The EU has argued that some agricultural subsidies are needed to provide the optimal amount of externalities (both positive and negative) produced by agriculture. The argument is that agriculture is "multifunctional" and externalities such as rural development and landscape would be underproduced, while some forms of pollution (such as nitrogen runoff) would be overproduced without government intervention. Meanwhile, the United States has raised the concern that multifunctionality is primarily an argument to transfer income to producers. One way to try and determine how much of these non-commodity payments are directed to externalities and how much is intended to distribute income to producers is to analyze the variation of the programs among the different member states of the EU. We estimate the degree to which environmental characteristics, agricultural characteristics and political economy variables determine the objective and amount of funding each member states uses to address environmental externalities (both positive and negative). Results indicate that little of the variance in agri-environmental expenditure can be explained by the difference in negative externalities, neither is there clear evidence that the payments are substituting for traditional agricultural subsidies. However, demand for environmental services and political variables seem to be the driving motivators behind a country's decision to spend money on agri-environmental programs.


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