Voluntary Cost-Share Programs: Lessons from Economic Theory and Their Application to Rural Water Quality Programs

Inducing farmers to adopt alternative, more environmentally friendly production practices has been attempted in a variety of ways ranging from moral suasion to direct regulation to economic instruments. Among the most common instruments are voluntary cost-share programs that involve taxpayers sharing in the cost of production practices that generate fewer pollutants. These programs increase the attractiveness of alternative practices to farmers because they either compensate the farmer for any loss in profits or they offset the capital costs of adopting the new technology. Voluntary cost-share programs are a common policy tool because of their political viability, but their effectiveness has been limited largely due to the blanket approach used to distribute funds (Weersink et al., 1998). Since such programs continue to be a popular policy tool, as evidenced by the Environmental Quality Incentive Program (EQIP) in the United States and the National Heritage Trust in Australia, regulators need to know how to improve their effectiveness. This paper examines whether voluntary cost-share programs can succeed in achieving environmental objectives efficiently. The paper begins by developing a conceptual model of atypical cost-share program in which the regulator subsidizes the cost incurred for a set of pre-approved abatement practices. The paper then examines the cost-share program — the Rural Water Quality Program (RWQP) implemented in the Grand River Watershed by the Regional Municipality of Waterloo, Ontario.