Designing Environmental Markets for Real Water Users

Photo Credit: Texas A&M AgriLife Today (Creative Commons license, http://www.flickr.com/photos/agrilifetoday/5012314598/)

Due in large part to years of heavy irrigation, the portion of the Arkansas River that cuts through southeastern Colorado is one of the most saline rivers in the United States. This has dangerous environmental and agricultural implications, and is complicated by the state’s strictly regulated system of water rights. Increasingly, policymakers seek to resolve natural resources problems such as these by creating water quality trading markets that offer financial incentives for environmental protection. However, these markets have generally underperformed, threatening to leave us with the unsatisfactory options of inaction or costly technological solutions.

Beaudry Kock (DUSP PhD ’10) believes that a market-based approach can work, but that it must be reoriented to reflect the reality of social and economic interactions. Policymakers typically design environmental markets by assuming that actors will behave in an economically rational manner, but in practice that is often not the case. Financial self-interest is rarely the only factor that individuals consider, and they are often unable to determine what the lowest-cost decision will be before acting. Instead, decisions are often based on precedent, recommendations from friends and colleagues, or other factors that fall outside the bounds of rational choice theory. Environmental markets need to address complex motivations, and Beaudry’s dissertation lays out a way to do this.

Through a collaborative fact-finding process involving local stakeholders, Beaudry shows how to reduce salinity levels in the Lower Arkansas Basin by as much 10%. He finds that, by implementing a package of incentives, policymakers can address the diverse preferences of the market. Some actors respond best to traditional financial incentives while others are more likely to be swayed by improved information regarding the financial and environmental consequences of their previous decisions or by social network interventions that take advantage of various community ties. Beaudry shows how environmental markets can succeed by appealing to various triggers—both rational and irrational—of human behavior. Read Beaudry’s dissertation here to learn more about his recommendations and share your thoughts with EPP’s Facebook group.

Posted on January 8, 2013, in environmental policy, water. Bookmark the permalink. Leave a comment.

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