Transaction Costs of Environmental Policies and Returns to Scale: The Case of Comprehensive Nutrient Management Plans

Environmental policies are considered to be more onerous for small businesses than for large ones due to increasing returns to scale of abatement technologies as well as transaction costs. Comprehensive nutrient management plans (CNMPs) are being promoted to reduce excess nutrient applications on livestock farms in order to improve water quality. Development of CNMPs has been shown to exhibit increasing returns to scale but these costs did not include farmer time and the estimates were made when the program was relatively new. Data from a farmer survey as well as interviews with government staff are used to characterize the magnitude and determinants of the transaction costs of CNMP development in the Midwest. The analyses confirm that transaction costs borne by farmers exhibit economies of scale.