By employing the basic theoretical paradigms of institutional economics, this paper analyzes the institutional arrangements of six major government led ecological services provision programs in China and appraises their effectiveness. It discovers that the high transaction costs associated with public goods have been a basic limiting factor to the provision of these services. It further shows that, in the Chinese context, the lack of clear property rights arrangements in the original forest resources from which forest ecological services are derived have been a major hindrance to encouraging market-based provision of these services as public goods. China has been experimenting on an unprecedented massive scale even by global standards with an alternative model, one in which the government takes the lead in securing the provision of these services. Even this approach has not fundamentally overcome the basic limitation of unclear property rights, while generating many other complexities unique to government-dominated subsidy programs. To establish markets for watershed services, China faces the dual challenge of better defining who has what property rights over forest resources as well as establishing a system of property rights covering the ecological services derived from these forests. In the short term, a more realistic approach would be to pursue reforms of property rights of forest resources and their services to improve performance of the ongoing massive government-led payment programs, while experimenting and encouraging innovative market-based transactions in forest watershed services.
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