Cover Crops and Water Quality

This work deals with the regulation of water pollution caused by the use of nitrogen in agriculture. We investigate the policy instruments that should be implemented to induce socially optimal water quality. To do so, we propose a dynamic theoretical framework. We focus on the potential of cover crops to preserve water quality by considering the impact of soil quality on water quality to be endogenous: we consider two interrelated dynamic equations, one for soil quality and one for water pollution, that interact through soil quality. The land area devoted to cover crops increases the soil quality stock which, in turn, decreases the water pollution stock. We show that the socially optimal fiscal scheme consists in two parts: one that acts at the intensive margin (proportional to nitrogen use) and one at the extensive margin (proportional to land cultivated with cover crops).