Market Incentives Versus Regulation

Op-Ed by Gal Hochman, C-FARE Board Chair and Professor at Rutgers University

While economists recommend using market incentives, there is the widespread use of regulation to achieve agricultural and environmental resource management objectives. Concerns about climate change, the environment, food security and resilience, and the agricultural sector's economic viability have led to various government interventions. While economists advocate for financial incentives like a carbon tax, most interventions are through regulations and subsidies. One explanation the late Martin Weitzman provided is uncertainty about policy outcomes and industry behavior. Other alternative explanations for policy choices include political economy and political power that affects the distribution of benefits and costs. The desire of incumbent governments to establish irreversible outcomes given political uncertainty leads them to set facts on the ground. The government promotes the early adoption of technologies, thus establishing policy durability. Additional explanations include uncertainty and credit constraints, which constrain the establishment of new industries and supply chains. 

These approaches may explain both environmental and agricultural policies. In the case of Environmental Policies, the political environment elects not to use a carbon tax and, instead, use various forms of command and control. In agriculture, we have a mixture of semi-market-based policies, for example, crop insurance, storage control, and conservation reserve program, with an element of subsidy. 

Understanding their impact and motivation is challenging and valuable. An upcoming NIFA funded pre-conference workshop for the Agriculture & Applied Economics meeting on July 22, 2023 – C-FARE Brandt Forum Agricultural and environmental policy: opportunities and challenges for US agriculture and the environment, aims to shed new light on policy design focusing on the United States agricultural and environmental policy.