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Abstract
This paper develops a general equilibrium framework to determine the optimal set of
internalizing policies under multifunctionality and relates these policies to trade. When
agriculture generates both amenity benefits and pollution, a welfare maximum can be achieved
through a combination of a subsidy on agricultural land and a tax on polluting inputs, but the
levels of these policies must be selected jointly. To illustrate this interaction, a set of stylized
policy simulations of the aggregate U.S. agricultural sector is performed. The estimated optimal
subsidy on farmland exceeds its social amenity value by approximately 50%. If opened to
international trade, small economies have no incentive to distort environmental policies away
from their internalizing levels, but large economies will manipulate domestic policies in order to
exploit terms of trade. As a large agricultural exporter, the U.S. could manipulate its
environmental policy set to increase world agricultural prices by an estimated 9% over a base
case of no environmental policy.