The design of environmental policy under uncertainty and the value of information

Uncertainty is an integral part of the agricultural nonpoint pollution problem. Discharges are not meterable because of the diffuse pathways taken by pollutants to get to the receiving media. Moreover, there are multiple small sized polluters making monitoring even more difficult. Most of the economic literature however, has treated the nonpoint pollution problem as if emissions were deterministic and meterable. These studies therefore have limited applicability to the nonpoint pollution problem.; This study analyses the choice of nonpoint pollution policy under economic and hydrologic uncertainty with and without market distortions. The value of information about the uncertain parameters is calculated to determine which parameter is important for each policy. The policies considered here are, a fertilizer tax and standard and an excess nitrogen tax and standard. Uncertainty is handled by treating uncertain parameters as random variables with distributions. The distributions are approximated using the Gaussian Quadrature approach.; A partial equilibrium simulation model of the U.S. corn market is used in this study. Policies are chosen to maximize expected net benefits. With market distortions, fertilizer tax outperforms all other instruments. This illustrated the theory of second best. Very little improvement is achieved with any instrument once the market distortions are eliminated. Quantity instruments do not improve expected net benefits. The excess nitrogen tax outperforms the fertilizer tax.; To evaluate the value of information, policy choice under perfect information is calculated. With perfect information and market distortions, the input based instruments outperform the excess nitrogen based instruments. The choice of policies is reversed when the market distortions are eliminated. The value of information with market distortions results indicate that price instruments are superior to quantity instruments under uncertainty.; The value of perfect information results indicate that price instruments are superior to quantity instruments under uncertainty. It also suggests that the elasticity of substitution between fertilizer and land is the most important parameter in the design of nonpoint pollution instruments. The runoff coefficient which is the second most important parameter is more important for the excess nitrogen instruments. The least important parameter in the design of nonpoint pollution instruments is land supply elasticity.