Policy Implications of a Water Quality-constrained Dynamic Model of Nitrogen Fertilizer Use

Abstract

Summary This paper has demonstrated that the omission of a time lag associated with contaminant transport processes will result in sub-optimal nitrogen fertilizer use by, first, presenting a surface and groundwater quality-constrained dynamic optimization model of nitrogen fertilizer use. Potential groundwater contamination has been presented in a probabilistic manner, with the probability of contaminant level exceeding the MCL. Second, we have discussed the economic effects of fiscal programs including a user tax and a unit subsidy for the reduction of nitrogen fertilizer use. We have highlighted that the introduction of a unit subsidy program via redeemable coupons transforms the fertilizer market into a market characterized by perceived imperfect competition, and the government subsidy expenditure under imperfect competition is greater than under perfect competition. Therefore, directly incorporating water quality-constraints, and accounting for perceived imperfect competition results in a better understanding of the impacts of government policy.