Second‐Best Tax Policies to Reduce Nonpoint Source Pollution

Control of nonpoint source pollution often requires regulation of inputs, but first‐best solutions are unattainable. Because inputs are monitored by different agencies and regulatory coordination can be costly, it may be more practical to regulate single inputs. A cost‐effectiveness approach to determining the best single‐input tax policy is developed and applied to the question of reducing nitrate leaching from lettuce production in California. Water is the best single input to regulate, and efficiency losses from this second‐best approach appear not to be great. Conditions for the welfare ranking of policies to be invariant to heterogeneity in production or leaching are identified.