*2.4. Allocation of Joint Costs and Benefits in the Case of Individual Responses*

In both individual and cooperative responses, we estimate the subarea net benefits as revenues minus variable operational costs and incremental costs. The incremental costs include costs associated with activities that polluters introduce to the agricultural production process in response to the regulatory objectives or constraints on input use imposed by the regulator for each subarea. In the case of a fine imposed on the entire region for exceeding the pollution EC objective, the subarea level of fine is allocated, based on several allocation principles, and the subarea amount of fine, Θ*j*, is added to the incremental costs. In the case of cooperation among the subareas; we estimate first the regional net benefits to the entire region. The value of the regional benefits is obtained by running a regional optimization model, coined 'a social planner' model, which maximizes the entire regional welfare rather than looking at welfare of each subarea individually.

Economic theory [31], suggests that a social planner allocating regional benefits or costs among the agents involved maximizes the joint welfare of the region, subject to physical and institutional constraints relevant to the situation under study. Under a social planner optimization, the region is seen as one unit without political borders. An optimal social planner allocation is considered as first best and serves as reference (benchmark) to which other allocation schemes are compared. Deviations from the social planner outcomes represent inefficiency (welfare loss) of the alternative allocations.

Once a regional social planner allocation solution has been found, the regional gains (either welfare benefits or savings of joint costs—such as regulatory fines) must be distributed among the regional parties. We will consider a couple of schemes for the allocation of the joint benefits or the costs of pollution control, or regulatory fines, among resource management regions, namely, the subareas (and the individual farmers in each subarea). For example, allocation of benefits or fines could be based on annual drainage flows or based on irrigated area. The likelihood of subareas forming stable coalitions aimed to reduce salt loads can be measured by comparing the empirical attributes of the standard allocation schemes with game theoretic allocation schemes whose acceptability and stability can be measured. We introduced several allocation schemes, based on the subarea's contribution of pollution load and consistent with the strategy described previously [32].
