International conservation investments are often made in the form of subsidies to purportedly eco-friendly enterprises rather than as payments conditional on habitat protection. Previous research demonstrated that direct payments for habitat protection are more cost effective than indirect subsidies for the acquisition of complementary inputs used in eco-friendly enterprises. In contrast to this earlier research, we assume in this paper that an eco-entrepreneur may have market power. Market power is shown to compound the advantage of direct payments. Through a simple numerical example, we show that subsidies intended to achieve habitat conservation by encouraging the acquisition of complementary inputs can be spectacularly inefficient. In some cases it would be cheaper simply to buy the land outright. In other plausible cases, the indirect subsidy approach would simply be unable to achieve habitat conservation objectives no matter how much funding were available.
Publisher: Cambridge University Press, Cambridge, UK
Publication Year: 2005
Source: Environment and Development Economics 10(05): 651-663