Alternative Control Policies for Water Quality Management: An Experimental Economics Approach

Problems of deteriorating water quality and the prospects of large invest ments for treatment facilities have motivated government decision makers to seek more cost-effective means to manage water quality. The most preferred policy advocated by economists is based on economic incentives. But the response of water quality managers to a particular incentive system cannot be predicted a priori . Before any incentive system is implemented, its effectiveness must be evaluated. Mathematical programming models have been used for this purpose. Experimental economics provides an alternative mechanism for testing the effectiveness of such a system. It can also help identify the necessary parameters of incentive-based systems. The objective of this paper is to describe the results of an experiment for evaluating the effectiveness of managing water quality under two different policies: a command and control policy; and a transferable discharge permit (TDP) policy. A review of previous research on the effectiveness of TDP systems is provided along with arguments supporting the use of experimental economics to investigate these problems. The particular experiments developed for this research along with the experimental procedures are described. Key results and observations from the experiments are presented.