Environmental policies and United States agriculture: An application of general equilibrium model

Agriculture is one of the major sources of water quality impairment, and chemical fertilizer causes most of the surface water contamination. The purpose of this thesis is to design two fertilizer tax systems (Uniform Tax vs Differentiated Tax) embodied in a Computable General Equilibrium model, and to access impacts of the tax on US economy. All markets are assumed to be perfectly competitive, and there is no substitution between agricultural factors and non-agricultural factors in production. When the general fertilizer tax is 500% (i.e. to raise the price of the fertilizer six times as high as the base year), prices of the Food Grains and Feed Grains increase by about 14% compared to the base year, and outputs of the Food Grains and Feed Grains drop by about 23% compared to the base year. Demand and supply for the Food Grains and Feed Grains reduce significantly. Changes in prices and quantities in non-agricultural sectors are not significant. Compared to the base year, fertilizer price rises to 5.4854 when the general tax rate is 500%. Domestic output of fertilizer drops by 6.46%, domestic sales for fertilizer drops by 4.92%, and export of fertilizer decreases by 17.78%. However, more fertilizer is used as intermediate input when the tax is added to its price. In the base year, 82% of the fertilizer produced is used as intermediate input. When the general tax rate is 500%, 85% of the fertilizer produced is used as intermediate input. Since the reduction in fertilizer use is not significant even when the tax rate is 500%, to impose the fertilizer tax might not be an effective instrument to improve water quality in a short run.