Summary and Keywords
The production of food, fiber, and fuel often results in negative externalities due to impacts on soil, water, air, or habitat. There are two broad ways to incentivize farmers to alter their land use or management practices on that land to benefit the environment: (1) provide payments to farmers who adopt environmentally beneficial actions and (2) introduce direct controls or regulations that require farmers to undertake certain actions, backed up with penalties for noncompliance. Both the provision of payments for environmentally beneficial management practices (BMPs) and a regulatory requirement for use of a BMP alter the incentives faced by farmers, but they do so in different ways, with different implications and consequences for farmers, for the policy, for politics, and consequently for the environment. These two incentive-based mechanisms are recommended where the private incentives conflict with the public interest, and only where the private incentives are not so strong as to outweigh the public benefits. The biggest differences between them probably relate to equity/distributional outcomes and politics rather than efficiency. Governments often seem to prefer to employ beneficiary-pays mechanisms in cases where they seek to alter farmers’ existing practices, and polluter-pays mechanisms when they seek to prevent farmers from changing from their current practices to something worse for the environment. The digital revolution has the potential to help farmers produce more food on less land and with fewer inputs. In addition to reducing input levels and identifying unprofitable management zones to set aside, the technology could also alter the transaction costs of the policy options.
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