Internalizing Externalities of Phosphorus Discharges from Crop Production to Surface Water: Effluent Taxes versus Uniform Reductions

TLDR: In this article, an empirical comparison of the social costs and the cost to farmers of achieving given levels of reduction in phosphorus discharge from crop reduction for effluent taxes versus uniform reduction is presented.

Abstract: Some economists have argued that the "solution to pollution" is effluent taxes. Ideally, the effluent tax should be set at a level which equates marginal social costs of effluent reduction with marginal social benefits of such reduction. Because of the difficulty of measuring these costs and benefits, particularly the benefits, economists have suggested an alternate approach. This approach requires that a socially acceptable standard of environmental (water) quality be set. Effluent taxes could then be used to achieve this standard. It has been argued that effluent taxes would achieve this standard at lower social cost than would policies such as uniform treatment or uniform reduction in effluent discharge by each discharger (Kneese; Kneese and Bower; Baumol and Oates; Freeman, Haveman, Kneese). Homer has presented a concise review of the case for effluent taxes. Few economists have disagreed with this argument. This article discusses an empirical comparison of the social costs and the cost to farmers of achieving given levels of reduction in phosphorus discharge from crop reduction for effluent taxes versus uniform reduction. A modified effluent tax, which would achieve the same water quality goals at a lower cost to farmers, is also analyzed. Research conducted on phosphorus in recent years lends itself to an empirical test of the aforementioned issue (Casler and Jacobs). Companion research indicates that reduction in soluble phosphorus inputs would decrease algal production in lakes in temperate latitudes (Oglesby and Schaffner). Presumably there are social benefits of reduced phosphorus discharges to such lakes, at least over some range of reduction.