Uniform and Non-Uniform Second-Best Input Taxes

We investigate second-best, input-based taxes foragricultural nonpoint pollution control when marketprices are endogenous and production isheterogeneous. Theoretically, we derive the optimalforms of taxes which take account of heterogeneity(non-uniform taxes) and a tax which does not (auniform tax). Empirically, we use a multi-factor,market-equilibrium simulation model to determineoptimal tax rates and associated equity effects,particularly differences in landowner gains/lossesacross a heterogeneous region. When market prices areendogenous, second-best tax policies result inpecuniary externalities that affect existingenvironmental externalities. In particular, thepecuniary externalities amplify the effect of producerheterogeneity on determination of sub-regionaldifferences in tax rates and returns to land,particularly for the uniform policy. With endogenousprices, the uniform tax rate is considerably higherthan any of the non-uniform rates and, ironically, thenon-uniform taxes result in less dispersion oflandowner gains across sub-regions than the uniformtax.