RISK MANAGEMENT THROUGH INSURANCE AND ENVIRONMENTAL EXTERNALITIES FROM AGRICULTURAL INPUT USE: AN ITALIAN CASE STUDY

The biological nature of agricultural production processes induce a higher degree of uncertainty surrounding the economic performance of farm enterprises. This has contributed to the development and acceptance of forms of public intervention aimed at reducing income variability that have no parallel in other sectors of the economy. In particular, subsidized crop insurance are a widely used tool. The impact of these programs on the decisions of production generates effects on input use, land use and thus, indirectly, environmental outcomes. The importance of this issue has grown in parallel with the growth in importance of the collective role of agriculture sector that has addressed the recent guidelines adopted by many developed countries. To examine the effects of public risk management programs on optimal nitrogen fertilizer use and land allocation to crops, this study carried out an empirical analysis by developing a mathematical programming model of a representative wheat-tomato farm in Apulia southern region of Italy. The model endogenizes nitrogen fertilizer rates and land allocation, as well as the insurance coverage levels, participation in insurance programs and the Environmental Payment (EP). This study utilized direct expected utility maximizing non-linear programming in combination with a simulation approach. Results show that with current crop insurance programs, the optimal nitrogen fertilizer rate slightly increases and the optimal acreage substantially increases for tomato whereas decrease for wheat. Assuming that the environmental negative effects of crop insurance are positively related to nitrogen fertilizer use, this type of public intervention implies negative environmental effects.