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European Review of Agricultural Economics Advance Access originally published online on December 19, 2005
European Review of Agricultural Economics 2006 33(1):1-30; doi:10.1093/erae/jbi033
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© Oxford University Press and Foundation for the European Review of Agricultural Economics 2005; all rights reserved. For permissions, please email journals.permissions@oxfordjournals.org

Determining the economic gains from regulation at the extensive and intensive margins

Renan-Ulrich Goetz

University of Girona, Girona, Spain

Hansjörg Schmid

Kantonsspital Luzern, Luzern, Switzerland

Bernard Lehmann

Swiss Federal Institute of Technology, Zürich, Switzerland

Corresponding author: Renan-Ulrich Goetz, Universitat de Girona, Departament d'Economia, Campus Montilivi, 17071 Girona, Spain. E-mail: renan.goetz{at}udg.es

Received December 2004; final version received October 2005

Among the second-best approaches for the regulation of pollution, little attention has been paid to the distorting effect of intensive margin policies on the extensive margin. This article shows, within a dynamic framework, that regulation of the intensive margin has to be complemented by regulation of the extensive margin. Depending on the elasticity of the pollution function with respect to nitrogen use, the appropriate regulation at the extensive margin is zero, a tax or a subsidy. We show empirically that combining a nitrogen tax with land-use taxes is about 18 per cent more cost efficient than a nitrogen tax alone and 58 per cent more efficient than off-site abatement in the form of groundwater treatment.

Keywords: cost efficiency, second-best policies, nitrate leaching, intensive and extensive margin, dynamic optimisation


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