Estimation of Optimal Tax Level on Pesticides Use and its Impact on Agriculture

Abstract

The optimal tax level on pesticides use is estimated based on the approach suggested by Kalaitzidakis, Mamuneas, Nicholas, Stefanou, Stengos (2010) as some amendments in the proposed model are done. The period in the analysis is 2002 – 2008, and the optimal tax for each case study is estimated as an average for the period. The optimal tax level is estimated for Bulgaria, Portugal, France, Germany, Poland and Hungary. The optimal tax levels on pesticides use obtained in all analysed cases are generally low, less than 50%, and are highly dependent on the assumption of the effect of pesticide use on the final consumption of agricultural good and not so much dependent on the assumption of the effect of the consumption of the agricultural good on overall utility and to the effect of environmental quality on overall utility. This practically means that consumers would value much more the effect of reduction of pesticides use on final consumption of agricultural goods than other external effects of pest use.
The optimal tax level estimated is used to evaluate the impact of tax introduction on farm level in Bulgaria and Portugal. In both cases, the highest level of the effect on consumption is used. This means that in case of Bulgaria the tax level is established at 14% thus leading to an increase in price of pesticides used by 14% and in Portugal – at 31% leading to an increase in prices of pesticides by 31%. The impact at farm level is evaluated based on the model developed by Skevas, Stefanou, Lansink (2011) and some amendments are done in model due to data availability in both countries.
The study shows that the effect of introduction of tax at farm level is relatively insignificant if the level of the tax is less than 50% in both countries, Bulgaria and Portugal. Impact that is more substantial could be expected in respect to the cost of pesticides in case of tax higher than 50%. The high taxes are needed to achieve significant reduction in use of pesticides. The impact of tax introduction depends on specialization of the farms. It is higher in the cases for farms with orchards and vineyard specialization than on average for all farms.
Having in mind that generally the use of pesticides is relatively inelastic to the price of pesticides which has been proven by the two case studies performed imposing tax less than 50% for Bulgaria and Portugal would not lead to substantial reduction of pest use and as the share of costs for pesticides in total cost on production (8 – 10% though the period 2002 – 2008 on average for agriculture) this increase in price of pest would lead to relatively low increase (less than 2% in case of Bulgaria and less than 3% in case of Portugal) in the total cost of production and that will not lead to a substantial reduction in pest use. Therefore, in two case study regions the effect of the introduction of tax on pesticides use even at highest socially optimal level is doubtful.