Economic Impacts of the Conservation Reserve Program: A General Equilibrium Framework

This article uses a general equilibrium framework and econometric analyses to examine economic wide impacts of the Conservation Reserves Program. It determines direct and indirect factors which affect the economic efficiency of the program and shows their magnitudes. It shows that the interaction between the program and the tax system causes indirect efficiency costs but the interaction between the program and the agricultural support subsidies generate economic gains. The program has the potential to distort the labor market and cause efficiency losses form this channel. However the analytical model shows that trade can reduce social costs of the policy because a part of the burden of the policy can be passed on to foreign consumers of crop products through the world market. The numerical results show that at the current level of acreage reduction (34 millions acres), the marginal cost of spending one more dollar on the program is about $1.9 for the US economy. In addition, the numerical results illustrate that the program has the potential to generate different and significant unintended economic impacts. For example, depending on the parameters of the model, the program can raise the prices of land up to 10.6%, generate up to 20% land conversion, and raise the demand for nitrogen fertilizer up to 4.2% at the current level of acreage reduction. Finally, the empirical regression results demonstrate that the program has affected the production behavior of the crop industry significantly. In particular, the program has increased the demand for fertilizer and labor and has decreased the demand for land and capital.