for mposng he margnal ax s se equal o he sandard (as was done n hs sudy). In he heerogeneous reamens, group emssons levels are also sgnfcanly dfferen from he amben sandard n he early rounds. Oucomes n he lae round groupng for boh of

15 he heerogeneous reamens, however, are no sgnfcanly dfferen from he amben sandard. Ths s an mporan resul, as appears ha ndvduals operang n a heerogeneous seng are more lkely o approach he amben sandard han homogeneous groups. 3 Ths s n lne wh Spraggon s (2004) fndngs wh heerogeneous groups operang under he ax/subsdy polcy. I s, however, surprsng ha heerogeneous groups appear on average o be able o beer approxmae amben sandards han homogeneous groups of polluers. Anecdoal evdence suggess ha ndvduals n he heerogeneous seng are less lkely o ncrease emssons ou of frusraon wh fellow group members ha are no reducng her emssons o levels necessary o acheve he amben sandard. When everyone n he group s dencal, some parcpans appear o respond more o relave payous han absolue payous and ncrease emssons n an aemp o earn more han her fellow group members. Resul 2: Wh heerogeney, he amben sandard s acheved as a resul of overabaemen on he par of large farms and underabaemen on he par of small farms n he Type 1 seng. In he Type 2 seng such sysemac dvergences do no occur, alhough here s some evdence of underabaemen by small farms. Correspondence wh opmal emssons by farm sze s nvesgaed hrough a model smlar o ha presened above. The dependen varable n hs case, however, s he dfference, y j s rj r, beween he acual farm emssons level ( j ) r and he heorecal opmum ( s r ) for each farm sze n each reamen. The dfference model ha s esmaed s gven by 3 Ths endency may be srenghened n our expermens n ha we do no allow a sochasc componen n he emssons funcon n our effor o be conssen wh he heorecal presenaon of Segerson and Wu (2006). In conras o he body of expermens ha follow a sochasc formulaon of he non-pon source polluon problem, he deermnsc polluon funcon allows parcpans o conclude ha someone n he group s underabang n he homogeneous sengs, lkely creang frusraon and a varey of possble sraegc responses

16 y j 3 3 m 1 s 1 β m, g T m, g j ε j (5) where m once agan represens one of he hree group srucures and g represens one of he hree farm szes. The dfference model s esmaed usng an economerc procedure dencal o ha descrbed above and he resuls are presened n Table 4. 4 The resuls show ha emssons from he large farms are sgnfcanly less han he opmal amoun n he Heerogeneous Type 1 reamen. The large farms are, n essence subsdzng small farms and allowng hem o underabae. Recall ha n hs nsance he opmal abaemen levels of small farms are relavely large, represenng 60% of he regulaon-free emssons levels. In conras he opmal proporon of abaemen for large farms, 28%, s relavely low. No sysemac devaons from opmal abaemen are observed for he medum sze group n he Type 1 seng. In he Heerogeneous Type 2 reamen he small farms agan sgnfcanly underabae, alhough he underabaemen s sgnfcanly less han ha of small farms n he Heerogeneous Type 1 reamen. The large farms do no, however, overabae n he Heerogeneous Type 2 reamen. Ths apparen reversal mgh be deemed conssen wh each sze farm gravang oward he average emssons reducon level of 40%. However, such a concluson s no suppored by he connued endency oward underabaemen exhbed by he small farms. Agan, here s no sysemac devaon from he socal opmum for medum-szed farms, whch s an neresng conras wh he homogeneous reamen. Resul 3: In he heerogeneous case, predaory acons by large farms can resul n bankrupcy by small farms. 4 One of he Heerogeneous Type I groups s lef ou of he esmaon as a bankrupcy occurred n hs group

17 Gven ha each farm n he group pays he dencal ax for polluon levels above he amben sandard, he poenal ax burden necessarly represens a greaer proporon of gross ncome for he small-szed farms. Ths was made parcularly apparen n group 3 of he Heerogeneous Type 1 reamen, whch grossly underabaed n early rounds. In parcular, n rounds 6-12, he large farm parcpan ook no effors o abae relave o he baselne case (.e., emsson levels remaned a 50 uns 5 ). The resul was unavodable bankrupcy by each of he hree small farms n round 9. Wh farms exng he ndusry, he amben sandard was clearly easer o aan for he survvng farms, resulng n hgher profs for hose ha connued o produce n he waershed. Ths resul should rase concerns as suggess sraegc possbles by farms ha can bes weaher axes for a shor perod and opens he door for predaory opporunsm when here are dsparae proporonal fnancal burdens borne by dfferen szed farms under he amben-based ax. 5. Polcy Implcaons Ths research adds o he lmed body of expermenal leraure ha evaluaes amben ax mechansms. In conras wh Spraggon s (2004) expermenal resuls, waersheds composed of homogeneous farms appear o perform worse, relave o he heerogeneous farm case, wh respec o achevng waer qualy sandards. Elsewhere, however, has been demonsraed ha underabaemen n homogeneous sengs can be reduced by lowerng he ax hreshold slghly below he amben sandard (Suer e al., 2008). Hence, from a polcy perspecve hs relave dsadvanage can poenally be mgaed. 5 Anecdoally, pos-expermen dscusson wh hs parcpan suggess ha he zero abaemen was a delberae, and ndeed successful, aemp o conrol he marke

18 One overarchng heme of our resuls s ha ha here appears o be mporan sraegc moves n heerogeneous farm sengs whch are absen from exsng heorecal models. These moves lead o, n some nsances, large devaons beween heorecal expecaons and acual behavor a he parcpan level. We manan ha hese oucomes may be arbued, a leas n par, o a common characersc of many of he proposed coercve amben ax nsrumens: hey mpose equal or approxmaely equal lables regardless of farm characerscs. Frs, n he Heerogeneous Type 1 seng, large farms sysemacally overabaed and hus subsdzed underabaemen by small farms. As noed by Spraggon (2004) such pracces elevae he concern noed by Shorle and Horan (2001) and ohers regardng he ably of amben polluon nsrumen o effecvely conrol he nonpon source polluon problem (p 854). Second, consder he occason when a sngle large farm delberaely underabaed relave o he socal opmum. In hs nsance, he applcaon of equal ax penales across farm szes drove small farms o bankrupcy. Hence, even f abaemen levels approxmae opmal levels on average n a waershed comprsed of heerogeneous farms, our resuls sugges ha he long run dsrbuon of farm szes may be affeced by he mplemenaon of amben ax polces. Should such forced srucural change be deemed undesrable, hen mplemenaon of amben ax measures may need o be accompaned by secondary polces, such as ax crcu breakers ha lm ax burdens for hose farms demonsrang ha hey have ndeed nvesed n sgnfcan polluon abaemen echnologes or pracces. Dynamc models ha allow for possble farm nsolvency due o excess ax burden, and allow a farm s decson o be based on expecaons abou collecve devaons from opmal behavor on he par of he oher farms, may beer descrbe laboraory daa and, by exenson, poenal polcy applcaons. Whle n hs research we concenrae on varaons n abaemen

19 cos funcons across farm szes, hs nsolvency ssue would seem o carry over o a seng wh a group of farms ha are relavely homogeneous n erms of sze and emssons, bu are heerogeneous n erms of her asses

20 References: Alpízar, F., T. Requae, and A. Schram Collecve versus Random Fnng: An Expermenal Sudy on Conrollng Amben Polluon. Envronmenal and Resource Economcs 29: Beck, N., and J.N. Kaz Wha o Do (and No o Do) wh Tmes-Seres-Cross-Secon Daa. Amercan Polcal Scence Revew 89: Cabe, R., and J A. Herrges The Regulaon of Non-Pon Sources of Polluon Under Imperfec and Asymmerc Informaon. Journal of Envronmenal Economcs and Managemen 32: Chesapeake Bay Program. Updaed Overvew of he Bay Program. Avalable: hp:// Cochard, F., M. Wllnger, and A. Xepapadeas Effcency of Nonpon Source Polluon Insrumens: An Expermenal Sudy. Envronmenal and Resource Economcs 30: Hansen, L. G A Damage Based Tax Mechansm for Regulaon of Non-Pon Emssons. Envronmenal and Resource Economcs 12: Horan, R. D., J.S. Shorle, and D.G. Abler Amben Taxes when Polluers have Mulple Choces. Journal of Envronmenal Economcs and Managemen 36: Karp, L Nonpon Source Polluon Taxes and Excessve Tax Burden. Envronmenal and Resource Economcs 32: Knoblauch, W.A., G.J. Connemann, and L.D. Punam, Dary Farm Managemen: Busness Summary New York Sae. Deparmen of Appled Economcs and Managemen. Cornell Unversy. Ihaca, NY. Knoblauch, W.A., G.J. Connemann, and L.D. Punam, Chaper 7. Dary Farm Managemen n New York Economc Handbook 2007, Deparmen of Appled Economcs and Managemen, Cornell Unversy, Ihaca, NY Poe, G.L., N.L. Blls, B.C. Bellows, P. Crosscombe, R. Koelsch, M. Kreher and P.E. Wrgh, 2001.Wll Volunary and Educaonal Programs Mee Envronmenal Objecves: Evdence From a Survey of New York Dary Farms. Revew of Agrculural Economcs 23(2): Poe, G.L., W.D. Schulze, K. Segerson, J.F. Suer and C.A. Vossler Explorng he Performance of Amben-Based Polcy Insrumens when Non-Pon Source Polluers can Cooperae. Amercan Journal of Agrculural Economcs 86:

21 Rbaudo, M Agrculural Resources and Envronmenal Indcaors, Chaper 2.3 Waer Qualy Impacs of Agrculure. Agrculural Handbook AH722. Uned Saes Deparmen of Agrculure. Economc Research Servce. Segerson, K Uncerany and Incenves for Non-Pon Source Polluon. Journal of Envronmenal Economcs and Managemen 15: Segerson, K., and J. Wu Nonpon Source Polluon Conrol: Inroducng Frs Bes Oucomes Through he Use of Threas. Journal of Envronmenal Economcs and Managemen 51: Shorle, J., D. Abler, and M. Rbaudo Agrculure and Waer Qualy: The Issues. In J. Shorle and D. Abler (Eds.) Envronmenal Polces for Agrculural Polluon. Walngford, UK: CAB Inernaonal. Shorle, J., and R. Horan The Economcs of Nonpon Polluon Conrol, Journal of Economc Surveys 15: Spraggon, J Exogenous Sandardng Insrumens as a Soluon o Group Moral Hazards. Journal of Publc Economcs 84: Spraggon, J Tesng Amben Polluon Insrumens wh Heerogeneous Agens. Journal of Envronmenal Economcs and Managemen 48: Suer, J.F., K. Segerson, C.A. Vossler, and G.L. Poe, Volunary-Threa Mechansms o Reduce Amben Waer Polluon, Unpublshed Draf Manuscp. Suer, J. F., C. A. Vossler, G.L. Poe and K. Segerson Expermens on Damage-Based Amben Taxes for Nonpon Source Polluers. Amercan Journal of Agrculural Economcs 90(1): U.S. Envronmenal Proecon Agency, Naonal Waer Qualy Invenory 2000 Repor. Offce of Waer, Washngon, DC. U.S. Envronmenal Proecon Agency, Overvew of Curren Toal Maxmum Daly Load - TMDL - Program and Regulaons. hp:// (accessed 10/19/07) Vossler, C.A., Essays on he Analyss of Economcs Expermens wh Envronmenal Applcaons, Ph.D. Dsseraon, Deparmen of Appled Economcs and Managemen, Cornell Unversy. Vossler, C.A., G.L. Poe, W.D. Schulze, and K. Segerson Communcaon and Incenve Mechansms Based on Group Performance: An Expermenal Sudy of Nonpon Polluon Conrol. Economc Inqury 44:

22 Weersnk. A., J. Lvernos, J.F. Shogren, and J.S. Shorle, Economc Insrumens and Envronmenal Polcy n Agrculure. Canadan Publc Polcy 24: Xepapadeas, A., Envronmenal Polcy Under Imperfec Informaon: Incenves and Moral Hazard. Journal of Envronmenal Economcs and Managemen 20:

23 Table 1. Represenave Characerscs of Small and Large Dary Farms Small Dary Large Dary Regulaon no regulaon heavy regulaon Sall e sall free sall Feedng ndvdual feedng oal mx rao-ea all you wan Forage managemen racors and wagons rucks Harvesng choppers self propelled Sorage uprgh slos bunker sorage Spreadng box spreader anker (lqud), pump sysem Manure daly spreadng sorage Treamen no reamen sysem dgeson and manure separaon Grazng feld grazng no grazng

24 Table 2. Expermenal Desgn Parameers Descrpon Small Dary Medum Dary Large Dary Baselne Income 30,000 75, ,000 Heero Type 1 Heero Type 2 Number of Cows (N) Baselne Emssons per Cow (EPC) Baselne Emssons Abaemen Cos Per Cow (CPC) Funcon (r s farm level emssons) Toal Abaemen Cos Funcon Opmal Emssons (% of Baselne) (52.9(EPC-r/80)) 3 (80.5(EPC-r/200)) 3 (125.8(EPC-r/660)) 3 CPC80 CPC200 CPC660 4 (40%) 12 (60%) 36 (72%) Cos of Opmal Abaemen 5,000 6,667 11,250 Abaemen Cos Per Cow (CPC) Funcon (r s farm level emssons) Toal Abaemen Cos Funcon Opmal Emssons (96.1(EPC-r/N80)) 3 (80.5(EPC-r/200)) 3 (82.5(EPC-r/660)) 3 CPC80 CPC200 CPC660 8 (80%) 12 (60%) 24 (48%) Cos of Opmal Abaemen 1,109 6,667 21,

25 Table 3. Group Emssons Model Group Srucure Round Predced Group Emssons Pooled Homogeneous Heerogeneous Type 1 Heerogeneous Type Acual Group Emssons (1.19) (1.42) (1.42) (1.96) (1.97) (1.58) (1.58) N = 288 Wald Ch Sq = 12,440 Noe: Asersks () and () denoe esmaed parameer ha s sgnfcanly dfferen from he predced oucome a he 5% and 10% levels respecvely. Sandard errors are n parenheses. Table 4. Dfference Model Treamen Farm Sze Dfference from Opmal Emssons Homogeneous M 1.57 (0.228) S 1.95 (0.333) Heerogeneous Type 1 M (0.302) L (1.44) S (0.118) Heerogeneous Type 2 M (0.412) L (1.251) N = 1,254 Wald Ch Sq = Noe: Asersks () and () denoe esmaed parameer ha s sgnfcanly dfferen from he predced level a he 5% and 10% levels respecvely. Sandard errors are n parenheses

26 APPENDIX INTRODUCTION Ths expermen s a sudy of ndvdual and group decson-makng. If you follow hese nsrucons carefully and make nformed decsons you wll earn money. The money you earn wll be pad o you, n cash, a he end of he expermen. A research foundaon has provded he fundng for hs sudy. You wll be n a group conssng of sx players. Each player assumes he role of a dfferen frm. Thnk of your frm and he fve oher frms as beng locaed near a common waer resource. Your frm yelds earnngs hrough s operaons. Your frm s operaons also generae emssons, whch affec he waer qualy of he common waer resource. The combned emssons from each of he sx frms locaed near he waer resource deermne he level of Toal Polluon n each round. Polluon affecs he well-beng of waer resource users. For example, hgh polluon levels affec he healh of fsh, causng losses o fsherman. The expermen s broken up no many decson rounds. There are wo pars o he expermen. Par A of he expermen consss of he frs 5 rounds, whereas Par B ncludes he remanng rounds. You wll be gven addonal nsrucons afer Par A s compleed. In each round you mus make an Emssons Decson. In general, he lower your frm s emssons, he lower he level of earnngs for your frm. You have been provded a shee led Emssons Decson Shee ha lss he level of Frm Earnngs assocaed wh varous levels of emssons generaed by your frm. Frm Earnngs are denomnaed n okens, whch wll be exchanged for cash a he end of he expermen accordng o he exchange rae lsed on he Emssons Decson Shee. In addon o Frm Earnngs, you are also gven 5,000 okens of General Earnngs n each round. In your group here are hree small frms, wo medum frms and one large frm. The sze of your frm s ndcaed on your Emssons Decson Shee. A round of he expermen s complee when all sx players have made her emssons decsons. The compuer wll hen repor he Toal Polluon for ha round. I wll also calculae your Toal Earnngs by summng up Frm Earnngs + General Earnngs. Polluon does no affec your earnngs whasoever n Par A of he expermen. Below we explan how o make decsons usng your compuer

27 USING THE COMPUTER In each round, your ask s o make an Emssons Decson. The Emssons Decson ha you ype n mus be a whole number ha s n he range lsed on your compuer screen. When you ype n an emssons decson and h he ener key, he correspondng Frm Earnngs amoun wll appear on your screen. You can verfy ha he frm earnngs amoun ha appears s dencal o ha provded on he Emssons Decsons Shee. When you are sasfed wh your Emssons Decson, you mus hen clck he <SUBMIT> buon for ha round. Once you have clcked he <SUBMIT> buon, s no longer possble o change your decson. Afer all sx players have clcked he subm buon, he expermen moderaor wll nsruc you o clck he <RECEIVE> buon. Afer clckng he <RECEIVE> buon, he cells ndcang he Toal Polluon and Round Earnngs wll be flled n. The Round Earnngs cell smply sums up your Frm Earnngs plus General Earnngs. Recall ha polluon does no affec your earnngs n Par A of he expermen. As he expermen progresses, he oal number of okens you have earned wll be calculaed n he Toal Tokens box locaed n he lower rgh poron of he spreadshee. The Toal Earnngs ($) box dsplays he amoun of money you have earned, n U.S. dollars, afer he okens have been exchanged

28 INSTRUCTIONS FOR PART B Please clck he Go on o Par B buon locaed underneah he Toal Earnngs ($) cell. In Par B of he expermen you wll connue o make an Emssons Decson. A key dfference, however, s ha Toal Polluon now affecs your earnngs. Recall ha Toal Polluon s he combned emssons from all frms n your group. In parcular, n order o proec he waer resource, he regulaor requres you, and everyone else n your group, o make he followng Tax Paymen on Toal Polluon: If Toal Polluon s less han or equal o 72: Tax Paymen = 0 If Toal Polluon s greaer han 72: Tax Paymen = 2,500 (Toal Polluon 72) In oher words, f Toal Polluon s less han or equal o 72, you pay nohng. If Toal Polluon s greaer han 72, each player pays 2,500 okens for every un of polluon above 72 uns. Snce Toal Polluon s he combned emssons from all sx frms, he amoun of he Tax Paymen s deermned by he emssons decsons of everyone n your group, no jus your own. The Tax Calculaon Shee ha has been provded o you ndcaes he Tax Paymen correspondng o levels of Toal Polluon. Afer everyone makes hs or her managemen decson, Toal Polluon wll be calculaed as before. The Tax Paymen cell wll be calculaed usng he formula above. The Tax Paymen, f any, wll be deduced from your earnngs so ha Round Earnngs = Frm Earnngs Tax Paymen + General Earnngs. Undersandng How he Expermen Works In hs expermen, he compuer makes all relevan calculaons. However, s very mporan for our research ha you undersand how he expermen works. In he able below, frs make an Emssons Decson and hen make a guess a he combned emssons from he oher fve frms. Noe ha here are no rgh or wrong answers for hese wo ems. Nex, fll n he remanng empy felds of he able usng he Emssons Decson Shee and Tax Calculaon Shee as references. Emssons Decson (you choose) Frm Earnngs (from Emssons Decson Shee) General Earnngs 5,000 Combned emssons from he oher 5 frms (you choose) Toal Polluon Tax Paymen (from Tax Calculaon Shee) Round Earnngs

29 Tax Calculaon Shee Toal Polluon Tax Toal Polluon Tax Toal Polluon Tax , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

30 Emssons Decson Shee Frm Sze: Medum Exchange Rae: $1 = 70,000 Tokens Emssons Decson Frm Earnngs 22 74, , , , , , , , , , , , , , , , , , , ,