Ecological Economics 30 (1999) 29 – 46 ANALYSIS Alleviating soil erosion/pollution stock externalities: alternative roles for government Edna T. Loehman *, Timothy O. Randhir Department of Agricultural Economics, Purdue Uniersity, West Lafayette, IN 47907, USA Received 1 March 1994; received in revised form 15 June 1998; accepted 18 June 1998 Abstract This paper addresses two temporal externalities due to agriculture: soil erosion and related pollution. The possibility of decentralization of decisions, the appropriate role of a resource manager, and the efficiency of alternative policies are examined using traditional welfare economics concepts for a two-sector model of rural – urban linkage. Three alternative types of policies can be socially efficient, but imply different involvement by government, and have different knowledge requirements. A Pigouvian policy requires full information. A bargaining solution involves government only in setting an entitlement, but it may require too much knowledge by rural households in terms of understanding dynamic environmental relationships. A third way is that government and rural households be co-producers of environmental goods. This concept assigns government the responsibility for maintaining knowledge about environmental relationships, and government is a participant in a market system that determines prices for environmental-related goods. © 1999 Elsevier Science B.V. All rights reserved. Keywords: Soil erosion; Pollution; Stock externalities; Policies; Incentives; Tax; Subsidy; Bargaining entitlements; Decentralization 1. Introduction Soil degradation is a common occurrence in Third World countries as growing populations try to satisfy subsistence requirements with limited resources. If current trends continue, agricultural output will not be sustainable in the long run in many areas. For example, from an interview with a scientist at the Chinese Academy of Sciences in 1988: ‘Unless urgent measures are undertaken, desertification will erode an additional 29000 square miles by the year 2000, more than twice the area of Taiwan’ (Postel, 1991). This is an example of the ‘tragedy of the commons,’ consid- ering soil quality to be a common property resource. * Corresponding author. Fax: +1 765 4949176; e-mail: Loehman@agecon.purdue.edu 0921-8009/99/$ - see front matter © 1999 Elsevier Science B.V. All rights reserved. PII: S0921-8009(98)00067-6