Toward controlling nonpoint source pollution of groundwater: A hierarchical policy formulation game

An integrative approach to formulating agricultural policy instrument levels is suggested for controlling groundwater quality deterioration from agricultural chemical-use, while reconciling the conflicting goals of primary interest groups in the farm policy process. The paper develops a Stackelberg game-theoretic model of public policy formation that simultaneously determines endogenous price supports and nitrogen-use quota, as well as the optimal permissible water contamination. The analysis distinguishes between the private and social opportunity costs of producing agricultural crops and using groundwater as a repository for nitrate leachate from agricultural sources. It is recognized that the social benefit of using nitrogen in agriculture is less than the private benefit to producers. Private and social benefits, as well as optimal production and pollution solutions, will vary as the relative weights which policymakers attach to different social constituents change. The method developed in this paper may be applicable to any policy process in which policymakers exercise indirect influence over industrial production decisions through economic instruments.