Agri-Environmental Program Compliance in a Heterogeneous Landscape

Heterogeneity of agricultural landscapes may necessitate the use of spatially targeted instruments. But costly enforcement may be needed to ensure compliance with these policies. This paper examines the design of agri-environmental policies designed to achieve reductions in fertilizer application rates and installation of riparian buffers through the use of incentive-based instruments. We derive monitoring strategies capable of ensuring perfect compliance from risk neutral farmers given realistic limits on penalties for non-compliance. We then apply that framework empirically using a parametric model reflecting Finnish agricultural and environmental conditions. The results of our simulations indicate that subsidies for installing and maintaining buffer strips, used alone, are the most cost effective means of reducing nitrogen runoff from crop production. This policy is also the most attractive politically, in that it reduces farm income less than the alternatives considered.