Doole, G.J., Marsh, D. & Ramilan, T. (2011). Evaluation of agri-environmental policies for water quality improvement accounting for firm heterogeneity. (Department of Economics Working Paper Series, Number 13/11). Hamilton, New Zealand: University of Waikato.
Permanent Research Commons link: http://hdl.handle.net/10289/5792
Policy makers worldwide are interested in the identification of cost-effective policy instruments to reduce diffuse pollution. A large economic model representing heterogeneous farms is used to evaluate a broad set of policies for reducing nitrate regulation within a large catchment dominated by dairy production. A policy instrument that allows the level of abatement to vary among producers according to differences in abatement cost is most cost-effective. The primary goal of 26 kg N ha⁻¹ can be achieved at a cost of $15 ha⁻¹ under this cap and trade policy, while a uniform cap on emissions for all farmers would be more than three times as expensive ($49 ha⁻¹). In contrast, requiring uniform reductions in stocking rate, banning the application of nitrogen fertiliser, and land retirement perform poorly. These instruments are at least three times more costly than a cap and trade policy over all simulated reductions. Moreover, the differentiated policy does not greatly alter the distribution of farm profit, relative to what exists without regulation. The use of a large, complex economic model incorporating disaggregated farms provides unique insight into the economic benefits accruing to a differentiated policy.
Waikato Management School
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