REGULATION OF NITROGEN POLLUTION: TAXES VERSUS QUOTAS

This paper investigates the effects of first-best policies to regulate nitrogen application. Some nitrogen fertilizer is applied ex ante before a random rainfall, but sidedressed nitrogen may be applied ex post. First-best policy is a tax or a quota on ex ante application, because sidedressed nitrogen is not leached. Since a risk-averse farmer uses more nitrogen ex ante than a risk-neutral farmer, a higher tax must be imposed on the former. Action equivalent first-best taxes and quotas are also welfare equivalent. An empirical model for wheat in Israel was used to demonstrate the analytical findings.