IMPACTS OF TAXES TO REDUCE AGRICHEMICAL USE WHEN FARM POLICY IS ENDOGENOUS

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Abstract
The economic impacts of policies to reduce water pollution from agriculture have been explored in a number of studies. A standard assumption in this literature is that farm income support policies are given. However, the modern public choice view of agricultural policy suggests that significant environmental initiatives in agriculture would likely be accompanied by changes in farm income policies to protect those with a significant stake in agriculture. We explore the potential effects of such compensating adjustments on the costs and effectiveness of taxes on polluting chemical inputs in US corn production. We find that compensating farm policy adjustments can greatly increase the costs and reduce the effectiveness of the environmental protection measure. The results also indicate the potentially high costs of poor policy co‐ordination.

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