Stimulating Organic Farming Via Public Services and an Auction-Based Subsidy

In order to stimulate organic farming governments generally use a mix of temporary hectare payments and provision of public services for stimulating the development of the organic sector. In this paper a conceptual model is developed for determining a socially optimal hectare payment for any given level of public services. Farm heterogeneity, due to the variability of soil quality and management skills, is explicitly taken into account. Using an n-th price auction mechanism farmers indicate what their reservation subsidy is for a given level of public input provision. The outcome of this problem is utilized in the government's optimization problem. We found that the level of per hectare socially optimal subsidy increases significantly with the elasticity of the social welfare function and decreases significantly with the degree of farmers' heterogeneity in suitability of growing organic crops (OC) as well as with the level of complementary governmental services. The total area planted for OC is also quite sensitive to these parameters. The effects of the deadweight loss parameter and the degree of risk aversion on per hectare subsidy and on total organic acreage are relatively small.