Uniform and non-uniform second-best input taxes

We investigate second-best, input-based taxes for agricultural nonpoint pol lution control when market prices are endogenous and production is heteroge neous. Theoretically, we derive the optimal forms of taxes which take accou nt of heterogeneity (non-uniform taxes) and a tax which does not (a uniform tax). Empirically, we use a multi-factor, market-equilibrium simulation mo del to determine optimal tax rates and associated equity effects, particula rly differences in landowner gains/losses across a heterogeneous region. Wh en market prices are endogenous, second-best tax policies result in pecunia ry externalities that affect existing environmental externalities. In parti cular, the pecuniary externalities amplify the effect of producer heterogen eity on determination of sub-regional differences in tax rates and returns to land, particularly for the uniform policy. With endogenous prices, the u niform tax rate is considerably higher than any of the non-uniform rates an d, ironically, the non-uniform taxes result in less dispersion of landowner gains across sub-regions than the uniform tax.