Prioritizing payment for environmental services: Using nonmarket benefits and costs for optimal selection

a r t i c l e i n f o This article provides a practical, applied analysis of optimal targeting in agricultural land preservation, comparing the performance of four alternative targeting strategies. Nonmarket benefit data and hedonic cost estimates are used for parcels in Sussex County, Delaware. The results show that branch-and-bound optimization (OPT) does not significantly outperform the much simpler benefit–cost ratio targeting (BCRT). However, significant losses of potential net benefits occur when applied methods overlook either benefits or costs. In this application, benefit targeting (BT) and cost targeting (CT) significantly underperform both OPT and BCRT, with BT underperforming all other methods. In his now classic article, Gardner (1977) clarified the economic rationale for public investment in land preservation. Among the justifications is the inability of the free market to allocate land efficiently in the presence of nonmarket amenities or benefits. Today, this argument is recognized to apply broadly to both conservation and preservation of natural and agricultural land uses, which deliver a host of public goods from environmental services. A large body of economic research assesses policies that ensure continued provision of these public goods; these include policies based on regulatory approaches and payments for environmental services (PES). Several rich literatures inform the design of optimal preservation policy. For the most part these literatures have progressed independently , each offering unique insights into policy design. Yet the synergies that emerge when combining these insights often remain un-explored. This paper seeks to coordinate results from these multiple strands of the literature within a single application, demonstrating the policy guidance that is possible through such an integrated approach. One branch of the literature, recently synthesized by Bergstrom and Ready (2009), quantifies the benefits of the environmental services of farmland protection so as to improve farmland preservation programs at the local, state, and national levels (Johnston and Bergstrom, 2011). The principal policy examined for agricultural land is the purchase of agricultural conservation easements (PACE). This literature shows that the public has substantial willingness to pay (WTP) for PACE and recognizes many environmental and other services resulting from these programs, such as water quality protection, habitat provision, and growth control (Duke and Aull-Hyde, 2002). A much larger literature examines optimal conservation, including analyses of fiscal prudence and conservation targeting. Recent papers pose this in terms of the return on investment (ROI) in conservation (Murdoch et al., 2007; Withey et al., 2012). …