A Smart Market for Impervious Cover

When farmland or undeveloped ground is covered over, runoff can cause environmental damage and flood risk. Policymakers want to compare the economic improvement of new development to the costs produced by the associated environmental impacts. In this paper, we propose a smart market in impervious cover. A smart market is a periodic auction which is cleared by an optimization model, a linear program (LP) in this case. The LP constraint coefficients come from a hydrological model. The LP objective coefficients come from users’ bids. To operate the auction, local government would appoint an auction manager, who would be responsible for maintaining the hydrological model and the LP, for operating the auction, and for maintaining the desired environmental standards. At regular intervals, the auction manager would accept bids over the internet, solve the corresponding LP, and announce the results. By LP duality, the smart market prices impervious cover at the opportunity cost to society, adjusted for location, the sensitivity of environmental features, and the incremental value of the development as indicated by bids. This design uses relevant hydrological information, and accepts community input on the desired environmental standards (avoiding the tragedy of the commons). The auction creates incentives to remove impervious cover, especially near environmentally sensitive areas. The proposed system nearly eliminates transaction costs associated with trading development rights.