Hot spots in animal agriculture, emerging federal environmental policies and the potential for efficiency and innovation offsets

In North America and Northern Europe high livestock densities in concentrated areas (hot spots) have led to manure surpluses, which have resulted in water pollution problems. Using the emerging policy objectives for animal waste in the European Union and the USA as a backdrop, this paper discusses the impact of environmental regulation on farm profits. A theoretical model of the farm is presented where pollution is a joint output of production and where inefficiency in production prevails. Given this assumption, environmental regulations affect both the level of inefficiency and the extent of technological change and can induce cost offsets. Data from the Netherlands, where strict environmental regulation has been in place for animal agriculture since 1987, are used to test the hypothesis about efficiency and innovation offsets. Furthermore, differences in these offsets between farm types are assessed.