Since the early 1980s, economists have been exploring policy instruments for agricultural and other non-point pollution problems. One result has been a body of theoretical research on non-point policy instruments and there are continued developments in this area. This research has identified a catalogue of instruments with theoretically appealing economic properties, but no
‘magic bullet’. The sorts of instruments that can in theory bring about a first- best solution to non-point problems are generally too complex, information intensive or costly to implement in practice. There is growing interest in theoretical and empirical research on instruments that make sense in real world conditions.
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Empirical research on agricultural non-point pollution control has produced a number of important lessons that can help to guide choices. This literature generally supports the presumption that economic instruments can, in most instances, achieve reductions in pollution from agriculture at a lower cost than regulatory approaches. It also demonstrates that choices about targeting polluters, choices among compliance measures, and the details of the incentives, or regulations, will generally have a significant impact on the economic performance of environmental instruments for agriculture. Other lessons include the importance of watershed-based approaches that coordi- nate point and non-point controls in watersheds in which both are significant sources, and the importance of coordinating agricultural environmental policies with other agricultural policies.
While much has been learned, significant research issues remain. In partic- ular, more empirical research is needed using integrated modelling approaches at watershed scales that capture multiple sources (e.g. agricultural, urban), multi- ple stressors (e.g. nutrients, toxic chemicals, suspended solids, pathogens) and multiple environmental endpoints (see Chapter 4). Further, it is important to capture such features as the variability of non-point pollution events. It is also important to incorporate transactions costs. Most analyses of second-best instru- ments acknowledge transactions costs to be important, yet few studies actually model these costs explicitly. Those that do model transactions costs do not do so in a consistent fashion, as these costs are assumed to depend on one set of factors in one study and other factors in other studies. This is not too surprising, given that the empirical literature on estimating transactions costs is extremely limited and it is not yet clear on what these costs will depend. Additional research is needed to assess the normative implications of transactions costs (Krutilla, 1999) as well as to quantify them (e.g. Carpentier et al., 1998; McCann and Easter, 1999).
Endnotes
1. This chapter borrows and builds on our previous joint work and work with others. In particular, see Shortle and Abler (1997), Shortle et al. (1998), Weersinket al.(1998), Ribaudo et al.(1999) and Shortle and Griffin (2001)).
2. Nature can be a large source of some pollutants that are also contributed by anthropogenic agricultural sources. Uncertainty about agricultural contributions to acidification, nutrient enrichment and other problems is due in part to limited information about the contributions from natural sources (Chesters and Schierow, 1985).
3. See Abler and Shortle (1991a), Phipps (1991), Braden and Segerson (1993), Dosi and Morretto (1993), Shogren (1993), Malik et al. (1994) and Tomasi et al.
(1994) for useful discussions of information issues in non-point pollution control and their policy implications.
4. One approach to dealing with non-point pollution in some instances is to convert diffuse non-point pollution into point source pollution. This is clearly limited to
62 R.D. Horan and J.S. Shortle
cases where pollutants can be collected for discharge at a central point at reasonable cost.
5. Indeed, many of the emissions taxes that are implemented in practice for point sources are in fact taxes on emissions proxies (OECD, 1994a).
6. Ours is a slightly more complex model than the one adopted by Griffin and Bromley, for consistency in our discussion of more recent models below.
7. More accurately, an efficient solution would also take entry and exit into consideration through the choice ofn. Griffin and Bromley and Shortle and Dunn did not consider this important issue. We delay our discussion of entry/exit issues until later.
8. The environmental objective in Griffin and Bromley’s model was to restrict a simple aggregation of non-point emissions, i.e. using our present notation, W=∑ri+ ∑ei.
9. We have made one simplification relative to Shortle and Dunn’s model in that we do not model asymmetric information between farmers and the regulatory agency about farmers’ profit functions. We return to this issue in a later section.
10. A special case of cost-effective outcomes is that of ex anteefficiency, which occurs when environmental performance is measured by expected damages (i.e. W = D) and the performance target is the level of expected damages that arises in the efficient solution (i.e. T = D*).
11. The relation for expected after-tax profits is identical to the expected after-tax profits for a producer who faces a runoff tax. Accordingly, risk-neutral producers will respond the same to instruments based on runoff as to those based on estimated runoff because, in each case, decisions are made ex ante(e.g. before weather and its impacts are known), based on the expectation of runoff. This discussion therefore also applies to runoff-based instruments, which could be utilized in the future if technologies are developed to monitor runoff cost- effectively.
12. Let f = f(q) (f, f> 0), where q = q(h, ν), h is deterministic and νis a stochastic variable. Then cov{f(q),q/h} is of the same sign as cov{q,q/h} = 0.5(var{q}/h), where this equality follows from: var{q}/h = (E{q2}E{q}2)/h =2(E{qq/h} E{q}E{q/h}) = 2cov{q,q/h}. If f< 0, then cov{f(q),q/h} will have the opposite sign relative to var{q}/h. This result is used throughout the paper, although with different definitions for f, qand h.
13. The site with the smallest expected incremental net private social benefit relative to expected incremental external costs is defined as the marginal site. Other sites that optimally remain in production are defined as infra-marginal, and sites on which production optimally does not occur are defined as extra-marginal.
14. Alternatively, κi could be a subsidy applied to extra-marginal farms that do not enter into production. Because the subsidy is larger than their after-tax profits, extra-marginal farms will find it more profitable not to produce. This type of subsidy would be similar to US Conservation Reserve Program subsidies paid to farmers to take land out of production.
15. At the farm level, a tax on the use of one input (e.g. a chemical) may increase the demand for alternative, non-targeted inputs (e.g. other chemicals) that could also be harmful to the environment. At the market level, a tax could impact input and output prices and alter the demand for non-targeted inputs in ways that could be environmentally damaging. It is optimal to consider such impacts when choosing among bases and setting instrument levels so that any adverse impacts are not
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too great. For example, a first-best tax would be negative for inputs that reduce emissions. However, the optimal second-best tax for a pollution-decreasing input will be positive if an increase in the use of the input is associated with increased demand for the use of pollution-increasing inputs, resulting in adverse environmental consequences. For further discussion of substitution effects, see for example Hrubovcak et al.(1989), Bouzaher et al.(1990), Eiswerth (1993), Braden and Segerson (1993), Schnitkey and Miranda (1993), Shogren (1993), Claassen and Horan (2001).
16. The value of information in this context is the expected increase in the expected net benefits that would result from improved policy design.
17. A related literature investigates the design and performance of group-based instruments or contracts (under conditions of asymmetric information) in which economic penalties or rewards are based on the performance of a group of polluters. For example, see Xepapadeas (1991, 1994), Herriges et al. (1994), Govindasamy et al. (1994) and Byström and Bromley (1998).
18. Implementation of state-dependent ambient taxes is not likely to be significantly more demanding than that of state-independent tax schemes. To aid producers in their decisions, each firm could be provided with a schedule of tax rates (for the linear case) or tax bills (for the non-linear case) corresponding to different realizations of the random variables. This is not greatly different from that of graduated income taxes. Income taxpayers know the rules that will be used to determine their taxes (or at least they are legally presumed to know them), but the actual base and rate are uncertain.
19. It is possible to develop a second-best uniform, linear ambient tax that is state- independent. The optimal tax rate would equal expected marginal damages, plus the average covariance between marginal damages and marginal ambient levels from input use, normalized by average expected marginal ambient pollution levels. However, it is not immediately apparent that transactions costs would differ from the efficient, state-dependent taxes. This is because the state- dependent taxes share the same tax base and utilize the same information for (optimal) rate design as other ambient taxes. How the taxes would perform in a second-best world is an interesting question, but inherently empirical.
20. Shavell (1987) discussed circumstances for which publicly and privately initiated approaches are most appropriate.
21. The liability rule may also be influenced by the relationship between polluters and the victims, defined as either unilateral care or bilateral care (Segerson, 1995).
Unilateral care is a situation in which only the polluter influences damages; in other words, the victim has no way of protecting himself. Alternatively, it is sometimes possible for the victim to protect himself. For example, the victim may be able to purchase a filtration system to protect against contaminated groundwater. This situation is known as bilateral care. Under some rules, liability is not assessed to polluters if the victim failed to take reasonable preventative actions (Segerson, 1995).
22. We use the term loadings as opposed to runoff because this term is commonly used in reference to point–non-point trading programmes. For our purposes, loadings can essentially be thought of as runoff. In practice, however, the two concepts are different as loadings are often used to define how much of a pollutant enters or loads into river reaches or the like, while runoff often refers to edge-of-field losses.
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23. Although responsibility is transferred, liability often is not. In most programmes such as the Tar-Pamlico programme or the programme proposed for Michigan, point sources are ultimately held liable for whether or not the conditions of the permit are satisfied. The point source is liable for any remaining reductions if a non-point source does not take appropriate abatement actions, although the point source may then have the right to sue the non-point source for compensation. Even so, failure to transfer liability to non-point sources when a trade occurs may represent an important barrier to trade.
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Chapter 2 focused on enforceable instruments for inducing farmers to adjust their production and pollution control practices, thereby impacting water quality directly. While enforceable instruments have found some use as a means for reducing water pollution from agriculture, governments have relied largely on voluntary compliance approaches that combine public persuasion with technical assistance to encourage and facilitate adoption of environmen- tally friendly technologies (OECD, 1993a, 1998). This is due in part to the difficulties involved with designing and administering environmental policies for agriculture, difficulties that are described elsewhere in this book. It is also due to the political clout of agricultural producers in most developed coun- tries. This political clout manifests itself in agricultural price and income support programmes that the OECD (2000) estimates cost US$361 billion per year in the Organisation for Economic Cooperation and Development (OECD) member countries, or 1.4% of OECD gross domestic product (GDP). Cutbacks in these policies could lead to less intensive production practices and could help to cut agricultural pollution (Abler and Shortle, 1992; OECD, 1998), but governments worldwide have been reluctant to undertake agricultural policy reform.
This chapter examines four types of voluntary policy instrument that have indirect impacts on water quality.2These are education, research and development (R&D), green payments and conservation compliance. The impacts of these instruments are indirect in that the instruments neither
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Pollution Control (eds J.S. Shortle and D.G. Abler) 67