Optimal taxation with joint production of agriculture and rural amenities

We show that, when there is joint production of an agricultural good and rural amenities, the first-best allocation of resources can be implemented with a tax on the agricultural good and some subsidies on the production factors (land and labor). The use of a subsidy on the agricultural good can only be explained by the desire of the policymaker to redistribute income from the consumers to the farmers.

Research highlights▶ We study the optimal taxation of goods and factors of production when there is joint production of agriculture and rural amenities. ▶ When the government does not favor consumers or producers, the first-best allocation can be implemented. ▶ This is achieved with a tax on the agricultural good and some subsidies on land and labor. ▶ When one of the two groups is favored, the allocation is distorted away from the first-best. ▶ In order to redistribute from the consumers towards the farmers, the government may choose to subsidize the agricultural good.