Subsidies! The Other Incentive-Based
Instrument: The Case of the Conservation
Hongli Feng, Catherine Kling, Lyubov Kurkalova, & Silvia Secchi
Environmental economists have produced numerous studies of the potential efficiency gains associated with the flexibility allowed to firms from market-like or incentive-based regulatory approaches.1 Although much has been learned from these explorations, they are primarily ex ante and designed to address questions about the potential efficiency gains that could accrue from the implementation of a well-functioning incentivebased system relative to a command-and-control (CAC) policy that has actually been in place. In contrast, there has been relatively little study of the efficiency of actual incentive-based programs, relative to a hypothetical CAC strategy.2
Although the efficacy of the SO2 trading program is being increasingly studied (Carlson et al. 2000; Schmalensee et al. 1998; Arimura 2002), there is in general a paucity of ex post studies of the effectiveness of incentivebased mechanisms. This omission has been credited largely to the sparse existence of such programs. In fact, however, incentive-based instruments for environmental control are not particularly rare in one large sector: agriculture. Rather, environmental programs in agriculture have a long history of implementing incentive-based instruments, albeit with a notable twist: Instead of charging fees or constructing tradable quotas, agricultural programs have generally paid farmers in the form of cost-sharing or subsidies to retire land or adopt environmentally friendly practices.
Table 9.1 provides a summary, adapted from Claassen et al. (2001), of some of the key programs that have been implemented by the U.S. Department of Agriculture (USDA) over the past century related to environmental performance of agricultural land and practices. These programs