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Extra resources for Linkages between Agricultural Policies and Environmental Effects : Using the OECD Stylised Agri-environmental Policy Impact Model (OECD Green Growth Strategy)

Sample text

By giving weights to different environmental aspects in the programme, the index establishes the relations between these aspects as concerns their relative priority (like the Environmental Benefits Index [EBI] in the United States). As index weights are typically known prior the auction, the index helps farmers to assess how their actions affect their chances of getting their bids accepted. Unlike previous index applications, where the weights given to the chosen environmental aspects are based on expert assessment, the weights of runoff reduction and biodiversity conservation are developed using Finnish valuation studies concerning biodiversity benefits and nutrient runoff damages.

Moreover, farmers promising to reduce fertilizer application are required to make a costly soil nutrient test and to report the actual amount of applied fertilizer to prevent moral hazard associated with non-point pollution. Drawing on the farmers’ bids, a single score value (I) will be computed for each application. The applications will be accepted according to the score value in so far as the scores exceed a cut-off value ( I c ) , which is defined endogenously after the bids have been submitted.

6) The economic problem of the farmer is to choose l and m (and thereby the bid r) so as to maximise the expected profits (6) from the bid subject to (4) and the obvious constraints E (l , m) ≤ 1 and r ≤ R . The Lagrangean for the problem reads as, [ ] L = π 1 (l , m) − π 0∗ + r (l , m) F ( I ) + λr ( R − r ) + λ E (1 − E ) (7) At an interior solution the Lagrange multipliers are zero and the first-order conditions can be expressed as rR º F ' ( I ) ª l 0 : (1 − m)[ pf l − c ] + rl = − «ω e El + ω r 2l » ΦI R ¼ F (I ) ¬ (8a) LINKAGES BETWEEN AGRICULTURAL POLICIES AND ENVIRONMENTAL EFFECTS © OECD 2010 4.

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