Welfare Impacts of Alternative Public Policies for Environmental Protection in Agriculture in an Open Economy: A General Equilibrium Framework

This paper uses stylized analytical and numerical general equilibrium models to evaluate the welfare impacts of alternative policies for reducing nitrogen run-off from agricultural production in an open economy while recognizing the presence of distortionary agricultural support subsidies and factor income taxes. The alternative policies examined here are a nitrogen run-off tax, a nitrogen run-off reduction subsidy, a tax on the production of agricultural goods, a "two-part" instrument - a combination of the second and the third policies, and land retirement. The paper uses an analytical model to express the welfare impacts of each policy into several components and compares these components across alternative policies. From the analytical model the paper concludes that all alternative policies, except land retirement, may generate a double dividend because they reduce the provision of distortionary agricultural support subsidies and because a part of the burden of these policies can be passed on to foreign consumers of agricultural products through the world market. The numerical results indicate that all policies, except for land retirement, generate some welfare gains at low levels of nitrogen reduction targets in the first and second best settings when nitrogen and other inputs are substitutable. Gains are higher in the second best setting. As the level of nitrogen reduction increases, all policies become costly and they impose net welfare costs. These costs are higher in the second best setting. The numerical results also indicate that the relative efficiency of alternative policies is sensitive to the level of nitrogen reduction target.