When two wrongs make a right: Second-best point-nonpoint trading ratios

Most research on point–nonpoint trading focuses on the choice of trading ratio (the rate point source controls trade for nonpoint controls), although the first-best ratio is jointly determined with the optimal number of permits. In practice, program managers often do not have control over the number of permits—only the trading ratio. The trading ratio in this case can only be second-best. We derive the second-best trading ratio and, using a numerical example of trading in the Susquehanna River Basin, we find the values are in line with current ratios, but for different reasons than those that are normally provided. Key words: agricultural pollution, environmental policy, permit trading, water quality. Among the most important EPA initiatives to address agricultural and other nonpoint source contributions to water quality problems is the Total Maximum Daily Load (TMDL) pro-gram. The program requires states to develop and implement watershed-based plans for wa-ter resources that are too polluted to meet designated uses. In many watersheds, achiev-ing designated uses will require that states tackle long unregulated nonpoint sources. As the leading nonpoint source, agriculture will likely be a major target of TMDL initiatives (USDA and USEPA). There is substantial interest in using point– nonpoint trading to achieve nonpoint source reductions (GLTN, Faeth, U.S. EPA). Several fully implemented and pilot point–nonpoint trading programs have emerged over the past decade, the best-known being Tar-Pamlic