ALTERNATIVE PROPERTY-RIGHTS TO WETLAND EXTERNALITIES

A two-sector model is developed in which wetlands increase the productivity of the fishing industry and enhance the utility of households, or, alternatively, are converted to agriculture. In the context of a perfectly competitive market economy, the optimal quantity of wetlands is fostered by a unit tax on converted wetlands in combination with a unit subsidy on preserved wetlands. The sum of the tax plus the subsidy must equal the marginal benefits of preserved wetlands to the fishing industry and to households. To the extent that property rights to wetland externalities are vested with wetland property owners, the subsidy will be large relative to the tax. Conversely, to the extent that property rights to these externalities are vested with the general public, the tax will be large relative to the subsidy.