Costs of controls on farmers' use of nitrogen : a study applied to Gotland

Abstract: The purpose of this thesis is to compare policy instruments with respect to cost efficiency, income distribution effects, technological change and violation incentives. The policy instruments under study are quota, charge and permit market system. The analysis is applied to Gotland, an island in the Baltic where the content of nitrate in drinking water is high. As in many other agricultural districts, the source of pollution is farmers’ use of nitrogen.According to the results, a permit market performs best with respect to cost efficiency and income distribution effects. The empirical calculations show that a permit market system may amount to half the cost of the most expensive alternative. All three policy instruments are found to encourage technological change, although to different degrees. In most instances the incentives for technological adjustments are highest for the charge and permit market systems.The incentives to violate regulations may be the smallest under a permit market system. But they can also be higher and of the same magnitude as under a charge system. The main reason for this variation is that the occurrence of illegal use of nitrogen affects the marketclearing price of permits. This, in turn, may reduce the economic incentives to violate regulations of a permit market system.