The Control of Nonpoint Pollution when Damages are Heterogeneous

Abstract

The expansion of intensive agriculture in Spain during recent decades has created substantial ambient pollution loads of nutrients and pesticides in streams and river courses. This pollution degrades water quality and damages aquatic ecosystems. Because the pollution emissions from agriculture are nonpoint, it is almost impossible (or very costly) to identify the responsible agent, the location of sources, and the amount of emissions. This paper analyzes the problem of saline percolation from farms into water bodies using an approach that takes into account the heterogeneity of biophysical processes and farm soils. A common assumption in the nonpoint pollution literature is that the function of marginal damages from pollution is unique across farms and soils. This implies a unique optimal tax rate (or a unique optimal pollution threshold) for all agents. The heterogeneity between farms implies that the pollution damage functions depend on biophysical characteristics, a very likely situation in nonpoint pollution where transport and fate processes are involved. Therefore, the implementation of a unique tax rate (or pollution threshold) for all agents generates significant welfare losses. This study highlights the importance of taking into consideration the heterogeneity among farms in order to design better pollution policies. Results show that no regulation could be a preferred option over regulation with a unique pollution tax (or threshold) when agents are heterogeneous.