The Effects of Domestic Agricultural Policy Reform on Environmental Quality
James A. Tobey and Kenneth A. Remert
Ah,tlact A qeneHII ell '" iI 1m II 11/ ,nadel" deve/oped
10 "'l(llllhe ellVIIOIIlI/elltol I1l1plICOtlOlI,' 0/ 0'1"
w/l/llalpoilc,", Model ,e,ult, ,hou, Ihal dec/me, III
Ihe oCleaqe ?edUG/101I plOqHlIII (ARP) wOllld ,educe
aq'/lIIl/llIal (erlilloe, ",e, b,lI Ihe letllIll 0/ ARP land
fo j)lOdllCtlOll would lead tv an ouetall Uluea<;,e III ,>ed­
))lIelllalwn allli o/!>"e ellUl/'ollllwlllal damage III GOIl­
'H"', 1/ land and Ie, IlI,zc" 'ne IlIghly ,ub,llIlIl(lble,
deGf/lle) Ul def~l.-IeIlGlj put/ment':, aud atlte," conmwdlilj
}Jl/("e "upp011 p1"og1a11l'> lVould lec/ute alrslie eul..tl1Oll­
/IIelllal lIall"'ge, blf ,eduGlllq /e,l1llze, I"e Aqll­
wllulld poilGIf le/01l11 IVollld be co,,,,,lelll IVtlh
wII,e,vallOll pollCl1 bewu,e It IVould ellwillage a
,eductlOlI /II Ilze ,,,e 01 le>lII,Zer-lIllell,we p/OdUctlO/I
p,aGIIGe,
Kel/words
PollGlI relm
III,
l>ade l,berallzallOU
qell­
cUlf eqllllllnu(1l1, COIl.,e}/~((t/o11 1'eSelVe p'(HI/am
CliVi I 01/ melltal qua/Ii 1/
The Model
The model IS fO! mula ted as a genel'dl eqUllIbl1um sys­
tem to evaluate the ultImate tradeoffs between
envIronmental quahty, productIOn, and ll1come In a
geneIaI eqUlhblIum system, agI IcultUl al plOductlOn IS
affected by cross-sectoral flows of [acto!s of' productIOn
and ll1tel me(hate Inputs and by the ll1come effects of
polIcy changes on the demand and supply of othel
goods Thl" model, although a general eqmlIbllum sys­
tem, IS only modestly more complIcated In ItS solutIOn
than a pal tlal eqUllIbllum system Thel e al e thl ee
plOductlOn sectors III the model agllcultUl e, manufac­
tUllng, and nontladed goods EnVIronmental degIada­
tIOn IS modeled as a JOll1t plOduct 111 the output of
agncultm e However, SInce there IS assumed to be no
market for thIS output, the market eqUllIbllum IS
found by droppIng the equatIOn for envIronmental
damages
Two maJO! agl'lCultUlallssues have tl1ggeled consIder­
able pubhc pohcy (hscusslOn at both the natIOnal and
mtel natIOnal level agllcultural pohcy 1 eform and the
envIronmental sIde effects of agncultwal productIOn
The deSIre to ,educe mal ket (hStOI tlOns, hIgh farm
program costs, and expensIve surplus commo(hty
stocks has fueled polIcy 1 efO! m debate
The follO\"Ing ploducllOn functIOns descllbe the StlUC­
ture of the economy
The second l~sue! concern 0\ el dgt Iculim e'f' llnpdct on
the enVIl onment, has gI own flom agI1cultm e's some­
tIme'; hal mful sIde effects The enVll onmental lobb~
bet-dme a "lglllfildnt playel fOl the fil st tIme III the
deS/gIl of the Food Secullty All (FSA) of 1<)85, \\ hleh
mlloduced slgl1lficant new pI ogl ams to protect ndtlll al
1e~om ces EnVIronmental conslrlel atlOns also entered
ll1to the lfJ90 Food, Agllcultm e, Consel vatIOn, and
Tlade Act
X,
Thl':;; dl ttcle advances consldel dtlOl1 of these t\\ 0 Issues
by bhowll1g how a sImple speCIfic-factO! model can be
emplllLally computed to 1m estlgate the lelatlOnshlps
between agllcultuldl policIes, I esource u&e, dlHI
em II onmental qualIty We stud v polIcy reform 111 a
gencldi cql1lhbllum fldmewol k fOCUSIng on resource
use ,md envllonmental llnplIcatlOns A ul1lque [eatul e
of OUI analYSIS IS the e,plIclt specIfIcatIOn of an
enVll onmental damage functIOn, dell\ ed from the
\\'01 k by RI baudo (2J) I
X,
1,(T, S, Xli)
(emlIonmental damages)
(nonlI aded goods)
XJ denotes the output of sectIOn J L J
denote~
the Idbol
mput mto ploductIon 111 sectOJ J X 11 1epl e.:::ents mtel­
medIate chemIcal fel tlllzel b flom the manufactllllIlg
sector to the agllcultural sectol ' T and S ,11 e
dgI~cultul'al-speclfi( lactors that I epl e,ent nonelO(hble
land (NEL) and hIghly elQ(hble land (HEL), lespec­
tlvely (8) We assume that the t\\ 0 types 01 land are
hIghly, but not peIfectly substItutable Ldnd IS Identl­
lied 111 thl" mannel to faclhtate modelIng the consel \a­
lIon I esel \ e plogram (CRP) ThIS method of modehng
agncultUl al land IS conceptually 'illllll,\l to that of
Hel tel and TSlgas (15) and RobIdoux and Sma! t (24)
KJ denotes the lIlpUt of' capltalll1to the pI oductlOn 111
secto! J We assume that labol IS pel fectly mobile
among sectol s, \I hlle capItal IS sectol speCIfic, because
we al e ll1tel e'ited 111 e:o.plollng polIcv ';cenarlOS that are
consIstent w1th the II1termedldte-I'UIl tllnefldme, dnd
Tuhe\ 10; an 3b'llcuitmal eUHlonu<:t \\ lth the ResoUl ce .. J.nd Tllh­
l101og\ Dl\.. \<"lOn ERS Remell I"; an econOlnl<;t \\ lth the Offiw of
L<..OllOIllK';, U S IntelnatlOlMI T1c1c1e (,onum..,o;loll
IItdliuzcd numbel-, m PJ.I entbe'H·... ute .,OUllCS lIsted III the ReJel­
ence<; ..,ceLlOn cit the end of tins ell tlele
20
2Pe<;tlclde.... <II e not lOduded In om eqU<ltlOn... be(d.u;;e then Lontll­
butlOll tu toteLl em II (Jnmentcli damJ.ge... tl om <l~] Icuitm e l~ not well
hno\\ n
THE .JOURNAL OF AGRICULTURAL ECONOMICS RESEARCHIVOL 13, NO l, SPRING 1991
reaffirming that fal m structures and some types of
capital are relatively Immobile In the short I un to
medIUm run (13) The associatIOn of the mtermedlate
run With capital specificity IS also consistent With the
trade literature on which OUi economic model IS
grounded (J 7)
(19)
(20)
(21)
To present this model as a general eqwhbnum system
of equatIOns, we mtroduce some additional variables
w, rK" IT, and rs, respectively, are the wage rate, the
rental rate on capital In sector I, the rental rate on
NEL, and the rental rate on HEL, PJ IS the price of
IS the world price of the agricultural
good j, and
goods, a IS the conclitlOnal mput coeffIcient repre­
sentmg t~e mput of factOi or mtermedlate good I mto
the productIOn of a umt of good j, DJ IS the domestic
consumptIOn of good j, and I represents natIOnal
mcome
pr
Given this notatIOn and the assumptIOns of constant
retul1ls to scale m productIOn and perfect competitIOn
m all mal kets, we can formulate the followmg general
eqwhbnum system m the traditIOn of the J ones model
of mternatlOnal trade (18)
=
L
aL'X, + aL,X3 + aJAX,
(1)
a.,X,
(2)
aK3X"
(3)
K, = aK'X,
(4)
KI
=
K,
T
=
an X,
(5)
S
=
a",X,
(6)
P,
waLl
+
l'KlaKl
P3
waLl
+
l'KJal\'1
(8)
waLl
+
l'K<l a l\.1
(q)
+
l'ra.rl
+
l'sas l
+
P3a31
(7)
(22)
EquatIOns 1-6 are fuB-employment conditIOns, and
equatIOns 7-9 are the zero-profit conditIOns EquatIOns
10-18 are the conditIOnal mput-output coefficient func- ,
tlons Because we want to focus pnmarily on the agn­
cultural sector, we mclude equatIOn 19, which gwes
the demand fOi agncultural goods EquatIOn 20 IS the
eqUilibrium conditIOn fOi the serVice, or nontladed
goods sector EquatIOn 21 defines the dollar price of
natIOnal mcome, and equation 22 defines the domestlc­
currency price of the agricultural good There are 22
equatIOns and 22 endogenous vallables (XI' X" X" D"
w, l'rJ r~, l'KiI ll\a, l'K,t, aLIt arb aSh a'lb a Kh au, aK&J
aL4' a", PI' P" and l) The model IS completely
specified
From thiS general eqUlhbrlUm model, we derive the
followmg linearized system of equatIOns of change
~L,XI + ~L3X3 + ~IAX4
= - ~LlaLI - ~LaaL' -~L4aL'
(lb)
x, = - a.,
(2b)
-a""
(3b)
aK,
(4b)
x, =
T- aT'
(5b)
X,
S-
(6b)
X,
=
X,
= -
=
as,
(7b)
PI =
(8b)
aLI
= aLl (W ,rK1,rr,l's, P 3)
(10)
a K,
al\\ (w , 1 Kll l'r,l's, P,1)
(11)
a-r, =
3trl (w, 1''''11 l'T'l'S,
P~)
(12)
as,
as\(w, 1'Kl1 l'rJ l'S,P3)
(13)
(9b)
3.:J, = 3.:J,(2, rK', rT,ls,P3)
=
(14)
aL.,(w,r",,)
(15)
aKI = a. 3(w,rK3)
(16)
alA = aL'(w, rK4)
(17)
aK4
(18)
aLa
a K4 (w, r K,,)
(lOb)
(llb)
(l2b)
+
'a .
(J~S~SllS
(13b)
21
(14b)
(15b)
(16b)
(17b)
(18b)
(19b)
The Cll cumfle, signifies a 1" opal tlOnal rate of change
= dX/"I) Au denotes the propO! tlOns of factor I
used m sector J, 0" denotes the share of factor I m the
output of sector J, <T;k IS the Allen pal tlal elastiCity of
substitutIOn between mputs I and k III sector J, e" IS
the pnce J, compensated elastiCity of demand for good
I, 1], IS the mcome elastiCity sector-J demand, v, IS the
shale of good J m consumptIOn, and E, m equatIOn 22b
IS the pllce elastiCity of expO! t demand for agllcultural
commmhties IncluslOn of equatIOn 22b shows that the
Umterl States, With respect to wOlld agllculture, has
some malket powel and, therefore, affects wOlld agl1­
wllulalpllces The appendix contams the derivatIOn
of the thange m the real IIlcome of the economy (i ­
\,I', - \ !Ii,) and the sources of the "hare and elastiCity
pal dmetels
ex,
d,rect payments, malket pllce support, Input sub­
S1(he<, marketmg subSidies, State progI'ams, and ta"a­
tlOn polICies We consllier here only the effect of
leducmg the level of suppO! t plOgrams that act as out­
put wedges, that IS, the programs that distort the
level, of plOductlOn pnmartly by mducmg farmel s to
plOduce a largel quantIty of output than would othel­
wise be the case The most Important programs m thIS
category Include pllce supports/quotas and defiCiency
payments We do not consldel the economIc effects of
I educmg mput subslfhes (commodity loans, Farmel s
Home AdmmlstJatlOn progl ams, subsIChes fOI land
Improvements), which cleate prImary factor "iedges
The producer subSidy equivalent (PSE) has been used
as a measllle of output and prImalY facto! "edges
(25, 26) It IS defined as the level of producer subSidy
that would be necessary to compensate 1" oducers for
the I emo\'al of government plograms affectmg com­
modities 1 The average PSE durlllg 1982-86 for 12
commoclitIes (wheat, corn, nee, s01ghum, barley, oats,
sovbeans, dany, sugar, beef, veal, and poultry), not
mcludmg mput subSidies, was 21 4 percent of total
producel value, or $2.3 2 btlhon (~2) 8mce thiS tlans­
fer accounts for the vast majority of total U S agri­
cultural pohcy translers, we use It to del'lve aPSE fO!
all U S agriculture We find the average PSE for all
agricultural commod,ties durmg 1982-86 to be 172
percent by chvldIng $23 2 bllhon by the average value
of U S agricultural output ($135 bdhon) ovel the same
penod (1S)
The PSE enters OUi model through equatIOn 22 as an
ad valorem price subSidy to agllcultUi e EquatIOn 22
now becomes
P, = Pi(1 + PSE)
Policy Reform and the CRP
EquatIOn 22b becomes
To lhlb model, two poltcy shock; are mtroduced
mueased Consel vatlOlI Reserve Program (CRP) pal­
tlclpatlOn and commorhty pohcy reform The CRP IS a
voluntalY long-tel'm progIam Imtlallv aimed at wlth­
,It awmg 40-45 mIllton acres of highly erodible land
It om PloductlOn It IS the most ambitious agricultural
congel vatlOn plogI'am to date Enrollment 1Il the pro­
gI am has been relatIVely constant smce February 1989
at about 31 mllhon aCles, 01 76 pelcent,of total 1989
oopland ('10) The pl'lmary objectives of thiS program
mclude controllmg offsite damages of erOSIOn, pro­
tectmg 10ngIlln agrIcultural product!vlty by reducmg
bOil erOSIOn, and promotmg wlldhfe habItat The CRP
entel" OUi model as an exogenous change m the
endowment of' land I esources Commodity poltcy
I efol III IS defended by proponents pnmarlly for the
de<"'ll abilIty of 1emovmg productJOll dlstortlOns and
reduclllg the Durden of agrICultural commodIty pro­
gI ams on the Fedel al budget
AgI Icultural pI OgI ams proV1de SUppOl t IO! pI oducel S
th, augh a broad range of pohcles Most ImpO! tant al e
1\
=
E,
(X, - D,)?], + dPSE/(l + PSE)
FlgUi e 1 shows how the pi Ice wedge Introduced by
commodity price ,upports and e"pOlt subSIdies affects
OUl' model With subslfhes, PloductlOn takes place at
pomt A, the tangenc'y of the domestic (distorted) price
Ime With the productIOn posslblhtIes f,ontler Con­
sumers, howe vel , face world pi Ices and would con­
sume at POInt B, but the subsidy, distorts consumptIOn
and PloductlOn Thus, pomt C IS the distorted con­
sumptIOn POInt With removal of the agI'lcultural p"ce
wedge, productIOn and consumptIOn move to pomts D
dnd E Exports of agricultural goods are reduced,
while exports of manufactUl es mCI ease The economy
IS better oft when It opel ates on a higher lOmmulllty
IIlcltfference curve (CIC) In OUi morlel, the Inwme
equatIOn (equatIOn 21) reflects the fact that 'It Ib not
IFol d more tOmpicte defimtlOJl of PSE's, 'lee (12)
22
~I -,
Removel of commodity price eupporte end
export eubaldlee
Manufactures
The pro pOI tlonal change m environmental damages
(ED) IS given by the sum of pi oportlOnal changes m
the use of HEL, NEL, and ferttllzers, weighted by
each factor's contl1butlOn to total agricultural envuon­
mental damage
ED
=
DHELS + D'ELT + DCHE"X",
where DHEL , D'EL' and DfERT are the contnbutlOn of
HEL, NEL, and fertlltzer to total agricultural
environmental damages
L -________
~
Free trade price line
____
Agriculture
possible to mCI ease economYWlde mcome by subslchz­
mg expmts
Not captmed m the PSE, but closely lmked with It, IS
the ACI eage ReductIOn Program (ARP), the Federal
Govel nment's lal gest annual cropland retll ement pro­
gram It IS desIgned to reduce total planted acres
when natlOnal supphes of agncultural commochtles are
pi oJected to be high The 1982-86 average ARP par­
tiCipatIOn level was 38 6 milhon acres (30) ARP par­
tiCipatIOn IS requn-ed of agncultural plOducers If they
ale to mamtam ehglblhty for Federal agl1cultural sup­
port ploglam benefits Like the CRP, the ARP enters
OUi model as an exogenous change In the endowment
of land I esoUi ces
Flgme 2 shows that an Illcrease 111 land available fOI
agllcultural productIOn shifts the productIOn POS­
Sibility frontier of agnculture and manufactures out­
ward (from PPF I to PPF,) along the agl-Icultural aXIs
The Imtldl ploductlOl1 pOint, whele the pllce hne IS
tangent to the ImtJaI frontier, IS pOint A ConsumptIOn
occm s at pomt B, the tangency of the pI Ice Ime WIth
the nlltJaI commumty II1dlffel ence CUi ve (CIC ,) The
Imtlal plOductlOn and consumptIOn eqUlhbllum IlIus­
bates that, In thiS model, agnculture IS consldeled the
e>.port good, whtle manufactUies al e conSldeled the
Import good The productIOn and consumptIOn pomts,
With an IIIcrease m agricultural land, are given by C
and D, respecttvely The economy IS better off-It
operates on a higher commumty mehfference curve
(CIC.,)-and agrICultural exports (plOductlOn less con­
sumptIOn) nse
Because OUI focus IS on the environmental effects of
farm pohcy changes, the envn onmental damage func­
tIOn reflects only damages from farmmg It does not
conSider envu-onmental damage from the manufactnr­
mg and service sectors We thmk It IS reasonable to
conSider only agrl-envlronmental damages related to
agricultural policy changes because farm agnculture
accounts for only about 2 pel cent of the total economy
Consequently, agricultural pohcy changes have httle
effect on productIOn and pollutIOn emiSSIOns m the
manufactUl1ng and service sectms
Ribaudo (23) prOVides estimates of offsite envn onmen­
tal damages flOm agricultural emissions of mtlogen,
phosphorus, and suspended seehment, which harm
freshwater and manne recreatIOn, water storage, nav­
IgatIOn, floodlllg, roadSide and IrllgatlOn dItches,
freshwater and mallne commercial fishmg, mumclpal
watel treatment, municipal and IIIdustrial use, and
steam power coohng We used Ribaudo's damage esti­
mate to determme that the contnbulton of agl"lcultUi al
chemicals to total agl-Icultural environmental damage
IS 23 pel cen t
The share of highly eloehble land and nonelOdlble land
m the remammg 77 percent of total agllcultural
envn onmental damages IS estimated from the fact that
......
Removal of AAP IlInd conetrllinte
Manufactures
Community Indifference curves
CIC, CIC.
Produc:tJon possibility
fronners
PF,
Environmental Damages
To assess the drrect and Inehrect effects of the CRP
and policy reform on environmental quahty, we spec­
Ified an agllcultural envuonmental ddmage equatIOn
PF.
Agriculture
23
hIghly erodIble land accounts for 63 percent of the
cropland sheet, 1111, and "md erosIOn
HIghly
clO(hble land's contllbutlOn to damage IS 63 pel cent of
77, or 485 pel cent NonelOdlble land's contllbutlOn IS,
consequently, 285 pel cent
Policy Experiments
ReductIOns III the ARP reduced agl,cultural fertlllzer
use, hut the retUl n of ARP land to plOductlOn leads to
an lllcrease of offsIte envn onmental damages (table 1)
ThIS I esult IS consIstent wIth the empmcal effol ts of
Shoemakel and Offutt, who find a hlstollcal posll!\e
bIas assocIated wIth chemIcals and acreage control pro­
grams (29) In contrast, decll11es m the PSE reduce
offsIte agl1cultm al envII on mental damages by I educ­
lllg fertlhzer use The posltn'e envn onmental effect of
a reductIOn m the PSE dommates the negal!ve
envIronmental effect of an eqUIvalent pel centage
leductlOn m the ARP In fact, the posItIve emnon­
mental effect of SImultaneous PSE and ARP I eductIOn
I; so strong that even modest pollcv reform (20 pel­
cent) genelates envnonmental benefits neady as gleat
as an II1crease m the CRP to 45 mllhon aCI es ThIS sug­
gests that pohcy I efO! m IS consistent with conserva­
tIOn pohcy because It encourages a I eductIOn m the use
of fertlhzer-lI1tenslve productIOn pI actlces
Two CRP scenallos are consldel ed no change from
the plesent enrollment of about 31 mllhon aCles and an
mCI ease m enrollment to 45 mllhon acres Under the
fn st scenarIO two levels of SImultaneous AR P and
PSE commodIty policy leform (20-pel cent and 40­
pel cent I eductlOns III the base level), and the sepal ate
Impact of a 40-pelcent reductIOn 111 the ARP and the
PSE ale consldeled The 1982-86 average PSE and
ARP 111 the Umted States (172 pel cent and 386 mll­
hon aCI es, respectIvely) al e used as the benchmarks
fOl the PSE and ARP levels The second scenallO
assesses the effect of an mCI ease m the CRP wIthout
any othel changes m pohcy
Reduced fel tlhzel use IS a I esult of two effects the
output effect and the sub,tltutlOn effect (fIg 3)
EconomIc optIma are prOVIded when the I atlO of
I esource pl'lces (PI) equals the margmal rate of sub­
stitutIOn of fertllizel s for land (pomt a) The substitu­
tIOn effect IS reflected m the movement flom a to b
caused by changes m mput prIces (flOm PI to P,) In
our analysIs, both ARP and PSE leform II1Clease the
prIce of fertIlizer I elatlve to land and, consequently
I educe the fel tlllzeriland ratIO m productIOn ARP
lefOlm places mOle land m plOductlOn, leducmg the
mal gmal phYSIcal ploduct and returns to land WIth
land cheaper and ferl!hzer prIces unchanged, fal mel S
un
Although the damage functIOn IS crude, It contams the
best mfOlmatlOn a\aJlable on speCIfic emlronmental
damage due to sedIment dehveled from clopland We
behe\e that It I' sufficIently lobust to prOVIde some
prehmlllal y and meamngful lI1(hcatlOns of the relatIve
magnItudes and (hrectlOns of change of surface watel
envnonmental damages flOm the mtroductlOn of pohcy
shocks, m thIs case of pohcy reform and mCI eased
CRP partICIpatIOn Ad(htlOnal work m measurmg the
envn onmental consequences of ag\"lcultUl al productIOn
would be useful
Table I-Percentage change
In
endogenous varldbles
Scenallo two eRP
Scenallo one eRP
Vallables
SlmultJ.ncous reductIOn
both ARP dnd PSE of
20 pel tent
40 pel lent
III
Em Il onmentdl damages (ED)
Output
Agl1wltlll e (X,l
MdT1ufdcttqes (Xl)
SerVices (X I)
Fel tlhzel
=
31 BlIllion
aCl
ReductlOll 111
es
mIllIon .-i.el e<;
ReductIOn m
ARP of
PSE of
No pobc\'
40 pel cent
40 pel cent
1efOl m
-430
-850
260
-II 20
-540
-350
Ob
04
-690
-S 80
-1 70
09
1 90
- 01
- 01
-2510
-5010
-1040
09
07
10
10
09
01
-1 70
--18 50
1 50
-2070
15
13
1 90
- 02
- 01
-22 GO
15
-1 G7
01
01
- 05
- 09
OJ
-10
- 01
-2160
10
09
-41 10
30
20
80
- 02
-44 10
- 02
30
20
- 70
02
01
-2050
-2050
-41 00
-41 00
-270
-270
-,18 00
-3800
10
II1PLlt~
Agllcultm e (X,,)
LabOl lI1puts
Agncultme (L,)
Manufactll! es (L ,)
Sel vice, (L ,)
Wage late (\\')
Returns to capItal
AglllLlltuJ e (1 "I)
ManufactUl es (i h.1)
Sel \'lCCS (1" I)
15
RetUl ns to land
Hlghlv elochble land (I,)
Nonero(hble land (! ,)
24
420
1 70
=
45
"-"
SubaUtuUon and output effects of policy
reform
Land
FertIlizer
shIft away from fertlhzers, whIch are a land sub­
stltute PSE reductlOns also reduce the return to land
and, consequently, the fertlhzer/land rat10 In
productlOn
Agncultm al pohcy not only creates statIc d,stortlOns
m mput markets, represented by the movement from
a to b, but It also dIstorts the nature of longrun
lesearch and development Ruttan (27), ReIChelderfer
(21), and the NatlOnal Research CouncIl (19) observed
that sCIentific and techmcal mnovatlOn m both the pub­
hc and prIvate sectors have been overly bIased toward
the development of land substltutes-plant protectIon
chemIcals and crop varletles and management systems
that reflect the overvaluatlOn of land and undervalua­
tlOn of the social costs of the dIsposal of resIduals from
agncultural produchon practlces
The output effect IS replesented by the mward shill of
the productIOn Isoquant (from Q. to Q,) and the move­
ment from eqUlhbrlum pomt b to c At pomt c, the new
Isoquant (Q,) IS tangent to the adjusted factor prIce
ratIO (P,,) In our analYSIS, the productlOn Isoquant
shIfts mward as a result of the sImultaneous reductIOn
of the PSE and ARP (although reducmg the ARP
mcreases agncultUl al output, the output-reducmg
effect of an eqmvalent percentage reductIon m the
PSE dommates)
The effect of pohcy reform m reducmg the return to
land Illustrates the fact that government commodIty
support payments are largely capltahzed m asset
values (land), negatmg the shortrun pohcy-mduced
mcreases m agl'lcultural mcome (6, 12,25) Land
values represent the present value of the expected net
retUl ns to agl'lcultural productIOn, reducmg or
elmunatmg support programs reduces expected future
returns
Increasmg the CRP to 45 mllhon acres, In contrast,
takes hIghly erodIble land out of productIOn and
reduces agl1cultural output and economywlde Income
W,th constant pnces and an Increase m the margmal
phYSIcal product of hIghly elOdlble land, the return to
land rIses For the zero profit conchtlOn to hold, the
return to agrICultural capItal and labor must fall
Labor mlgl'ates out of agnculture, and fertlilzer mputs
are subst,tuted for land mputs as the employed endow­
ment of land IS reduced W,th the CRP at 45 mllhon
acres, and assummg no pohcy reform, the retm n to
hIghly erodIble land nses by 4 2 percent Under the
paid d,verSIOn feature of the CRP, farmers must
receIve thIS rental mcrease on hIghly elOdlble land to
mduce them to partIcIpate ill the program
The I eductlOn m fertilIZer use WIth pollcy reform rests
strongly on the elastICIty of substitutIOn between land
and fertlhzers The more substItutable they are, the
greatm the reductlOn m fertlhzer use As shown III the
appendIX, we set the Allen elastICIty of substitutIOn
between fertlhzers and land at 2 9 It IS not clear
whether thIS should be conSIdered an oveJiy optimIstic
estImate of land and fertlhzer substltutablhty, or a low
estimate Most estimates of substltutlOn elastICItIes do
not speCIfy land and fertlilzer (3, 4, 20) However, m a
comparatIVe study of agncultural development, Hay­
amI and Ruttan (10) suggest that land and fertlhzer
are strongly substItutable Hertel and others, how­
ever, have estimated the Allen elastiCIty between land
and fertlhzer to be 068 for the Umted States (14) To
test the sensItIvIty of envIronmental damages to th,s
cntlcal elastICIty parameter, we reduced the elastICIty
of substItutIOn between fertlhzers and land to 1 and
Imposed a 40-percent reductlOn on the PSE and ARP
Agam, pollcy reform produced envIronmental benefits,
but m th,s case only marginally (ED = -0 4)
Conclusions
Om styilzed model Illustrates some Important relatlOn­
shIps among agrIcultural pohcles, resource use, and
envIronmental quahty G,ven the structure of the
present model and ItS parameters, pollcy reform (of
the ARP and other agl'lcultural support pI ogl ams)
tends to reduce the negatIve envllonmental extel­
nahtles from cropland productIOn Although pohcy
reform amehorates undesu able envn onmental effects,
It cannot be a complete solutIOn to an envIronmental
problem associated WIth agricultural productIOn,
because agl1cultural programs a! e not the root source
of the problem The root source denves from the lack
of markets for the use of the envIronment PollutIOn
control programs mdependent of government SUppOlt
programs are reqmred to attam an "optImal" level of
envll'onmental quahty
The lmkages between agnculture and the ellVlronment
are complex Our analYSIS has uncovel ed some Impor­
tant relatIOnships, and our pohcy experIments have led
25
to some mterestmg obsel vatlOns, but we also I eahze
the stlong need fOl tm thel I eseal ch For e"ample, we
noLed the Impol tance of some cIltICal pal arne tel s, such
as the elastIcIty of substItutIOn between fertIhzeI and
land
Othel effOl ts mIght fUI thel (h"aggI egate the agIl­
wltll! al sector to better captll! e the comple"Itles of
agIlcultuI al commo(hty progI ams and changes m the
composItIOn of agIleultural plOductlOn-changes that
ha\e Important envllonmentallmphcatlOns smce "ome
crop" ale more "pollutIOn mtenslve" than othel s The
p"nclpal dIfficulty m new research mvolves the eon­
"tructIon of an envn onmental socIal accountmg matI I"
that descIlbes envIronmental effects assocIated \I Ith
(hffelent agIlcultUlal actIvItIes The matIl' would
lorm the fl amewOI k for estunatmg total envn onmen­
tal damages ,stemmmg from agrlcultlll al PloductIOn
Beeaus"e It IS not possIble to measure (hrectlv emlS­
SlOns flOm agrlcultUlal nonpomt SOUlces of pollutIOn,
estlmatmg total agIlcultural envn onmental damages
thlough the eonstrucllOn,of damage equatIOns IS Cllt­
ICal for pohey modelel s seekmg to compare the efficacy
of measure~ to I educe envn onmental damage from
agIlcultural plOduetlOn We ha\e assumed m thIS al tI­
e1e a Imeal and sepal able damage functIOn whel e the
ddmdge flOm each mput IS mdependent of the level of
the othel Illputs Future reseal eh mIght I cia" these
clssumptlOl1S
Appendix
Income Effects
The PloductlOn po,slblhtles of the economy dl e gwen
by
We substitute equatIOn A-3 mto A-4 to obtam
(i - vili , - 'v,p,)
=
<l>TT + <1>,,8
(A-5) The til st two telms on the rIght-hand sIde of equatIon
A-5 show the propOl tlOnalmclease m I eallilcome alls­
mg from changes III the stock of lionel o(hble and
hIghly elO(hble land, I e<;pectlvely The thn d telln
shows Lhe I'loportlOnal dechne III leal IIlcome that
comes tram an IllCI ease III e"pol t subsIdy and defI­
cIency paYments
Data Sources
As wIth anv economIC model, the <tl ucture and pal am­
etels ot the model dllve the Iesults FO! th" leason.
we cal efullY reVIewed the htel "tUl e to ensUl e that
pdI arne tel s weI e assIgned that I eah~tlcallv I eflected
the economy and the Stl uctm e of the model The
employment shales, A". e"pemhtme shdres, v" value­
"dded sh,,,es, <l>T' <1>" ,md <1>" and plOduct shdles, e",
III appendIX table 1 dl e calculated flam a SOCial
accountmg matn" dellved flOm (9) We calculated the
land-value-added shal es by dssummg that 60 pel cent
of capItal value added 1I1 agllcultUl e IS the land-value­
added component (22) Land value added IS then
dIvIded Into nonelO(hble and hIghly elOlhble land
based on the plOpOl tlOn of total clopland whIch IS non­
elOdlble ,md hIghly elo(lible. 29 4 and 70 G percent
I espectlvelv (JO)
The mcome of the economy IS gwen by
(A-2)
By totallv (hffel entIatmg equdtlOn A-2 and
equatIon A-I, we obtam
dI
=
Impo~mg
XldP I + X,dP , - cPSE)PjdX ,
+ (PSE)P;(lD, - Pi(X , -D,)dPSE
+ ITdT + l,dS - (PSE) (X, - D,)dPj
(A-3)
The fOlmula fOI the real mcome of the economy IS
given by
p,D, dp,
I
p,
2b
(A-4)
Appendl" t"ble 2 fm lllshes elastICity values The
CIOs"-p"ce, Allen elastlcltles,of substItutIOn fOl agrl­
cultlll e, (T~h! I = k, dt e Ltken [10m (2) 0\\ n-prlce
elastICItIes al e cakuldted u"lI1g the addlllg-up con­
"tl amt (:!: (T~ e'J = 0) (28) Bmswangel estImates a
tldnblog ~ost functIOn 101 US agllcultllle usmg tlme­
selles data (2) FOI OUI purposes. Bm~\Vangel 's estI­
mates al e partIculaIly appropllate because, unlIke
mm,t stmhes (J. 4. 20), the Ideqtltied factOls at plOduc­
tlOn mdude both land ami fel tlhzel s WhIle Hel tel and
others (14) also lllclude land and leltllIzel', thell
aggI e"atlOn scheme IS qUIte dlffel ent flam the one
used hele In ad(ht1On, It IS a"sumed that NEL and
HEL oubstltute IdentICally \11th oLhel lactols of PIO­
I (Th.!
I = <Tk....,'
I cm(I (f-11
I = (T Ij <.,
I I 1011 th at IS, CTII T = (fl.,,'
(UL
We fm ther set (T~" = IT~I = 1000 becduse endence
suggest" that HEL and NEL are hIghly 'iubslItutable
fOl one anothel (J 1) The sUbStItutlO1l pal ameters 111
the nonlal m secto! s dl e 1I am (1)
o
We calculated the compensated demand elastIcItIes,
eo' I,J = 1,4, usmg the elastIcItIes form of the Slutsky
equatIOn wIth estImates of uncompensated demand
elastIcItIes from (5) and the expendIture shares The
pnce elastIcIty of export demand, E I , for agnculture IS
an intel1nedJate-run elastIcIty taken from a revIew of
the hterature contamed In (7)
AppendIX table l-Share parameter values
Pruameter
Value
Parameter
Value
0020
250
730
730
270
650
350
006
003
020
0007
336
657
220
280
297
123
080
009
722
AppendIX table 2-Elasbclty values
Elasbclty ,
,
"LL
,
,
,
"L'
"LK
"LT ,
,
"TT
,
"1',5
"TL (Tn.
"'L,
,
"1K ,
"1T
0"3S "
"LL
J
"LK J
,
(1KL
"KK
ell
ell
e.,
e"
1),
1),
Value
-0883
851
204
204
204
1215 -6240
10000
-1622
-672
2987
2987
- 185
500
500
-1351
ElastICIty
Value
0851
-2299
1 215
1215
204
1215
10 000
-29200
- 269
500
500
- 929
-164
165
057
- 126
376
836
-2000
References
1 Ballard, C , D Fullerton, J Shaven, and J
Whalley A General Eqmltbnurn Model jar Tax
Poltcy Evaluatwn ChIcago U mverslty of ChI­
cago Press, 1985
2 Bmswanger, H P "A Cost FunctIOn Approach to
the Measurement of Factor Demand and
ElastICItIeS of SubstItutIOn," Amencan Journal of
Agncultural Econonucs Vol 56, No 2, May
1974, pp 377-86
3 Brown, R , and L ChrIstensen "Estlmatmg
ElastlCltIes of SubstItutIOn m a Model of PartIal
Stahc EqUlhbrlUm An ApphcatlOn to U S Agri­
culture, 1947-74," Modelmg and Measunng Natu­
ral Resource Substttutwn (eds E Berndt and B
FIeld) Cambndge, MA MIT Press, 1981
4 Chambers, R , and U Vasavada "Testmg Asset
FIXIty for U S Agriculture," Amencau Journal
of Agncultural EcOn01ntCS Vol 65, 1983, pp
761-9
5 Eastwood, D , and J Craven "Food Demand and
Savmgs m a Complete Extended Lmeal ExpendI­
ture System," Amencan Journal of Agr,cultwal
Economlcs Vol 63, No 3, Aug 1981, pp 544-49
6 Floyd, J "The Effects of Farm PI~ce SUPPOlts on
the Returns to Land and Labor m Agl'lculture,"
Journal of Poltttcal Economy Vol 73, 1965, pp
148-58
7 Gardmer, W H , and PM DlXlt Pnce Ela.tlctty
of Export Demand Concepts and Estmwtes ERS
Staff Report No AGES860408 US Dept Agr,
Econ Res Serv, 1986
8 Gardnel, B L "RedlstnbutlOn of Income Thlough
CommodIty and Resource Pohcy " Papel prepared
for the Umverslty of Maryland CommerCIal Agl1­
cultural and Resource Pohcy SymposIUm, Bal­
tImore, May 1989
9 Hanson, K A , and S Robmson "Data, Lmkages,
and Models US NatIOnal Income and Ploduct
Accounts m the Framework of a Soc131 AccountIng
MatrIx" Unpubhshed manuscript U S Dept
Agr ,Econ Res Serv, July 1988
10 Hayaml, Y , and V
Ruttan Ag"cult",al
Development An Inte",atwnal Pe,-,pectwe Bdl­
tImore_ Johns Hopkms Umverslty Press, 1985
11 Helmhch, R "ProductIVIty of HIghly Elochble
Cropland," The Journal of Agl,wltuwl
EconomIcs Research Vol 41, No 3, Sum mel
1989, pp 17-22
12 Hertel, T "Ten Truths About Supply Control,"
Agrtcultural PotteteS m a New Decarie (ed
KrIsten Allen) Annual Pohcy RevIew. Resources
for the Future and the Nahonal Pldnmng As,ocla­
tlOn, Washmgton, DC, 1990
13 Hertel, T "Apphed General EqUlllbnum AnalYSIS
of Agncultural Pohcles " Staff Paper #90-9 Dept
Agr Econ, Purdue Umverslty, West L,lf'ayette,
IN, 1990
14 Hertel, T ,E Ball, K Huang, and M TSlgas
ComputIng Farm Level Gene1al Eq1ltl,bl znm
27
Demand Elastzclt,e; f01 Agllcu/twe Research
Bulletm No 988 Agr Exp Sta, Purdue UnIver­
SIty, West Lafayette, IN, 1989
15 Hel tel, T , and M TSlgas "General EqUlhbrlUm
AnalysIs of Supply ContI 01 m U S AgllcultUl e "
Unpubhshed manuscript Purdue Umverslty,
West Lafayette, IN, 1989
16 Hedel, T, R Thompson, and M T"gas
"EconomYWlde Effects of Umlatel al Trade and
Pohcy L,berahzatlOn m US AgllcultUle," MaG­
loecononllC Consequence,l 0/ Fa"n SllPp0l1, (eds
Andrew Stoeckel and othels) Durham, NC Duke
UnIVelblty Press, 1989
"Shol t-Run and Long-Run
17 HOSlOS, A J
EqUlhbllum fOI a Small Open Economy wIth
Intermechate Goods," Journal of Intematw1Iai
EconomIcs Vol 13, No 1-2, Aug 1982, pp
143-61
18 Jones, R "The Structure of SImple General
EqulhbrlUm Models," The JOllllwl of Poll/zwl
Economy Vol 78, 1%5, pp 557-72
19 NatIOnal Resealch Councll Alter1latwe Aqllcul­
tn,e Washmgton, DC NatIOnal Academy Press,
1989
20 Ray, S "A Translog Cost FunctIOn AnalYSIS of
U S AgllcultUl e, 1939-77," AlIlerzcan Joumal of
Agl1cllltmal Econo"tlc; Vol 64, 1982, PI' 490-8
21 RelChelderfel, K "Envn onmental PlOtectlOn and
AgJ1cultUlal SUppOlt Ale Trade-offs Necessarv?"
Agricultural PolLcle; In a New Decade (ed
KI,sten Allen) Annual Pohcy RevIew, ResoUlces
fOl the Future and the NatIOnal Planmng Assocla­
tlOll, Washmgton, DC, 1990
tUI e " Unpubhshed manuScllpt Dept Fmance,
Otta\\ a, Ontano, Canada, Mal 1990
25 Roblllson, S , M KIlkenny, and I Adelman "The
Effect of AgJ'lcultUl al Trade LIbel ahzatlOn on the
US Economy PIO]ectlOns to 1991," Mac­
lOeC01WlIllC Can,;equences of Farm Support (eds
Andrew Stoeckel and other~) Durham, NC Duke
Umvel'slty Press, 1989
26 ROlllngen, V , and P DIXIt How Leuel " the
PlaY11lq Field? An EconomIC Anaiysl,' oj Aqrl­
c/t/tnml Pol,cy Refonn" 11/ Indnstrwl Malket
Econo",lCs F AER-239 U S Dept AgJ , Econ
Res SelV, Dec 1989
27 Ruttan, V "Technology and the Envn'onment,"
Ame!!can Jonl nal of Agncultural Econanl1cs
Vol 53, 1971. PI' 707-17
28 Sato, R , and T KOlzuml "On the Elastlcltles of
SubstltutlOn and Complementanty," O~,fo, d
Econo""c Paper, Vol 25, No 1, pp 44-56
2q Shoemakel, R , and S Offutt "Agncultural Land,
Technology and Farm Pohcy," The JOU1"1wl of
Aqnwltwal Econoll1lC; Resealc/z Vol 41, No 1,
1990, pp 1-8
30 U S Depm tment of Agllcultul'e, EconomIc
Research ServIce Agl-Icultlllal Rewnneo Cmp­
land, Watel', and Consel vat lOll SituatIOn and
Outlook Report AR-16, Sept 1989
31 U S Depm tment of Agncultul e "Consel vatlOn
Reserve PlOgI am Progress Report and Prehml­
nary EvaluatlOn of the FIrst Two Years" Conser­
vatIOn Reserve PlOgram WOl k GlOup, Jan 1989
32 U S Depal tment of AgrIculture, EconolTIlc
Research ServIce Estmwtes of PlOd"cel and.
22 Rendleman, C "The Economvwlde Impact of the
U S Sugal Program" Ph D dlbsertatlOn, Purdue
Umverslty, West Lafayette, IN, 1989
Cun;mnel' SubSIdy Eqn,valent; Government
Inte,'VentlOu 11/ AgI-,cnltl"e, 1982-86 Staff RepOlt
AGES880127, Apr 1988
23 RIbaudo M Wate, QualIty Beneht; f,a1ll the Con­
;eruatlO1I Rese,'Ve Proqmlll AER-606 US Dept
AgJ- , Econ Res Sel v ,Feb 1989
33 U S Depal tment of Agl"lcultule, EconomIc
Research Sel vIce Ewno1llz" IndICa!",,, of the
Fanll Sectol Natwnal F,nal/clal Summon/,
1986 ECIFS 6-2, Dec 1987
24 RobIdoux, B , and M Smal t "The Agllculture­
Expanded GET Model Ovel VieW of Model Struc­
28