I build an empirical model of the South American agricultural sector to show how environmental policy is transmitted along a supply chain when regulation at the externality’s source is infeasible. Given obstacles to a carbon tax on farmers, I show how alternative market-based policies—downstream agribusiness taxes—reduce upstream emissions but their effectiveness is limited by international leakage and domestic mistargeting, while also being regressive. Agribusiness monopsony power worsens targeting by lowering pass-through to upstream farmers in uncompetitive and emissions-intense regions, thus eroding the Pigouvian signal where social cost is highest. By contrast, command-and-control tools perform robustly when markets face pre-existing distortions.

This talk is presented by the Applied Microeconomics/Industrial Organization Seminar, sponsored by the Department of Economics with generous gifts given through the Jean Coven Speakers Fund in Economics and the Economics Strategic Fund.