Cost Effective Non-Point Source Pollution Control : Mandatory BMPs v.s. Ambient Subsidies in the Florida Everglades

On a theoretical front, environmental economists have one last pollution problem to contend with and that is the issue of non-point source pollution (NPSP). The issue of NPSP is important on many levels but central to this field is how to efficiently regulate what you cannot observe? A promising tool relies on punishing/rewarding a group of polluters based on observable group pollution; this is known as an ambient mechanism. The Everglades Forever Act (EFA) of 1994 is the only such policy in the U.S. that has implemented anything resembling an ambient mechanism. This paper studies the effectiveness of the (EFA) in reducing phosphorus loads. By identifying what happened under the EFA, I am then able to uncover what would happen under a hypothetical ambient subsidy mechanism. I use the two-step difference GMM estimator (Arellano-Bond) to show that, on average, farms did reduce discharges in response to the incentives under the EFA. Using the estimates of farm responsiveness, I am able uncover the average abatement cost curve which then allows me to calculate the optimal ambient subsidy rates for different levels of ambient pollution targets. I then compare the optimal subsidy rates with the estimated cost of mandatory best-management practices (BMPs) to gauge how cost effective the the BMPs were relative to an ambient subsidy mechanism. I find that the BMPs were at best, as cost effective and at worst, 68% higher than that under the hypothetical ambient subsidies