A structural model of agricultural land use for predicting the impact of policy change
This paper develops a structural econometric model of land use in the United Kingdom to
investigate the impact of policy changes upon agriculture. The model starts from a general farm
profit function and derives accordingly the land use allocation equations. The empirical
specification is based on a normalized quadratic profit function and it is estimated on a large panel
database covering the entirety of England and Wales for 12 years between 1976 and 2004,
integrated with the economic and physical environment determinants of all major agricultural land
use types. Our model performs well in out of sample prediction of current land use and we apply it
to assess a proposed implementation of the Water Framework Directive via a tax on fertilizer.
Results indicate that such policy change would generate substantial switching from arable to
grassland systems, reducing significantly the amount of nitrate leaching into UK water-bodies.