Policy objectives and economic incentives for controlling agricultural sources of nonpoint pollution

In this paper, we review the physical characteristics of agricultural nonpo int pollution and discuss the implications for setting appropriate pollutio n control objectives and designing incentive-based pollution control polici es. First, we discuss that policy objectives must be designed carefully to ensure positive economic net benefits can be expected from pollution contro l. Next, we review several classes of incentives and recommend the use of d esign-based incentives (i.e., incentives based on variable input use, manag ement practices, and land use) for controlling nonpoint pollution. Cost-eff ectiveness requires that incentives elicit three types of responses from fa rmers: (1) use variable inputs at appropriate levels, (2) adopt appropriate management practices, and (3) make appropriate land use decisions at the e xtensive margin of production. If a set of incentives fails to induce the c orrect responses, the resulting runoff levels and hence ambient pollution l evels and damages will be too large relative to policy goals. A review of e xisting programs suggests that greater program coordination and improved ta rgeting of incentives are needed for further water quality improvements. Al ternatively, properly designed market-based systems may be effective altern atives. These systems would reduce overall pollution control costs by allow ing markets to allocate point source and nonpoint source control costs more efficiently.