Abstract
The development of voluntary certification schemes in areas as diverse as fish, coffee and forestry offer the promise of environmental improvements without the requirement of governmental regulation and intervention. In many cases, however, the costs to landholders of making the transition are too large for them to do so. At the same time, the large intermediaries appear to have little economic incentive to introduce certification because the market does not adequately value the environmental benefits. Instead, NGOs and other aid and development agencies who would like to see small producers benefit from the change in production practices have typically stepped in to provide financial support for certification. This paper shows how voluntary price discrimination (in the form of donations) by the consumers that most highly value certification can be used to finance a switch to environmentally sustainable practices and thus address a market failure. This analysis shows that an NGO’s optimal intervention depends on the size of its budget, the elasticity of supply of the product, and the elasticity of participation by producers. NGOs with smaller budgets rely more heavily on lump sum transfers to the intermediary and less heavily on volume and participation-dependent subsidies. Volume and participation dependent subsidies are inversely related to the elasticity of supply and the elasticity of participation in a standard Lerner relationship.
Similar content being viewed by others
Notes
The processor could earn higher profits by using a continuous non-linear pricing schedule rather than a two-part pricing schedule (Spence 1977). A non-linear pricing schedule is seldom observed in reality and therefore is not considered in this analysis.
Note that \(\pi (W;\theta )\) is a measure of the area above marginal cost and below the price line in a standard upward sloping supply schedule diagram. For a given value of \(\theta \) a higher price increases this surplus area, and for a given price a higher value of \(\theta \) shifts marginal cost down and therefore also increases this area.
Ignoring the cost to revenue ratio and the \(\theta = \hat{\theta }\) qualifier, the expression for \(E\) can be written as \(-[d N(\theta )/d\theta ]/N(\theta )\) divided by \([dc/d\theta ]/c\) where \(N(\theta ) \equiv 1-G(\theta )\). After canceling terms this approximate expression for \(E\) reduces to \([d N(\theta )/(-dc)][c /N(\theta )]\), which is the elasticity of the number of participating smallholders with respect to cost.
The term \(-(\beta -m)\hat{q}\) is the value of the participation fee which would just eliminate the loss in profits for the marginal smallholder that is caused by \(\beta > m\). Thus, \(\alpha +(\beta -m)\hat{q}\) can be interpreted as the markup in the participation fee.
It is interesting to note that the retail price premium for certified products is typically believed to be small in the wood products case—see Taylor (2005).
The assumption that \(\Psi ^0\) and \(\Psi ^c\) take on fixed values implies that marginal changes in the level of smallholder production, which is likely to change the level of environmental damage, and marginal changes in smallholder income do not affect consumers’ unit valuation of the processed product. This assumption, which greatly simplifies the analysis, is not unrealistic given that consumers are unlikely to be fully informed about the upstream market mechanism. In other words, \(\Psi ^0\) and \(\Psi ^c\) can be viewed as consumers’ perception of some sort of generic quality where quality is some type of index of the environmental and smallholder income outcomes.
This assumption is quite strong because the smallholders who self-select out of the certified market have the highest cost. In reality higher cost is likely to be correlated with lower overall household income, in which case the NGO may wish to place positive weight on this high cost group when maximize aggregate smallholder surplus. See Feldstein (1972) for a formal analysis of optimal pricing when equity issues matter.
The procedure used here is similar to that described by (Tirole (1990), p. 28), who derives the optimal subsidy rule for a budget-constrained public agency who wishes to shift a monopolized market closer to the competitive outcome.
Another way to view this equivalence result is that the NGO wishes to “undo” the pricing distortion that is caused by monopoly pricing in order to convert deadweight loss into consumer surplus. Consequently, the NGO subsidy rule is proportional to the monopolist’s price markup rule.
The calculation for \(cs'(P)\) assumes \(\nu =P\) for the marginal consumer who makes the purchase.
All parameters and variables have an indirect connection because the various elasticity values will typically experience a second order change if one or more of the parameter values are changed.
References
Atkinson AB, Stiglitz JE (1987) Lectures on public economics. McGraw-Hill, Singapore
Auld G, Gulbrandsen LH, McDermott CL (2008) Certification schemes and the impacts on forests and forestry. Annu Rev Environ Res 33:187–211
Bass S, Thornber K, Markopoulos M, Roberts S, Grieg-Gran M (2001) Certification’s impacts on forests, stakeholders and supply chains. International Institute for Environment and Development, Nottingham
Baumol WJ, Bradford DF (1970) Optimal departures from marginal cost pricing. Am Econ Rev 60:265–283
Dawes RM (1980) Social dilemmas. Annu Rev Psychol 31:169–193
Feldstein MS (1972) Equity and efficiency in public sector pricing: the optimal two-part tariff. Q J Econ 86:175–187
Fulton ME, Vercammen J (2009) Optimal two-part pricing in a carbon offset market: a comparison of organizational types. South Econ J 76:513–532
Giannakas K (2011) Consumer demand in vertically differentiated markets. In: Lusk J, Roosen J, Shogren J (eds) Oxford handbook on the economics of food consumption and policy. Oxford University Press, Oxford chap. 9.
Hansmann H (1981) Nonprofit enterprise in the performing arts. Bell J Econ 12:341–361
Laffont JJ, Tirole J (1993) A theory of incentives in procurement and regulation. MIT Press, Cambridge
Leland HE, Meyer RA (1976) Monopoly pricing structures with imperfect discrimination. Bell J Econ 7: 449–462
Madrid S, Chapela F (2003) Annex 3. Forest certification in Mexico: the cases of Durango and Oaxaca, Washington, DC: Forest Trends. Forest certification and communities: looking forward to the next decade
Meyer CA (1995) Opportunism and NGOs: entrepreneurship and Green North-South transfers. World Dev 23:1277–1289
Mussa M, Rosen S (1978) Monopoly and product quality. J Econ Theory 18:1–17
Oi W (1971) A disneyland dilemma: two-part tariffs for a Mickey Mouse monopoly. Q J Econ 85:77–96
Olson M (1965) The logic of collective action: public goods and the theory of groups. Harvard University Press, Cambridge
Rametsteiner E, Simula M (2003) Forest certification—an instrument to promote sustainable forest management? J Environ Manag 67:87–98
Saitone TL, Sexton RJ (2010) Product differentiation and quality in food markets: industrial organization implications. Annu Rev Res Econ 2:341–368
Sherman R, Visscher M (1982) Rate-of-return regulation and two-part tariffs. Q J Econ 97:27–42
Spence M (1977) Nonlinear prices and welfare. J Public Econ 8:1–18
Steinberg R (2006) Economic theories of nonprofit organizations. In: Powell WW, Steinberg R (eds) The nonprofit sector: a research handbook. Yale University Press, New Haven, CT
Taylor PL (2005) In the market but not of it: fair trade coffee and forest stewardship council certification as market-based social change. World Dev 33:129–147
Thornber K, Markopoulos M (2000) Certification: its impacts and prospects for community forests, stakeholders and markets. Working paper, International Institute for Environment and Development (IIED); Oxford Forestry Institute (OFI), London
Tirole J (1990) The theory of industrial organization. MIT Press, Cambridge
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
The purpose of this Appendix is to obtain expressions for the four differentials, \(d(P-\beta )/d\alpha ,\,d(P-\beta )/d\beta ,\,d\hat{\theta }/d\alpha \) and \(d\hat{\theta }/d\beta \). These expressions are obtained by totally differentiating the two equilibrium conditions given by Eqs. (3) and (4). The total differentials of this pair of equations, with the various elasticity expressions from Table 1 substituted in, can be written as
and
Within these two expressions, \(\hat{q} \equiv q(\hat{\theta }),\,\hat{g} \equiv g(\hat{\theta })\) and \(\hat{G} \equiv G(\hat{\theta })\)
The differentials contained in Eqs. (25) and (26) can be solved for using Crammer’s rule:
Rights and permissions
About this article
Cite this article
Fulton, M., Vercammen, J. Optimal NGO Financing of a Resource Management Certification Scheme. Environ Resource Econ 58, 605–626 (2014). https://doi.org/10.1007/s10640-013-9712-5
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10640-013-9712-5