Answer to Question #186531 in Economics of Enterprise for Ajith

Question

Consider a model of voluntary incentive mechanism design for protecting endangered species on private land. After a regulator has identified endangered species on private land, she wants private landowners to retire the land from production. The landowners suffer a monetary loss when they retire land for species protection. They would voluntarily participate in the program of species protection if they received monetary compensation from the regulator to offset their loss. The regulator designs a contract to maximize social welfare from species protection subject to the landowner’s participation constraint. Social welfare is the utility of the individual landowner and social benefits from species protection, minus the monetary compensation scaled by the social value of public funds.

Answer 1

If the regulator knows the value of land and offers a contract specifying a monetary compensation for the land’s retirement, then such compensation should be high enough to satisfy the land owners, but not to high counting the social value of public funds.