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Abstract

Governments in developed countries aim to increase the market share of organic products as a possibility to improve the environment or animal welfare or as a reaction to food crises and changing consumer preferences. Assuming that organic farming creates a positive externality, we address the question of how this environmental benefit can be internalized best. We use the concepts of heterogeneous producers with different unit production costs and heterogeneous consumers with different preferences for conventional and organic food, and compare two policy options to enhance organic supply and demand with respect to their efficiency and distributional effect: Firstly, we analyze the effect of a supply-side oriented policy like a subsidy on organic production on equilibrium prices and quantities, and producer and consumer welfare. Secondly, we compare this policy measure with a demand-side oriented information policy, which aims to enhance the acceptance and identification of an organic label. The main findings of this paper are that in either case, producers and consumers of conventional food are worse off, organic producers and consumers experience a gain in welfare, but the change in welfare is identical under the two policy options.

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