Wastewater as a Collective Action Problem: Effluent Trading for Water Quality in Urban India

The density that defines cities exacerbates collective action problems: my garbage litters your street, my sewage taints your drinking water. Households and firms often do not see the true cost that their waste imposes on others, which leads to excessive discharge. The resultant pollution of common resources, like waterways and reservoirs, imposes high costs on downstream residents. Researchers will investigate whether markets for pollution—specifically, the discharge of industrial effluent in urban India—can provide better incentives for conservation. Such trading markets have never been used to manage water pollution in India. Researchers will partner with an Indian state regulator and a common effluent treatment plant to set up a cap-and-trade system for effluent in a large group of industrial plants. Markets theoretically yield efficient water conservation, provided there are clear property rights and low transaction costs. Researchers will conduct a randomized evaluation of the initial allocation of discharge permits to test this fundamental relationship. This trial will provide policy guidance on the scope for market instruments to address collective action problems in public services with externalities from overuse.