IDEAS home Printed from
   My bibliography  Save this paper

Optimal Voluntary "Green" Payment Programs To Limit Nitrate Contamination Under Price and Yield Risk


  • Peterson, Jeffrey M.
  • Boisvert, Richard N.


A model of a voluntary "green" payment program is developed to control nitrate leaching and runoff from corn production in New York. The program achieves environmental goals through self-interested choices of farmers, grouped by the productive and environmental characteristics of soils. It considers randomness in prict}~, production, and environmental damage. Farmers are assumed to maximize expected utility subject to chance constraints on severe levels of nitrate contamination. This program compensates farmers for applying environmentally safe levels of nitrogen fertilizer. If information is symmetric, program participation conditions require that the post-policy expected utility is at least as large as pre-policy expected utility. Under asymmetric information payments must be set so that farmers in group i always prefer their own policy over group's policy. If information is symmetric, the two groups have separate optimal policies. If information is asymmetric, separate policies are optimal if, and only if, the group with higher marginal productivity of nitrogen can meet environmental standards more easily; otherwise only a single policy need be specified. An empirical application of the model to three New York farming regions is based on estimated yield and environmental damage relationships from New York soils data. Asymmetric information between producers and the government would impose a cost burden on society. Separate policies are specified for the two groups, and the cost of information is as high as $11 per acre. The group most susceptible to nitrate leaching and runoff receives a windfall benefit, but this group makes up only about 10% of the total corn acreage. Two alternative methods of defining environmental quality standards are examined. First, environmental standards impose relative (percentage) reductions from pre-policy levels of nitrate loss. The second method requires an absolute level of environmental quality. The optimal payments range from $1 to $28 per acre. Under relative standards, payments are highest in the region with the highest level of pre-policy environmental quality. This situation is reversed when absolute standards are imposed. At an aggregate level, the program payments would range from $0.5 million to $3.5 million over the regions combined, representing between 3% and 18% of total government payments received by farmers in the three regions in 1992. The effect of risk aversion on program payments depends on whether nitrogen fertilizer is a risk increasing or risk reducing input. For the New York case studied, nitrogen was a risk reducing input for the group with higher yielding soils, and a risk increasing input for the other. Higher levels of risk aversion increase payments for the first group and decrease payments for the second.

Suggested Citation

  • Peterson, Jeffrey M. & Boisvert, Richard N., 1998. "Optimal Voluntary "Green" Payment Programs To Limit Nitrate Contamination Under Price and Yield Risk," Research Bulletins 122687, Cornell University, Department of Applied Economics and Management.
  • Handle: RePEc:ags:cudarb:122687

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Zhu, Minkang & Taylor, Daniel B. & Sarin, Subhash C. & Kramer, Randall A., 1994. "Chance Constrained Programming Models for Risk-Based Economic and Policy Analysis of Soil Conservation," Agricultural and Resource Economics Review, Cambridge University Press, vol. 23(01), pages 58-65, April.
    2. Keileher, Michael J. & Bills, Nelson L., 1989. "Statistical Summary of the 1987 Farm Management and Energy Survey," Research Bulletins 183304, Cornell University, Department of Applied Economics and Management.
    3. Lars Brink & Bruce McCarl, 1978. "The Tradeoff between Expected Return and Risk Among Cornbelt Farmers," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 60(2), pages 259-263.
    4. Edwards, Steven F., 1988. "Option prices for groundwater protection," Journal of Environmental Economics and Management, Elsevier, vol. 15(4), pages 475-487, December.
    5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    6. Sun, Henglun & Bergstrom, John C. & Dorfman, Jeffrey H., 1992. "Estimating the Benefits of Groundwater Contamination Control," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 24(02), pages 63-71, December.
    7. Wu, JunJie & Babcock, Bruce A., 1995. "Optimal Design Of A Voluntary Green Payment Program Under Asymmetric Information," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 0(Number 2), pages 1-12, December.
    8. Thomas, Arthur C. & Boisvert, Richard N., 1995. "The Bioeconomics Of Regulating Nitrates In Groundwater From Agricultural Production Through Taxes, Quantity Restrictions, And Pollution Permits," Research Bulletins 122999, Cornell University, Department of Applied Economics and Management.
    9. Boisvert, Richard N. & Regmi, Anita & Schmidt, Todd M., 1996. "Policy Implications of Ranking Distributions of Nitrate Runoff and Leaching by Farm, Region, and Soil Productivity," Working Papers 127932, Cornell University, Department of Applied Economics and Management.
    10. Smith, Stuart F. & Knoblauch, Wayne A. & Putnam, Linda D., 1992. "Dairy Farm Management: Business Summary, New York State, 1991," Research Bulletins 123081, Cornell University, Department of Applied Economics and Management.
    11. Erik Lichtenberg & David Zilberman, 1988. "Efficient Regulation of Environmental Health Risks," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 167-178.
    12. Anderson, Jock R. & Feder, Gershon, 2007. "Agricultural Extension," Handbook of Agricultural Economics, Elsevier.
    13. Chambers, Robert G. & Quiggin, John, 1996. "Non-point-source pollution regulation as a multi-task principal-agent problem," Journal of Public Economics, Elsevier, vol. 59(1), pages 95-116, January.
    14. JunJie Wu & Bruce A. Babcock, 1996. "Contract Design for the Purchase of Environmental Goods from Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 935-945.
    15. Poe, Gregory L. & Bishop, Richard C., 1992. "Measuring the Benefits of Groundwater Protection from Agricultural Contamination: Results from a Two-Stage Contingent Valuation Study," Staff Papers 200549, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    16. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Boisvert, Richard N. & Peterson, Jeffrey M., 2001. "Control Of Nonpoint Source Pollution Through Voluntary Incentive-Based Policies: An Application To Nitrate Contamination In New York," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 0(Number 2), pages 1-12, October.
    2. Goodhue, Rachael E. & Gruere, Guillaume P. & Klonsky, Karen, 2001. "Designing Green Programs To Protect Environmental Amenities: A Mechanism Design Approach," 2001 Annual meeting, August 5-8, Chicago, IL 20702, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Huennemeyer, Anne-Juliane & McKitrick, Ross & Rollins, Kimberly S., 1999. "Optimal Compensation For Endangered Species Protection Under Asymmetric Information," 1999 Annual meeting, August 8-11, Nashville, TN 21693, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Boisvert, Richard N., 2002. "Analysis of a Re-Focused Agricultural Policy within a Farm-Household Framework Some Data Requirements," Workshop on the Farm Household-Firm Unit: Its Importance in Agriculture and Implications for Statistics, April 12-13,2002, Wye Campus, Imperial College 15727, International Agricultural Policy Reform and Adjustment Project (IAPRAP).
    5. Huennemeyer, Anne-Juliane & Rollins, Kimberly S., 2001. "Private Resource Management And Public Trust: Optimal Resource Conservation Contracts Under Asymmetric Information," Working Papers 34141, University of Guelph, Department of Food, Agricultural and Resource Economics.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:cudarb:122687. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.