Equilibrium Effects of Agricultural Technology Adoption: The Case of Induced Output Price Changes

Pollution from agricultural activity depends on the agricultural practices or technologies that farmers employ. Adoption of less polluting practices can be induced by a variety of policy instruments. Cost-$haring by the government to reduce the costs of technology adoption and/or implementation for producers is an instrument widely used by the U.S. Department of Agriculture. This report examines the problem of designing economically efficient cost-sharing programs. The adoption decision for a farm is based on a comparison of the relative profitability of the existing technology and a new, less polluting one where the profitability of each technology depends on land quality. The problem for government is to determine the optimal subsidy rates that will induce a level of adoption sufficient to achieve some exogenous pollution goal. A benchmark (or first best) solution to the pollution problem serves as a reference against which to compare the optima! cost-sharing policy with imperfect targeting of land. The authors also examine the importance of specifying the land on which a technology should be u~ed and of varying subsidy rates across inputs.