Synchronized use of instruments targeting farm income and nutrient runoffs

Abstract

We study the simultaneous and synchronized use of alternative instrument combinations targeting both nutrient runoffs and farm income in a market equilibrium model with endogenous land allocation and crop prices. Both the fertilizer tax and the buffer strip subsidy create beneficial distortions by decreasing the use of fertilizers and shifting land to the production of crops that are less fertilizer-intensive. In contrast, the acreage subsidy creates negative distortions by decreasing the size of buffer strips and shifting land to fertilizer-intensive crops. A decoupled lump-sum subsidy is always neutral. If the aim of agri-environmental policy is to reduce nutrient runoffs while keeping the farmer s profits constant, then our qualitative analysis demonstrates that this can be achieved by many alternative instrument combinations. Our simulations suggest that the best performance is achieved by a policy that compensates for higher fertilizer tax by an increase in lump-sum subsidy.