Optimal NGO Financing of a Resource Management Certification Scheme

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.

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

$$\begin{aligned} \left( \frac{1}{\eta }-\epsilon \right) dP+ h\frac{\hat{g}}{1-\hat{G}}(P-\beta )d\hat{\theta }=-\epsilon d\beta +0d\alpha \end{aligned}$$

(25)

and

$$\begin{aligned} dP-\frac{1}{E}\frac{\hat{g}}{1-\hat{G}}(P-\beta )d\hat{\theta }= d\beta +\frac{1}{\hat{q}}d\alpha \end{aligned}$$

(26)

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:

$$\begin{aligned} \frac{dP}{d\beta }&= -\frac{(\epsilon +hE)\eta }{1-\epsilon \eta - hE\eta } \\ \frac{d(P-\beta )}{d\beta }&= -\frac{1}{1-\epsilon \eta - hE\eta } \\ \frac{d\hat{\theta }}{d\beta }&= E\frac{1-\hat{G}}{\hat{g}}\frac{1}{(P-\beta )}\frac{1}{1-\epsilon \eta - hE\eta } \\ \frac{dP}{d\alpha }&= -\frac{hE\eta }{\hat{q}(1-\epsilon \eta - hE\eta )} \\ \frac{d\hat{\theta }}{d\alpha }&= \frac{(1-\epsilon \eta )E}{\hat{q}(1-\epsilon \eta - hE\eta )\frac{\hat{g}}{1-\hat{G}}(P-\beta )} \end{aligned}$$