5. Environmental Policy Instruments for Agriculture

Agriculture poses a unique set of challenges for water pollution control policy that emerge from the large spatial scope of agricultural production, the small-scale spatial heterogeneity and complexity of agricultural operations, the complex and diffuse pathways by which pollutants move from agricultural land to water resources, and the importance of weather to pollution events. This chapter explores the implications of these characteristics for the choice of water quality goals and policy instruments for agriculture. The chapter presents a framework for characterizing policy instruments based on property rights, policy targets, and regulatory mechanisms; discusses essential features of policies that are effective and efficient; and presents and illustrates concepts and methods for policy optimization using simple numerical examples and empirical case studies. The chapter evaluates contemporary agricultural nonpoint pollution controls given the criteria and the principles for efficient policy. These policies are dominated by voluntary compliance approaches that rely on information programs to encourage producers to adopt pollution control practices and participate in programs that provide subsidies in various forms to facilitate adoption. The effectiveness and efficiency of the voluntary compliance approaches are generally limited by a variety of factors. These include the reliance on farmer self-selection into pollution control programs, a reliance on public spending to purchase pollution controls, suboptimal targeting of locations for public expenditures on pollution control, muddled policy objectives, and unproductive economic spillovers. Policy reforms that can improve the voluntary approach are suggested but the fundamental limitations of the approach suggest a need for innovative alternatives. The chapter presents examples that are in the Pigouvian tradition of internalizing externalities through policies requiring mandatory compliance. The chapter provides overall guidelines for better policies but concludes that no single option stands out for all circumstances. Identifying the best choice for a particular problem requires place-based evaluation of options.