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Abstract
Models used for policy evaluation rarely consider firm heterogeneity, despite its
importance for instrument design. This study considers agent heterogeneity explicitly
in the evaluation of policies for nonpoint pollution control through the integration of
decomposition and calibration procedures for programming models. The application
concerns the regulation of nitrate leaching from intensive dairy production in the Waikato
region of New Zealand. Failing to represent firm heterogeneity leads to widely
different estimates of mitigation costs, relative to where heterogeneity is considered.
Variation in baseline emissions and the slopes of abatement cost curves between firms
renders a differentiated policy less costly than a uniform standard. However, the relative
values of these policies are not broadly different, as firms required to do the most
abatement – intensive farms with large baseline pollutant loads – can do so more
cheaply, on average.