Economics of Water Pollution: Permit Trading, Reliability of Pollution Control, and Asymmetric Information

Abstract

This dissertation analyzes three aspects of the economics of water pollution and is organized in three essays. The first essay examines permit trading in water pollution where pollution is different in the persistence of environmental damage. The second essay examines the problem of reliably meeting a water quality standard under environmental uncertainty. The third essay considers the problem of reliably meeting a water quality standard under asymmetric information. The first essay analyzes how to properly design water pollution permit trading with pollutants which are non-uniformly mixed across space and have different persistence in environmental damages. The efficient solution to water pollution abatement involves integrating the difference in the environmental persistence caused by pollutants and setting trading ratios in permit trading accordingly. The second essay analyzes the problem of meeting a water quality standard with a certain degree of reliability given environmental stochasticity, where the distribution of environmental stochasticity is unknown. The essay develops the use of a reliability target that caps the probability of not attaining the target in any period at α, where 1− α is the level of reliability. A single-tailed version of Chebyshev’s inequality is used that measures the maximum probability of being in the right tail of the probability distribution. The essay also examines a margin of safety in Total Maximum Daily Loads (TMDL) and concludes that if a given level of reliability is desirable, the margin of safety should vary with the level of TMDL. The third essay considers the problem of reliably achieving a water quality standard where water pollution is generated by multiple sources and there is asymmetric information. Asymmetric information comes from privately observable actions like fertilizer application and private information on profits. This essay develops a Vickery-Clark-Groves (VCG) subsidy auction and incorporates a fine/reward scheme based on whether the water quality standard is met. This subsidy auction can achieve an efficient solution to the problem of achieving a reliability standard under asymmetric information.