Spatial Heterogeneity and the Choice of Instruments to Control Nonpoint Pollution

Because it is difficult to monitor emissions and to implement differential taxes and standards, uniform taxes and standards on agricultural chemical use are often proposed and used to control nonpoint-source pollution. This article analyzes the relative efficiency of these uniform instruments in the presence of spatial heterogeneity. We show that the relative slopes of the marginal pollution cost and marginal profit of chemical use are only one of the factors that affect the relative efficiency. Other factors include correlation between marginal pollution costs and marginal profits and the slope and variability of marginal profits. In addition, a uniform tax may result in some farmers not using the chemical, and a uniform standard may have no effect on low-input land. We show empirically that the presence of corner solutions can reverse a conventional finding of tax or standard superiority based on the relative-slop rule.