Incentive mechanisms and the provision of public goods: Testing alternative frameworks to supply ecosystem restoration

Elizabeth C Smith, University of Rhode Island

Abstract

Increased demands on our coastal ecosystems, due to increased development, over-fishing and population growth are threatening many environmental goods and the amenities associated with these well-functioning ecosystems. Few to no markets exist for ecosystem services, such as those provided by healthy sea grass beds or water quality benefits associated with clam habitats, yet consumer preferences can provide insight to managers and policymakers on how to prioritize limited funding and make trade-offs between coastal restoration priorities. ^ While willingness-to-pay techniques have been used to estimate preferences on many environmental goods, this study uses a new approach to explore real money auctions that generate revenues sufficient to pay for restoration activities, grounded in Lindahl's marginal benefit theory for public goods. Empirical analysis focuses on public valuation for three specific types of ecosystem activities (sea grass restoration, bird habitat and shellfish restoration) in coastal Virginia. ^ Data was collected using a field experiment employing an individualized price auction (IPA) approach and mechanisms to reduce free riding often seen in the experimental economics literature. We evaluate the IPA against a separate, incentive compatible choice experiment that generates data to estimate (Hicksian) willingness-to-pay measures. In addition, lab experiments are constructed to evaluate mechanism properties where benefits are known, decisions are rewarded and we can simulate repeated situations. ^ Results indicate that individual participants do not have different relative values for specific ecosystem restoration activities, but value them equally on a per-unit basis. Individual incentive mechanisms do impact marginal offers on infra-marginal units of restoration. We conclude that the Lindahl inspired individualized auction approach to fund public goods may be an alternative to provide such goods and reach a Pareto efficient outcome.^

Subject Area

Economics, Environmental

Recommended Citation

Elizabeth C Smith, "Incentive mechanisms and the provision of public goods: Testing alternative frameworks to supply ecosystem restoration" (2012). Dissertations and Master's Theses (Campus Access). Paper AAI3493834.
http://digitalcommons.uri.edu/dissertations/AAI3493834

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