Value of information for targeting agro-pollution control: a case study of the lower Susquehanna watershed

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Virginia Tech

Targeting farms with low costs of reducing agro-pollution has been suggested as a means to reduce control costs. The potential to use better information to reduce costs of achieving a regulatory performance standard was evaluated. Using the Lower Susquehanna watershed as a case study, three strategies to target reductions in nitrogen runoff from dairy farms were studied: 1) no information -- uniform allocation, 2) perfect information -- cost-effective allocation, and 3) partial information - estimated cost-effective allocation. From no information to perfect information, more detailed information about the farms’ marginal compliance costs with a reduced nitrogen runoff standard was collected. Two strategies to target the performance standards, the private and social cost-effective allocation (private cost-effective allocations minimized farm compliance costs while social cost-effective allocations minimized the sum of compliance plus transaction costs) were also compared.

Each strategy's total control cost (compliance plus transaction costs) were estimated for a 237 dairy farm sample with a modified micro parameter (bieconomic) model which preserves the watershed heterogeneity. Because cost-effective performance standards involve large transaction costs, they were compared to two design standards which have lower transaction costs.

It was found that targeting problem farms in the Lower Susquehanna watershed could save nearly $3 million for the sampled 237 farms. Extrapolating this result to the 6,662 dairy farms in the watershed could save the state more than $55 million over a uniform allocation of responsibility. Results also show that the social cost-effective allocation of control responsibilities (based on marginal compliance plus transaction costs) in targeting policies targets only 50 percent of the dairy farms with a mean control cost per pound of $11 compared to $47 per pound with the uniform performance standard applied to all the farms.

This study suggests that a few farms in the Lower Susquehanna should be targeted a large reduction burden. Criteria to target these farms should be: somewhat larger farms with steep and long slopes, on soil hydrological groups C and D, close to surface water, that have no or few best management practices in place, and grow large amounts of corn. Cost-effective practices for dairy farmers in the Lower Susquehanna are manure incorporation and storage, eliminating or reducing winter manure spreading, and using more strip-cropping.

The value of perfect information was found to exceed the value of partial information in the study area because the total control costs were lower. Compliance costs for perfect information under the social cost-effective allocation were $853,911 compared to $968,121 under the partial information strategy. Total transaction costs were $126,996 for the perfect information and $74,368 for the partial information strategy. Total control costs were $980,907 for the perfect information and $1,042,489 for the partial information strategy. Results for the private cost-effective allocation were similar. The private cost-effective targeting strategy did not differ significantly from the social cost-effective targeting strategy mainly because aggregate compliance costs make up 99% of the total control costs.

The two regulatory design standards requiring manure storage and stripcropping on more erosive soils were also evaluated. However, neither design standard achieves the 40 percent nitrogen delivery reduction goal in the watershed.

compliance costs, targeting, agro-pollution, transaction costs, information