THE BIOECONOMICS OF REGULATING NITRATES IN GROUNDWATER FROM AGRICULTURAL PRODUCTION THROUGH TAXES, QUANTITY RESTRICTIONS, AND POLLUTION PERMITS

Agricultural production in the United States, through its intensive use of nitrogen fertilizer, has contributed to nitrate accumulation in groundwater. Concern over this contamination has led to increased public interest in schemes designed to reduce nitrate leachate from agricultural lands. This research compares the costs of alternative regulatory policies in an area of the Com Belt with those for an area of the Northeast. The bioeconomic models of agricultural production and nitrate leaching are used to compare alternative policy instruments. They include soil-specific leaching and productivity characteristics, variables for management response, the dynamic nature of nitrogen movement through the soil, and the stochastic influence of precipitation on both net farm revenue and nitrate leaching. The models include state variables for nitrogen levels in the crop root zone and control variables for nitrogen fertilizer application and crop rotations. Nitrate leaching is restricted using a chance constraint, thus in some sense minimizing the probability of worst-case leaching scenarios. Six alternative regulatory policies are compared empirically in two specific regions: Boone County in Iowa and Genesee and Wyoming Counties in New York. The policies, which are designed to reduce expected annual leachate by 10% and 25% in each region, include a tax on nitrogen fertilizer, quantity restrictions on both fertilizer and leachate, and three forms of leachate permits. The three permit schemes are permits sold by a regulatory agency at a fixed price, permits auctioned by a regulatory agency, and tradable permits initially allocated at no cost to farmers with the initial distribution based on historic leachate levels. The empirical analysis shows that costs of achieving a regional reduction in leachate are greater in Iowa than in New York. Within a region, the net cost of reducing regional leachate (the net cost being the cost to farmers less any public revenues generated) is the least under the three permit schemes, although the costs of other policies are generally not substantially greater. The ranking of the net costs of these other policies differs by region and by the percent reduction in leachate. While net costs are the least under all three permit schemes, two of the three schemes result in substantial transfers of money from the farming community to the public treasury. In addition, a case is made for using a tradable permit scheme in targeted areas in and around major groundwater sources that are highly susceptible to contamination