The economics of water quality trading

James S. Shortle, Richard D. Horan

Research output: Contribution to journalArticlepeer-review

50 Scopus citations


Textbook pollution permit trading markets are appealing due to simple market designs and their ability to solve allocation problems without firm-specific inforation. Neither of these features is true for water quality markets, which may explain why emerging programs in this area have with few exceptions not fulfilled the promise of trading. We review water quality trading programs, and examine market design by focusing on three tasks that must be addressed to cost-effectively achieve environmental targets: (i) defining the point and nonpoint commodities to be traded, (ii) defining rules governing exchanges of the commodities, and (iii) setting caps on the commodity supplies so as to achieve an environmental target. Our examination of the third task, the cap and its role in determining trading rules (e.g., trading ratios), is novel. We examine this task from both an ecological and an economic perspective, and obtain new insights about the challenges of designing water quality trading programs.

Original languageEnglish (US)
Pages (from-to)101-133
Number of pages33
JournalInternational Review of Environmental and Resource Economics
Issue number2
StatePublished - Oct 2008

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Management, Monitoring, Policy and Law


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