Efficiency-Equity Tradeoffs in Targeting Payments for Ecosystem Services

This article develops an analytic framework to analyze the tradeoff between economic efficiency and distributional equity in targeting payments for ecosystem services (PES). It also proposes an empirical procedure to trace out the efficiency-equity frontier, where the program is Pareto optimal in the sense that it cannot be improved upon to achieve either higher efficiency or distributional equity without compromising the other. We apply the procedure to the Conservation Reserve Program (CRP), the largest PES program in U.S. history, to analyze (a) whether it is possible to improve both the efficiency and the distributional equity of the program, and (b) what the choice made by CRP administrators implies about the political-economic balance. Results reveal that (a) CRP administrators forfeited about 9% of efficiency for an 18%–23% improvement in distributional equity, depending on the equity indicator used, in the eighteenth signup of the CRP; (b) reducing the maximum allowable rental rate for all contracts would improve efficiency at the cost of distributional equity; (c) reducing the maximum county enrollment cap would reduce efficiency without generating much improvement in distributional equity; and (d) the CRP targeting criterion could be redesigned to achieve both higher efficiency and higher distributional equity.