Transaction costs and sequential bargaining in transferable discharge permit markets

Area of Science:

• Environmental economics
• Market-based environmental policies
• Agricultural non-point source pollution

Background:

• Market-based mechanisms are increasingly used for environmental regulation.
• Projected cost savings from these programs are not always realized.
• Transaction costs and the nature of trade execution impact cost-efficiency.

Purpose of the Study:

• To empirically assess potential cost savings in a sediment abatement market.
• To model the influence of transaction costs on trading outcomes.
• To compare market-based approaches with uniform environmental standards.

Main Methods:

• Development of a market simulation model for farmland sediment abatement.
• Inclusion of transaction costs and discrete, sequential trade execution in the model.
• Analysis of cost savings under random and gain-ranked contract execution.

Main Results:

• No statistically significant change in mean abatement costs was found under various transaction cost levels with random contract execution.
• Gain-ranked contract execution yielded similar results to random execution.
• At the highest transaction cost level, trading reduced total compliance costs compared to a uniform standard.

Conclusions:

• Market mechanisms for environmental abatement may not inherently guarantee cost savings.
• Transaction costs significantly influence the efficiency of environmental trading programs.
• Market-based approaches can be more cost-effective than uniform standards under specific conditions, particularly with high transaction costs.