Integrating Watershed Hydrology and Economics to Establish a Local Market for Water Quality Improvement: A Field Experiment

• Published in: Ecological economics 2018-04, Vol.146, p.17-25
• Main Authors: Uchida, Emi, Swallow, Stephen K., Gold, Arthur J., Opaluch, James, Kafle, Achyut, Merrill, Nathaniel H., Michaud, Clayton, Gill, Carrie Anne
• Format: Article
• Language: English
• Subjects: animal manure management; Auctions; decision making; ecological value; ecosystem services; field experimentation; Hydrologic ecosystem services; livestock; Market-based approach; markets; nonpoint source pollution; phosphorus; pollution load; prices; risk; supply balance; Water quality; watershed hydrology
• ISSN: 0921-8009; 1873-6106
• DOI: 10.1016/j.ecolecon.2017.09.003

Innovative market mechanisms are being increasingly recognized as effective decision-making institutions to incorporate the value of ecosystem services into the economy. We present a field experiment that integrates an economic auction and a biophysical water flux model to develop a local market process consisting of both the supply and demand sides. On the supply side, we operate an auction with small-scale livestock owners who bid for contracts to implement site-specific manure management practices that reduce phosphorus loadings to a major reservoir. On the demand side, we implement a real money, multi-unit public good auction for these contracts with residents who potentially benefit from reduced water quality risks. The experiments allow us to construct supply and demand curves to find an equilibrium price for water quality improvement. The field experiments provide a proof-of-concept for practical implementation of a local market for environmental improvements, even for the challenging context of nonpoint pollution.