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

Market-based instruments such as fees or tradable perm its can be used to simultaneously regulate point and non-point 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 non-point source phosphorus discharges in the Minnesota River Basin. Results show that when dischargers of pollutants are strategic, discharge perm its may yield lower deadweight losses than discharge fees