Environmental Targets and Shadow Prices of Bad Outputs in Organic and Conventional Farming

We present a framework for deriving shadow prices for negative environmental impacts regulated in agriculture. The shadow prices can be used as indicators of the costs of environmental regulation imposed as reflected in alternative farming technologies adopted. We illustrate our analytical findings with implications of the Finnish water protection policy measures on conventional and organic livestock farms over the period 1994-2002. Generally, the representative organic farm is found to be more technically efficient relative to its own technology than is the conventional representative farm. However, there is no statistical indication of a difference between these two particular representative farms in valuing the costs of undesirable output (manure) at the margin.