Mechanisms for Allocation of Environmental Control Cost: Empirical Tests of Acceptability and Stability

Abstract

This paper evaluates schemes for allocation of joint environmental control cost among polluters using, as an example, the drainage pollution problem of the San Joaquin Valley of California. The analysis is conducted by comparing cost allocation schemes» performance in a regional context. Different schemes (proportional allocation, Nash–Harsanyi, allocation according to marginal cost, Shapley, the nucleolus and the Separable Cost Remaining Benefit principle) are used to allocate regional joint environmental control costs under two extreme states of nature scenarios, resulting in different pollution flows. The results provide clear empirical evidence that regional arrangements may vary with state of nature. Another important result is that the different allocation schemes have different outcomes in terms of their acceptability to the players, and in terms of their derived stability, as measured by the Shapley–Shubik Power Index, and by the Propensity to Disrupt. Therefore, implementation of environmental policy should also be examined based on its long-term sustainability, and taking into consideration only the cost recovery aspect.