Richard D. Horan

The Economics of Nonpoint Pollution Control

A timely literature on the design of economic incentives for nonpoint pollution control has been emerging. We describe the nonpoint pollution control problem, some of the peculiar challenges it poses for policy design, and the policy-related contributions of the theoretical and empirical literature on the economics of nonpoint pollution. Copyright 2001 by Blackwell Publishers Ltd

Biological Pollution Prevention Strategies under Ignorance:The Case of Invasive Species

Invasive alien species (IAS)—species that establish and spread in ecosystems to that they are not native—are argued to be the secondmost important cause of biodiversity loss worldwide (Holmes). Without natural predators, parasites, and/or pathogens to help control population growth, IAS frequently outcompete or prey on native species. They cause or spread diseases to cultivated plants, livestock and human populations. They often encroach on, damage or degrade assets (e.g., power plants, boats, piers, and reservoirs). The associated economic impacts can be significant (Perrings, Williamson, and Dalmazzone). For example, the zebra mussel alone is predicted to create

Adaptive human behavior in epidemiological models

5 billion in damages over the next decade in the Great Lakes (Michigan Department of Environmental Quality). Human activities—particularly those associated with trade and travel—are the most common cause of IAS invasions. IAS invasions are now more frequent than ever before, largely due to the expansion of world trade and travel over the past century (Heywood, Parker et al.). For instance, at least 145 species have invaded the Great Lakes since the 1830s, with one-third

Research Issues in Nonpoint Pollution Control

The science and management of infectious disease are entering a new stage. Increasingly public policy to manage epidemics focuses on motivating people, through social distancing policies, to alter their behavior to reduce contacts and reduce public disease risk. Person-to-person contacts drive human disease dynamics. People value such contacts and are willing to accept some disease risk to gain contact-related benefits. The cost–benefit trade-offs that shape contact behavior, and hence the course of epidemics, are often only implicitly incorporated in epidemiological models. This approach creates difficulty in parsing out the effects of adaptive behavior. We use an epidemiological–economic model of disease dynamics to explicitly model the trade-offs that drive person-to-person contact decisions. Results indicate that including adaptive human behavior significantly changes the predicted course of epidemics and that this inclusion has implications for parameter estimation and interpretation and for the development of social distancing policies. Acknowledging adaptive behavior requires a shift in thinking about epidemiological processes and parameters.

Managing ecological thresholds in coupled environmental–human systems

Research on nonpoint pollution control instruments has focused primarily on incentives applied either to production inputs that affect nonpoint pollution, or to ambient pollution concentrations. Both approaches may in theory yield an efficient solution. However, input-based incentives will generally have to be second-best to make implementation practical. Design issues include which inputs to monitor and the rates to apply to them. The limited research indicates that second-best, input-based incentives can be effective in adjusting input use in environmentally desirable ways. Alternatively, ambient-based incentives have theoretical appeal because efficient policy design appears to be less complex than for input-based incentives. These incentives have no track record nor close analogues that demonstrate potential effectiveness, however. Research on how households and firms might react in response to ambient-based incentives is needed before these instruments can be seriously considered.

The economics of managing infectious wildlife disease

Many ecosystems appear subject to regime shifts—abrupt changes from one state to another after crossing a threshold or tipping point. Thresholds and their associated stability landscapes are determined within a coupled socioeconomic–ecological system (SES) where human choices, including those of managers, are feedback responses. Prior work has made one of two assumptions about managers: that they face no institutional constraints, in which case the SES may be managed to be fairly robust to shocks and tipping points are of little importance, or that managers are rigidly constrained with no flexibility to adapt, in which case the inferred thresholds may poorly reflect actual managerial flexibility. We model a multidimensional SES to investigate how alternative institutions affect SES stability landscapes and alter tipping points. With institutionally dependent human feedbacks, the stability landscape depends on institutional arrangements. Strong institutions that account for feedback responses create the possibility for desirable states of the world and can cause undesirable states to cease to exist. Intermediate institutions interact with ecological relationships to determine the existence and nature of tipping points. Finally, weak institutions can eliminate tipping points so that only undesirable states of the world remain.

When Two Wrongs Make a Right: Second-Best Point-Nonpoint Trading Ratios

We use a two-state linear control model to examine the socially optimal management of disease in a valuable wildlife population when diseased animals cannot be harvested selectively. The two control variables are nonselective harvests and supplemental feeding of wildlife, where feeding increases both in situ productivity and disease prevalence. We derive a double singular solution which depends on the initial state and does not require bang-bang controls. The case of bovine tuberculosis among Michigan white-tailed deer is analyzed. In the base model, the disease is optimally maintained at low levels, with intermittent investments (via feeding) in deer productivity. Copyright 2005, Oxford University Press.

Differences in Social and Public Risk Perceptions and Conflicting Impacts on Point/Nonpoint Trading Ratios

Most research on point-nonpoint trading focuses on the choice of trading ratio (the rate point source controls trade for nonpoint controls), although the first-best ratio is jointly determined with the optimal number of permits. In practice, program managers often do not have control over the number of permits—only the trading ratio. The trading ratio in this case can only be second-best. We derive the second-best trading ratio and, using a numerical example of trading in the Susquehanna River Basin, we find the values are in line with current ratios, but for different reasons than those that are normally provided. Copyright 2005, Oxford University Press.

Livestock Disease Indemnity Design When Moral Hazard Is Followed by Adverse Selection

If stochastic nonpoint pollution loads create socially costly risk, then an economically optimal point/nonpoint trading ratio—the rate point source controls trade for nonpoint controls—is adjusted downward (a risk reward for nonpoint controls), encouraging more nonpoint controls. However, in actual trading programs, ratios are adjusted upward in response to nonpoint uncertainties (a risk premium for nonpoint controls). This contradiction is explained using a public choice model in which regulators focus on encouraging abatement instead of reducing damages. The result is a divergence of public and social risk perceptions, and a trading market that encourages economically suboptimal nonpoint controls. Copyright 2001, Oxford University Press.

The Economics of Water Quality Trading

Averting or limiting the outbreak of infectious disease in domestic livestock herds is an economic and potential human health issue that involves the government and individual livestock producers. Producers have private information about preventive biosecurity measures they adopt on their farms prior to outbreak (ex ante moral hazard), and following outbreak they possess private information about whether or not their herd is infected (ex post adverse selection). We investigate how indemnity payments can be designed to provide incentives to producers to invest in biosecurity and report infection to the government in the presence of asymmetric information. We compare the relative magnitude of the first- and second-best levels of biosecurity investment and indemnity payments to demonstrate the tradeoff between risk sharing and efficiency, and we discuss the implications for status quo U.S. policy. Copyright 2008, Oxford University Press.