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Policy-related transaction costs of agricultural policies
in Finland

Markku Ollikainen1*, Jussi Lankoski2 and Sami Nuutinen1
1Department of Economics and Management, PO Box 27, FI-00014 University of Helsinki, Finland,

2OECD, Directorate for Trade and Agriculture, Paris, France
*e-mail: markku.ollikainen@helsinki.fi

This paper assesses policy-related transaction costs (PRTC) associated with the main agricultural and
agri-environmental policy instruments in Finland. We find that area-based income support measures entail
low transaction costs as expressed in percent of payments, not only in Finland but also in other European
countries. Moreover, transaction costs in the Finnish agri-environmental programme are surprisingly low.
Within the agri-environmental programme, transaction costs increase with more targeted and differenti-
ated agri-environmental measures. For the basic mandatory measures, these costs are even lower than the
transaction costs for the area-based income support measures. What regards the most differentiated policy
measures such as conservation of special biotopes or establishment of riparian buffer zones, transaction
costs increase considerably. Combining these findings with the actual targets of the Finnish agricultural
policies provides indirect evidence about the impacts of policy instruments and the efficiency of administra-
tion in implementing the instruments. For area-based income support measures, the Finnish administration
seems to work very efficiently. For water protection targets, enforcement and division of labour within the
administration seem to be insufficient.

Key-words: transaction costs, agricultural policies, targeting, efficiency of administration

Introduction

Agricultural policy measures have traditionally
required administration and monitoring. Recent
policy shifts from commodity production coupled

support payments towards decoupled payments that
are targeted to specific environmental or farm income
objectives will further increase administration and
monitoring of policies (OECD 2007). Decoupled and
targeted policies imply increased administration and
monitoring, and therefore also higher implementa-

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tion costs for the government. Administrative costs
of agricultural policies accrue at national, regional
and local levels of administration. It has become
commonplace to name these costs as policy-related
transaction costs, PRTCs (see OECD 2007).

PRTCs belong to the more general class of
transaction costs, introduced by Ronald Coase
(1937) when explaining the nature of firms. The
concept has been further developed especially in
the work of Williamson (1985). OECD has given
the following broad definition of transaction costs:
“Broadly defined, transaction costs could include
all costs associated with any allocative decision re-
gardless of whether the decision is made in a mar-
ket or by government” (OECD 2007, 21). Furubotn
and Richter (1998) suggest that the broadly defined
transaction costs can be divided into institutional
transaction costs, managerial transaction costs
and market transaction costs. The policy related
transaction costs belong to the class of institutional
transaction costs (OECD 2007). They cover the
costs associated with the transaction between the
government and farmers, that is, costs that are as-
sociated with a given policy or policy reform.

PRTCs are important for any policy or policy
reform for two reasons. First, tracking and meas-
uring PRTCs helps to assess the costs of public
administration and to improve administrational ef-
ficiency, thereby making better use of public funds.
For instance, a comparison of PRTCs between the
EU countries may reveal important differences in
the efficiency of national administration. Second,
accounting for PRTCs is important for designing
policy alternatives and choosing optimal policies.
Recent policy reforms imply increased targeting,
that is, improved precision of policies. However,
increasing precision increases policy-related trans-
action costs in a percent of payments (see Vatn et
al. 2002). Therefore, a good grasp of PRTCs is
required to find a policy that has a good balance
between improved precision and increased transac-
tion costs.

Indeed, there has been a lot of policy debate
concerning whether the potentially higher PRTCs
of more decoupled and targeted policies can be
large enough to offset the economic benefits of
such policies (for a comprehensive treatment of

PRTCs of agricultural policies, see OECD 2007).
As shown by Vatn (2002) and others, the trade-
off between the precision of agri-environmental
policies and the associated PRTCs is obvious. For
instance, reducing nitrogen runoff can be shown to
require a combination of a fertilizer tax (restriction)
and buffer strip payment that are differentiated ac-
cording to the land productivity and environmental
sensitiveness of field parcels. However, accounting
for the transaction costs may reveal that adhering
to uniform instruments instead of differentiated in-
struments is cheaper for the society (see Lankos-
ki and Ollikainen 2003). Hence, when designing
policies, the key question is how great the PRTCs
are.

It is somewhat surprising that, despite the fact
that the importance of PRTCs for policy choice
is widely recognized, PRTCs have seldom been
included in formal models for agricultural and
agri-environmental policy making (OECD 2007).
Moreover, there are only a few studies that provide
empirical estimates of PRTCs of agricultural and
agri-environmental policies. These include notably
Falconer and Whitby 1999, Falconer et al. 2001,
Falconer and Saunders 2002, Mann 2000, McCann
and Easter 1999, McCann and Easter 2000, Vatn
et al. 2002, and Rørstad et al. 2007. The common
way to define PRTCs in this literature has been to
express them as a percentage of transfers.

Overall, this empirical literature shows that
there is huge variation in PRTCs between differ-
ent agricultural and agri-environmental policy in-
struments. As a percent of transfers or payments,
PRTCs range from less than 1% up to over 110%
(see e.g. OECD 2007 and Rørstad et al. 2007).
Studies demonstrate that payments through com-
modities, arable area payments and payments based
on livestock numbers have the lowest PRTCs (see
e.g. Vatn et al. 2002, McCann and Easter 1999, Fal-
coner et al. 2001). Not so surprisingly, individually
tailored agri-environmental management agree-
ments have the highest PRTCs (McCann and Easter
1999 and Vatn 2002). Quite clearly, the number
of transactions decreases PRTCs (Falconer et al.
2001). Moreover, some studies suggest that there
is a significant learning effect, which exerts down-
ward pressure on PRTCs in the longer run (Falcon-

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er and Whitby 1999) as an indication of improved
efficiency of administration. Finally, evidence from
expenditure data from U.S. conservation programs
shows that there are substantial transaction costs in
developing and rolling out conservation programs
in their initial years, relative to ongoing costs once
programs are established (OECD 2007).

In this paper we assess the PRTCs of the main
agricultural and agri-environmental policy instru-
ments in Finland. Like Vatn et al. (2002) and Rør-
stad et al. (2007), we focus on the costs of imple-
mentation of these policies and omit the set-up
costs (initial and closing costs of a program). The
farmers’ transaction costs are also omitted here
as they are subject to another study. We collected
the data from all levels of administration by us-
ing personal interviews that covered all ministries
involved with agricultural policy implementation.
We interviewed the representative regional and mu-
nicipal authorities in Southern Finland and general-
ized these results to the rest of Finland. Given that
our focus is on the implementation of agricultural
and agri-environmental policies, the data contain
working time, average salaries, and computer costs
and other operational costs.

The main contribution of this paper is to pro-
vide, for the first time, information on the PRTCs
in Finland. We contribute to the international lit-
erature in two ways. First, we contrast the Finnish
PRTCs to those of Norway, which has similar agri-
cultural conditions. Also, we make comparisons of
PRTCs between selected EU countries; this brings
indirect information about how the administrative
efficiency, that is the effectiveness and capability
of the administration to implement policy meas-
ures, differs between these countries. Second, we
link transaction costs to the success of policies in
achieving their targets and assess how well the di-
vision of PRTCs across administrations and their
efforts in designing, implementing and monitoring
helps in achieving those targets.

The rest of the paper is organized as follows. In
the next section, a conceptual framework of PRTCs
is presented and policy instruments included in this
study are reviewed. This is followed by a descrip-
tion of data collection, the estimation results and
a comparison of those results with estimates from

other EU countries. A concluding section ends the
paper.

Framework and overview of
policy measures

In this section, we describe the conceptual frame-
work for identifying relevant elements of PRTCs and
present some typical hypotheses that affect the size
of the costs. We then discuss the agricultural policy
measures for which the data are collected.

Policy-related transaction costs:
a framework

The key concept of this study is that of policy-related
transaction costs of agricultural and agri-environ-
mental policies. To discuss PRTCs of agricultural
policies with a sharp focus, we distinguish between
the set-up costs and running costs of PRTCs. The
set-up costs of PRTCs refer to initial and closing
costs (i.e., the costs related to initiating or closing a
program) of any policy, including required agricul-
tural census systems. Typically, the implementation
and monitoring system, such as the EU’s IACS
(Integrated Administration and Control System)
takes the main share of set-up costs. The running
costs in turn refer to all ongoing variable and fixed
costs of policy implementation in practice.

Set-up and running costs have an interesting
mutual relationship. Set-up costs, typically lump-
sum costs, may originally be high, but after the
establishment of the system these costs are sunk,
so that it is the running costs of a policy that really
matter. Modifying Vatn (2001), we illustrate this
relationship in Figure 1, where the vertical axis de-
scribes PRTC and the horizontal axis the precision
of the policy in question. Precision is defined as the
degree to which the desired target is achieved and
described graphically as the distance between the
desired and realized situation.

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Figure 1 illustrates two alternative policies:
Policy 1 with associated transaction costs (P1) en-
tailing high set-up costs, F, but low running costs
ts(p), and Policy 2 with associated transaction costs
(P2) with zero set-up costs but high running costs
TS(p). As Figure 1 demonstrates, despite the fixed
costs, the total PRTCs under Policy 1 are lower
than those of Policy 2 when the policy precision
level is higher than p’. The important lesson of
Figure 1 is, thus, that existing implementation and
monitoring systems, such as the EU’s IACS, entail
sunk set-up costs but can benefit many alternative
policy designs. For this reason, the focus of the
study is on running costs of policy instruments,
because most likely the running costs differ signifi-
cantly from one policy measure to another.

The link of PRTC to actual policy and the im-
portance of understanding transaction costs are

illustrated in Figure 2, which describes the mar-
ginal social costs (MSC) and marginal social ben-
efits (MSB) of a given policy i as a function of its
precision. The MSB curve is decreasing in preci-
sion and varies in the type of the good in question.
The vertical axis of Figure 2 measures marginal
social benefits and marginal social costs of a policy
whereas the horizontal axis measures the precision
of this policy.

In Figure 2, if transaction costs are neglected,
the optimal policy in terms of its precision would
be p*. However, at that point the marginal social
benefits are lower than the overall marginal social
costs comprising transaction costs. Hence, the op-
timal policy would be to choose p**, which implies
less precision in the policy.

OECD (2007) distinguishes between three
main sub-categories of PRTCs for budgetary pay-
ments for agricultural policies: initial and closing
costs (set-up costs), implementation costs (running
costs) and farmers’ participation costs.1 Specific
items under each category are represented in Fig-
ure 3.

PRTCs occur first at the governmental level,
where the policy is explored and designed. The de-
signed policies need to be enacted and the required
consensus between government and civil society
has to be built. Policy implementation comprises
the distribution of support and monitoring and con-
trol. Distribution of payment comprises the identi-
fication of beneficiaries, processing of applications
and the provision of payment. The processing of
applications may sometimes need further fine-tun-
ing and special conditions, individual or collective
projects and technical assistance. Eligibility and
compliance need to be monitored. Enforcement
and litigation might follow, if required compliance
is not achieved. Participation costs refer to all costs
that farmers have to bear to participate in the policy
(OECD 2007).

In this study the focus is on the middle sub-
category, the costs of implementing agri-environ-

1 This is by no means the only way of defining the
relevant transaction costs. For instance, Dahlman (1979)
breaks up the transaction costs in three components: the cost
of information gathering, the cost of contracting and the cost
of control.

P1 = F + ts (p)

PRTC

P2 = TS (p)

Precision, p
p’

Fig. 1. Set-up costs, unit costs and the precision of
policies

MS Bi

mci (p)

Precision, p

MSB i , M S C i

p* p**

M S Ci = mc i (p) + Pi (p)

Fig. 2. The impact of PRTCs on optimal policies

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mental policies. As we analyze administration, the
participation aspect is omitted, as well as set-up
costs. However, given that agri-environmental
policies are revised every five to seven years, we
include the costs of design (which has in practice
been fine-tuning in Finland) in our analysis. The
costs identified in Figure 3 for this study can be
assessed using either direct interviews, top-down
or bottom-up approaches (for these methods, see
OECD 2007).

As for the expected size of the identified cost
items, we follow Williamson (1985). He identifies
three main factors affecting the transaction costs
for different goods: asset specificity, frequency
and uncertainty (for a discussion, see Milgrom
and Roberts, 1992, 303-313). Rørstad et al. (2007)
applied these concepts to agri-environmental poli-
cies as follows. If asset specificity (variation in
the quality of the good in question) is high, poli-
cies targeted to it may entail high PRTC, and vice
versa. Hence, environmental goods, such as local
landscape features and semi-natural habitats, imply
that agri-environmental policies targeted directly to
their provision may have high PRTCs. By contrast,
targeting market goods with low asset specificity,
such as commodities, fertilizers and pesticides en-

tails potentially low PRTCs. The higher the trans-
action frequency (how often the transaction is un-
dertaken, or how many operations or contracts can
be treated equally) and the number of agents, the
lower the PRTCs per program participant or per
contract will be. Uncertainty relates to behavior
under asymmetric information; the higher the in-
formation gap the higher the PRTCs. Uncertainty
and PRTCs are negatively linked to the frequency
of transactions, as frequent transactions create
trust (Rørstad et al. 2007). Note that through these
features PRTCs occur at all stages of the policy
process: design, implementation, monitoring and
evaluation of policy.

Agricultural and agri-environmental
policies in Finland

Before the implementation of the Single Farm Pay-
ment Scheme as part of the Mid-Term Review of
the EU Common Agricultural Policy, the Finnish
agricultural policy consisted of the following main
agricultural support measures: CAP compensation
payments, Compensatory allowances (support

Transaction costs

Implementation costs

Farmers’ costs

Distribution Monitoring/control

Identification of
beneficiaries

- filling forms

- transport

- etc.

Actual payment

Compliance and
enforcement

Eligibility

Participation costs Set-Up Costs

Processing of
applications,
including
contracting

Research,
information

Design

Enactment/
consensus
building

Evaluation
Monitoring of
implementation

Fig. 3. Sub-categories of poli-
cy-related transaction costs for
the provision of budgetary pay-
ments – modified from OECD
(2007) and Mann (2000).

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for Less Favoured Areas, LFA), National support
and Agri-environmental support. We assess the
PRTCs for all these support forms. In terms of
our framework, we can expect that the PRTCs for
area-based CAP support (CAP and LFA payments)
and National support differ from those of the agri-
environmental support. While the other support
measures are frequent, simple and subject to easy
monitoring, agri-environmental support measures
are less frequent, differentiated and more subject to
opportunistic behaviour due to asymmetric informa-
tion. Hence, the natural hypothesis is that the other
examined support payments entail lower PRTCs
than agri-environmental support payments.

CAP compensation payment is paid on the ba-
sis of the arable area and the number of animals
and it constitutes a central policy instrument in the
common agricultural policy of the EU. These area
payments are based on regional reference yields
on the basis of historical production. Area-based
CAP support also includes the so-called drying
aid (24 €/ton) in Finland and in Northern Sweden.
The amount of support is 295 €/hectare in support
area A, € 243/ha in areas B and C1 and € 200/ha
in areas C2-C4 (Niemi and Ahlstedt 2005). The
location of different agricultural support areas in
Finland is shown in Figure A1 in Appendix and the
level of payments in Table A1 in Appendix. CAP
support is fully financed by the EU. Compensatory
allowances (LFA support) are intended to equalise
differences between different agricultural regions,
guarantee farming and maintain the rural popula-
tion. LFA support is paid in all areas of Finland
and the average EU contribution is 32%. The LFA
support is € 150/ha in support area A, € 200/ha in
support areas B and C1 and in support areas C2-C4
it is €210/ha. (Niemi and Ahlstedt 2005).

Acreage-based national support is divided into
four main policy measures: Northern aid, National
aid for Southern Finland, National supplement to
the agri-environmental support, and National sup-
plement to the LFA support. These payments are
intended to secure the preconditions for Finnish
agriculture in different support regions and produc-
tion lines. The support is based on cultivated area
and crop, livestock units, and support area (Niemi
and Ahlstedt 2005).

The agri-environmental support compensates
the farmers for extra costs incurred and income
losses due to the undertaking of environmental
measures. The contribution of the EU is on the av-
erage 55 percent (Niemi and Ahlstedt 2005). The
agri-environmental support consists of basic meas-
ures, additional measures and contracts for special
environmental measures. There are five basic man-
datory measures. A farmer that participates in the
agri-environmental support scheme gives a com-
mitment to the basic measures for five years. The
amount of support is €93/ha. In addition to these
five basic measures, livestock farmers have a sixth
measure concerning the handling of animal manure
and for that they receive an extra payment so that
the support for livestock farmers is €117/ha.

Mandatory basic measures are as follows. Envi-
ronmental planning and monitoring in farming: the
objective of this measure is to establish an active
planning and monitoring system. Basic fertilisa-
tion levels of arable crops: here the objective is to
reduce the nutrient load to surface waters, ground
waters and emissions to air by a more precise use of
fertiliser and manure. The objective of plant protec-
tion is to reduce pesticide emissions by means of
training and testing of the equipment used in the
spreading of plant protection products. Headlands
and filter strips prevent and reduce the runoff of
nutrients and soil particles to watercourses. Main-
taining biodiversity and landscape aim at preserv-
ing the traditional biotopes and open arable areas
shaped by agriculture. Basic measures on livestock
farm aim at reducing nutrient runoff and emis-
sions related to the storing and handling of manure
(Kröger et al. 2004).

Besides the mandatory basic measures, each
farmer has to select one additional measure. For
this study, the following three measures were se-
lected. More precise fertilisation aims to reduce nu-
trient loads by increasing precision in the combined
use of manure and chemical fertilisers. Plant cover
in winter and reduced tillage aims to reduce erosion
and prevent runoff of particulate phosphorus and
nitrogen into surface and ground water. Additional
measures on livestock farms aim to reduce nutrient
loading, promote the welfare of production animals

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and reduce ammonia emissions from manure stor-
ages. (Kröger et al. 2004)

Special environmental measures consist of en-
vironmentally more effective measures and they
are targeted to a limited number of farmers. Con-
tracts are made for five or ten years. In order to be
eligible for these measures, the farmer must imple-
ment the basic and additional measures as well.
The following special measures were selected for
this study. Buffer zones aim to reduce erosion and
nutrient runoff through the establishment of at least
15 meters wide buffer zones to those field parcels
that have a steep slope towards a watercourse.
Traditional biotopes aim to preserve and enhance
the biodiversity of flora and fauna in traditional
biotopes (such as meadows and pastures). Their
purpose is also to maintain rural cultural heritage
and landscape values. (Kröger et al. 2004)

Levels of administrations and
generation of data

The data for this study was gathered in 2005. Fol-
lowing the logic of Figure 3, we identified the levels
of public authorities participating in the public
implementation of the Finnish agricultural policies.
The levels of administration follow the Integrated
Administration and Control System (IACS) of the
EU and comprise the national, regional and munici-
pal authorities. Three ministries are participating
in the administration of the programmes at the
national level. These ministries are: the Ministry of
Agriculture and Forestry, the Ministry in Industry
and the Trade and Ministry of the Environment. The
Ministry of Agriculture and Forestry is responsible
for the design of policies.

Administration at the regional level is conduct-
ed by the Rural Departments of the Ministry in
Industry and Trade and the Regional Environment
Centres of the Ministry of the Environment. Final-
ly, at the local level there are municipal agricultural
authorities. All levels of administration participate
in the implementation of agricultural policies.

Municipal agricultural authorities, governed by
the Rural Departments, handle, for instance, farm-
ers’ support payment applications and other related
issues. Regional Environment Centres and Rural
Departments also directly contact farmers when
promoting alternative policy measures, designing
prescriptions and monitoring the implementation of
the measures. The monitoring and enforcement of
policy is accomplished by the IACS. Monitoring
of policy consists of measurement with satellites
image and farm and field inspections. It is carried
out by the Ministry of Agriculture and Forestry,
Rural Departments, Regional Environment Centres
and municipal authorities.

Our interviews covered two ministries, the
Ministry of Agriculture and Forestry and the Min-
istry of the Environment. We chose the representa-
tive Rural Department and Regional Environment
Centres from Southern Finland, because it is the
most important area for crop production. The in-
terviews began from the Ministry of Agriculture
and Forestry. Here, the data gathering method was,
exceptionally, a top-down approach. Information
of total person-years was collected from electronic
telephone directory that includes task descriptions.
Based on that, person-years were divided between
policy measures. The overhead costs were derived
from the ministry’s report of administration pro-
ductivity program.

Data from the Ministry of the Environment are
based on direct interview in the department of En-
vironmental Protection. The duties of the Ministry
of the Environment (in year 2004) relate to agri-
environmental support design, implementation
and follow-up. In the interview, the share of basic
measures was about 10%, and the additional and
special measures took up 20% and 70% of labour
input, respectively. The share is the same for all du-
ties. On the basis of this information and allocated
time the person-years within the measures and du-
ties were divided.

The Rural Departments of Employment and
Economic Development Centres are supervised by
the Ministry of Agriculture and Forestry and the
Ministry in Industry and Trade. There are a total of
15 Rural Departments. The Varsinais-Suomi Rural
Department was chosen as the representative office

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because of its location in the main crop production
area. Within the Rural Department, the Support and
Environmental Service unit was the main focus of
this study.

In the interview, annual task calendar was used
to get overall picture of activities related to our
study. Monitoring is the most important duty of the
Rural Departments. That includes the monitoring
farmers in co-operation with municipal authorities
and the Regional Environment Centres, monitoring
municipal authorities, and different cross-examina-
tions. Monitoring information is registered at very
high accuracy. This proved helpful in the division
of the labour input for different policy measures
and administrative duties. Consequently, these data
can be considered to be very reliable.

There are a total of 13 Environment Centres.
The Centre of Southwest Finland was selected as
a representative office. Agricultural duties in the
Regional Environment Centre are supervised by
the Rural Group of Environmental Techniques and
Management Department. The duties of the Re-
gional Environment Centre concern only special
agri-environmental measures. Labour years were
allocated to the policy measures by similar time
usage estimates as in the case of the Ministry of En-
vironment. This entails some uncertainty when it
comes to allocation of person-years, yet it is based
on the assessment of a specialist.

In 2004, there were altogether 444 municipali-
ties in Finland, out of which we chose Loimaa and
Somero as the representative municipalities. Data
are based on interviews of persons responsible for
municipal rural services. The division between the
duties and measures is based on evaluated shares
of person-years. Labour and overhead costs were
derived from settlement of accounts.

We generalized the data from the interviews to
the whole Finland as follows. We assumed that the
unit implementation costs do not differ between
areas; they differ only across the measures. Under
this assumption we can define a coefficient for each
measure as the share of support payments paid in
each region to the overall support payments in the
whole country for this measure. Thus, the regional
total transaction costs of the Rural Departments,
Environment Centres and Municipal are calculated

as a sum of constant unit transaction costs from the
acreage-based support payments and from the agri-
environmental support payments multiplied by the
share of payments by the regional authorities in the
payment of the whole country.

Policy-related transaction costs
for the Finnish agricultural

policy

We follow the convention and express the transac-
tion costs as a percentage of the payment transfers.
This is generally regarded as the most convenient
way to compare different policy measures. Using
percentage expressions leans to an assumption that
transfers are a proxy for the size of the policy or the
value of social outcomes. The results are generalized
to the national level and reported in Table 1.

In Table 1, we aggregated the area-based CAP,
LFA and national support into one figure, as the
PRTCs associated with each support measure were
quite similar. This only reflects the fact that the
measures by themselves are quite similar. The
PRTCs of the basic, additional and special meas-
ures are from the interviews. While it was impos-
sible to impute costs separately for the specific sub-
measures among the basic measures, we were able
to define the costs for some selected additional and
special measures that represent a set of fairly differ-
entiated and targeted measures. This was done by
assuming that the costs of the agri-environmental
policy measures vary with the number of hectares
they are applied to.

From Table 1, the basic lesson is quite evident.
PRTCs for CAP, LFA and national supports are rel-
atively low. These measures are very frequent and
simple, and given the IACS system, they are easy
to monitor. Thus, PRTCs should be low. As we will
shortly see, these figures are perfectly in line with
findings in Norway and many other countries.

Interestingly, the PRTCs in percent of the total
agri-environmental support are quite low, too. They

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are only slightly higher than the PRTCs associated
with the area-based support. The explanation for
this feature is two-fold. First, the share of basic
measures in the agri-environmental support pay-
ments is large, and the farmers’ participation rate
in basic measures is high (more than 92% of farm-
ers), making thereby the magnitude of payments
large, since 90% of agri-environmental funding
is allocated to basic and additional measures and
only 10% to special measures. The high participa-
tion rate and large payments decrease the percent
PRTCS. Second, the enforcement costs of basic
measures are fairly low: All basic measures ad-
dressing land use and crop choices are quite easy
and inexpensive to monitor due to establishment of
the IACS system. However, a sub-measure that is
difficult to monitor and enforce is the application
limits for fertilizer use.

We next focus in detail on the basic, selected and
additional measures within the agri-environmental
support programme. The basic measures have low
PRTCs – even lower than those associated with the
CAP, LFA, and national support payments. In line
with our hypothesis, PRTCs increase when mov-
ing from basic measures to selected additional and
special measures. The selected special measures
entail the highest PRTCs 33.1%.

Within the selected additional measures, the
measure on livestock farms has fairly low PRTC;
it is only about half of the average PRTCs for addi-
tional measures. Interestingly, payments to a more
precise fertilisation have higher PRTCs than other
additional measures. The special measures entail
high transaction costs. These arise from a large la-
bour input for design and monitoring. The differ-
ence between percent PRTCs of traditional biotopes
and riparian zones was larger than expected, since
traditional biotopes are a very site-specific meas-
ure. As design and monitoring of riparian zones
require significant labour input and total payments
are quite low, the percent PRTCs were highest of
the analysed policy measures.

Table 2 indicates how the PRTCs are associ-
ated with the area support payments and agri-envi-
ronmental support at each level of administration.
Also, it shows how the transaction costs emerge
from the three basic operations, policy design, im-
plementation, and monitoring.

From Table 2, the share of the Ministry of Ag-
riculture and Forestry is almost 25 million euros,
which makes 61% of the total PRTCs. The Ru-
ral Departments have PRTCs of 7.6 million euros
(18.6%); the share of municipal authorities is 13%
and Regional Environment Centres 10%. While
implementation entails the highest PRTC item in

Measure
PRTC,
€ 1000

Subsidy,
€ 1000

PRTC/subsidy,
%

CAP-, LFA- and national support 32 077 1 519 000 2.11
Agri-environmental support 8 664 312 000 2.78
Total 40 741 1 831 000 2.23
Forms of the agri-environmental support
Basic measures (total) 3 079 211 000 1.46
Additional measures (total) 2 719 40 620 6.69
More accurate fertilization 471 4 800 9.81
Plant cover in winter and reduced tillage 1 710 21 270 8.04
Additional measures on livestock farms 538 14 550 3.70
Special measures (total) 2 866 8 670 33.06
Buffer zones 1 131 2 640 42.83
Traditional biotopes 1 735 6 030 28.77

Table 1. PRTC of the Finnish agricultural and agri-environmental policy measures in the year 2004.

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the CAP, LFA and national support, PRTCs in mon-
itoring are the biggest item in agri-environmental
policy. The share of monitoring costs of the total
PRTCs in agri-environmental scheme is about 42%
which is almost twice as high as monitoring costs
in the area payment support. However, the abso-
lute cost is about € 3.64 million, which cannot be
regarded high.

Table 3 provides a more detailed look at the
PRTCs associated with the mandatory, additional,
and selected measures of the agri-environmental
support.

Table 3 contains many interesting features.
Most of PRTCs for the Rural Departments emerge
from the monitoring of the basic and additional
measures. In contrast, the respective figure of the
local administration, the municipal agricultural
authorities is just 1%, although they should have
in principle the best possibilities to monitor the
farmers. The task of monitoring is mostly a duty
of Rural Departments. Environmental centers have
the role only in the case of special measures. An
interesting observation is that the share of PRTCs
in design is very high, 52% of total PRTC of the
Environmental Centers. This is due to the fact that

buffer zones and traditional biotopes require a lot of
labor input to make both regional and farm specific
plans for these measures. As pointed out by the
referee, the design by the Environmental Centers
can equally well be interpreted as the implementa-
tion of the agri-environmental policy. This would
imply that the more than 90% of their PRTCs are
due to implementation.

In Figure 4 we omit the allocation of PRTCs
between the administrations and demonstrate how
the total policy-related transaction costs are divided
in aggregate between policy design, policy imple-
mentation, and monitoring.

From Figure 4, in comparison to area-based
income support measures, the basic and additional
agri-environmental measures imply a higher share
of monitoring costs. In fact, monitoring costs rep-
resent approximately 60% of transaction costs in
the case of basic and additional agri-environmental
measures. In the case of specialised agri-environ-
mental measures, the share of policy design is rela-
tively highest, which is explained by the heteroge-
neous and site-specific nature of these two policy
measures. Indeed, both of these special measures
require a detailed site-specific planning, which in-

Measure and authority
Total PRTCs,

€ 1000
PRTCs in
design, %

PRTCs in
implementation, %

PRTCs in
monitoring, %

CAP, LFA and national support 32 077 24 55 21
Ministry of Agriculture and Forestry 23 340 29 58 13
Ministry of the Environment 0 0 0 0
Rural Departments 3 678 0 0 100
Environment Centers 0 0 0 0
Municipal Authorities 5 059 21 78 1

Agri-environmental support 8 664 23 35 42
Ministry of Agriculture and Forestry 1 641 39 39 22
Ministry of the Environment 7 29 14 57
Rural Departments 3 899 0 19 81
Environment Centers 1 973 51 42 7
Municipal Authorities 1 144 23 76 1

Total PRTCs 40 741 - - -

Table 2. PRTCs in total (€ 1000), design (%), implementation (%) and monitoring (%) by administrations.

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203

creases the labour input of environmental authori-
ties, especially in Regional Environment Centres.

We would finally like to emphasize that when
comparing the different policy measures with each
other, the percent PRTCs as an indicator does not

give the whole picture of the nature of policies and
specific measures. The shares are strongly influ-
enced by the level of payments and they may not
entail all costs and benefits of a policy (see e.g.
Vatn et al. 2002 and OECD 2007).

Agri-Environmental support
Total PRTCs,

€ 1000
PRTCs in
design, %

PRTCs in
implementation, %

PRTCs in
monitoring, %

Basic measures 3 079 16 25 59
Ministry of Agriculture and Forestry 851 39 39 22
Ministry of the Environment 2 29 14 57
Rural Departments 1 624 1 0 99
Environment Centers 0 0 0 0
Municipal agricultural authorities 602 24 75 1

Additional measures 2 719 16 26 58
Ministry of Agriculture and Forestry 778 39 39 22
Ministry of the Environment 4 29 14 57
Rural Departments 1 403 1 0 99
Environment Centers 0 0 0 0
Municipal agricultural authorities 534 22 77 1

Special measures 2 866 36 55 10
Ministry of Agriculture and Forestry 12 39 39 22
Ministry of the Environment 1 50 14 57
Rural Departments 872 0 84 16
Environment Centers 1 973 52 42 7
Municipal agricultural authorities 8 22 77 1

Total 8 664 23 35 42

Table 3. PRTCs in agri-environmental support.

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

CAP, LFA and
national support

Basic measures
(total)

Selected
additional

measures (total)

Riparian zones Traditional
biotopes

Share of cost components

Design Implementation Monitoring

Fig. 4. Share of transaction cost
components in selected policy
measures.

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But even more importantly, the mere size of
PRTCs does not indicate much about the perform-
ance of policies. The fact that transaction costs are
either high or low does not guarantee that the cho-
sen policy measures and the administrative effort
achieve the objectives and targets set for the policy.
Hence, one should distinguish between the admin-
istrative efficiency of implementing a given set of
policy measures and the performance of the cho-
sen instruments in producing the desired outcomes.
The level and allocation of PRTCs provide indi-
rect evidence about the administrative efficiency in
implementing the given policy measures. An effi-
cient administration implements policies with least
transaction costs. This does not, however, imply
that the selected measures always have the desired
impact; this depends on how well the measures are
chosen and designed.

These aspects are especially important for the
discussion on the Finnish agri-environmental sup-
port policy, which was originally launched in 1995
and has remained roughly the same over the years.
Its goal is predominantly to reduce nutrient runoff

from the fields. Additionally, it aims at maintaining
agricultural landscape and safeguarding biodiversi-
ty. Empirical studies show, however, that achieve-
ments in reducing nutrient runoff have been very
modest. In fact, there has not been reduction in the
nutrient runoff from agriculture (Turtola and Lem-
ola 2004). Our analysis shows one factor that may
have affected the slow progress in nutrient con-
trol. PRTCs in monitoring the basic measures were
relatively low indicating that monitoring effort is
not expanded to a level needed for full compliance
with the basic measures. This conclusion is con-
firmed by Turtola and Lemola (2004), who notify
failures in the enforcement of agri-environmental
measures. This indicates inefficient allocation of
administrative efforts, but is by no means the only
reason for the failure of agri-environmental sup-
port program to reduce runoff. We will return to
this issue at length in the concluding section. We
next turn to comparing our findings with the results
obtained in other studies.

Acreage
support

Traditional biotopes
and landscape ventures

Government agencies
PRTCs,
€ 1000

PRTCs,
%

PRTCs,
€ 1000

PRTCs,
%

FINLAND

Ministry of Agriculture and Forestry 2 204 0.37 10 0.16
Ministry of the Environment 0 0.00 1 0.02
Rural Departments 1 094 0.18 393 6.52
Environment Centers 0 0.00 1 325 21.97
Municipal agricultural authorities 2 357 0.40 7 0.11
Total 5 655 0.95 1 735 28.77
NORWAY
Ministry of Agriculture 0 0.00 3 0.02
Norwegian Agricultural authority 675 0.17 455 3.31
County authority 357 0.09 421 3.06
Local agricultural authority 2 143 0.54 6 313 45.90
Total 3 175 0.80 7 192 52.29

Table 4. PRTCs in the Finnish acreage-based national and traditional biotopes support, and in the Norwegian acreage
and special landscape ventures support

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Comparison of policy-related
transaction costs in some

countries
We first compare our findings with those obtained
for Norway by Vatn et al (2002). Vatn et al. (2002)
estimated PRTCs of various Norwegian agricultural
and agri-environmental policy measures. Their data
is based on interviews of farmers, policymakers,
and wholesalers and they determined labor cost,
computer, information material, postage and general
overhead costs. They focus on the running costs of
policy measures because the lack of data related to
set-up costs. Given that agriculture is practised in
northern conditions and both countries have large
rural areas with low population density, the com-
parison is meaningful. We restrict the comparison
to the measures that are similar in Finland and
Norway. Also, the total PRTCs are compared. The
Norwegian currency, NOK was converted to euros
using exchange rate of year 2000.

Starting from the total figures, we find that in
Finland the total subsidy payment amount to € 1
831 000 000 and the total PRTCs is € 40 741 035,
which gives the share of PRTCs 2.23%. Accord-
ing to Vatn et al. (2002), the respective figures in
Norway were € 772 626 646, € 905 239, and 2.19
% PRTC share. Hence, the PRTCs are very low
and close to each others despite the differences in
policy measures. This indicates that the adminis-
tration is efficient in implementing the policies in
both countries.

We next compare the PRTCs associated with
two measures, the acreage-based national pay-
ments and landscape conservation in both coun-
tries. The acreage-based national support payments
in Finland are 594 million euros and in Norway
they are slightly below 397 million euros. While
these support payments promote conservation of
traditional biotopes, they slightly differ from each
others. The Norwegian special landscape venture
consists of five different measures that, in addi-
tion to traditional biotopes, include promotion of
biodiversity and preservation of cultural sites. The
overall payments for this purpose are 6.03 mil-

Subsidy PRTC
PRTC/Subsidy,

England (1998) 1 582 300 17 900 1.1

Finland (2005) 594 000 5 430 0.9

Netherlands (1997) 128 000 8 745 6.8

Norway (2000) 396 836 3 175 0.8

Sweden (1996) 418 310 11 939 2.9

Table 5. PRTCs of acreage-based national supports and arable area payments for selected countries.

Payment,

€ 1000

PRTCs,

€ 1000

PRTCs/Payment, %

Belgium 1 604 1 065 66

Finland 6 030 1 737 29

Norway 13 755 7 192 52

Sweden 17 073 4 828 28

Uk 40 430 9 959 25

Table 6. Transaction costs in biodiversity and landscape conservation programs in selected countries.

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207

lion euros in Finland and 13.75 million euros in
Norway. Table 4 facilitates the comparison of the
PRTCs; the Norwegian data produce using Vatn et
al. 2002, Appendix 3.

As for the acreage support, the percentage cost
shares are of the same size, though slightly higher
in Finland. The Finnish acreage-based national sup-
port consists of four different measures, which may
explain the higher estimate. The Finnish national
support payment system benefits from the monitor-
ing of the CAP support system (including CAP in-
come support and LFA), which may underestimate
the PRTCs of national acreage support in Finland.
The total transfers in Finland are about 200 mil-
lion euros larger than in Norway. There are also
differences in the shares of different governmental
agencies. The Finnish Ministry of Agriculture and
Forestry bears about 37% and local authorities 40%
of the costs, while the Norwegian Ministry does not
have any PRTCs and local authorities bear 54% of
costs. Thus, the Norwegian support system seems
to be more decentralized than the Finnish system,
which follows the requirements of the EU’s Com-
mon Agricultural Policy. In sum, however, the
transaction costs of the Finnish and Norwegian
acreage payments are very similar.

From Table 4, the PRTCs of the traditional
Finnish biotopes are clearly much smaller but the
explanation for this may be due to above-men-
tioned differences in policy measures. Still, tradi-
tional biotopes may be an efficiently administered
policy measure, especially when the required level
of precision is taken into account. An interesting
difference between Finland and Norway is in the
fact that in Norway PRTC burden lies in local ag-
ricultural authorities, whereas in Finland it is in the
regional Environmental Centres; in both countries
duties are decentralized but more so in Norway.

We, finally, extend our comparison to England,
the Netherlands, Norway and Sweden. Again, our
comparison is restricted to measures that can be ex-
pected to be quite close to each other. However, the
amount of uncertainty is now much higher than in
the previous comparison between Finland and Nor-
way. We first focus on the crop area payments and
then discuss conservation of traditional biotopes
and other semi-natural habitats.

Table 5 condenses PRTCs of acreage-based
supports and arable area payments for some se-
lected countries (data is taken from SAI 2000).
Unfortunately, the data for each country comes
from different years, which makes the comparison
less reliable. The general picture seems to be quite
clear, though. Finland, England and Norway have
low PRTCs for their area-based support measures.
Sweden and Netherlands have much higher esti-
mates for PRTCs.

Conservation measures for special semi-natural
habitats and landscape ventures differ but aim at a
similar type of goals. The Finnish and Norwegian
systems have been presented above. Sweden has
a conservation system similar to the Finnish case:
cultural heritage and traditional biotopes are con-
served. We do not have data from the Netherlands
but from Belgium, which has roughly similar ag-
ricultural conditions as in the Netherlands. In Bel-
gium the conservation aims at promoting pollard-
willows and small landscape elements. Finally, in
the UK, the aim is to conserve environmentally
sensitive areas. Table 6 facilitates the comparison
(the data is from Falconer and Whitby 1999b, ap-
pendix 1 summary tables and Vatn et al. 2002, ap-
pendix 3).

Irrespective of differences in measures, all coun-
tries exhibit the common feature that semi-natural
habitat conservation entails much higher PRTCs
than area payments. The observed range is from
25% (UK) up to 66% (Belgium). Finland, Swe-
den and UK have roughly similar PRTCs, between
20% - 30%, while Norway and Belgium have much
higher figures. Belgium and Norway have higher
figures, because their conservation measures are
more comprehensive and differentiated than those
in Finland, Sweden and UK. This demonstrates that
increased targeting of agri-environmental measures
leads to higher transaction costs.

Conclusions

Policy-related transaction costs are important for
two reasons. Tracking and measuring PRTCs helps

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us to assess the costs of public administration and
to improve its efficiency. This leads to a better use
of public funds. Equally importantly, accounting
for PRTCs helps in the design and implementation
of agricultural policy instruments and choosing the
optimal policies. Optimal policies increase target-
ing (precision) up to the point where the marginal
benefits from targeting equal the marginal policy-
related transaction costs.

We assessed the PRTCs of agricultural and
agri-environmental policies in Finland for the main
policy instruments. Our focus was on the costs of
implementation of policies. To get some indirect
information on the efficiency of the Finnish ad-
ministration, we also compared Finnish PRTCs
with Norway and some selected EU countries. Our
method was to interview all levels of administra-
tion to produce estimates on working time, aver-
age salaries, and operational costs. The interviews
covered all ministries involved with agricultural
policy implementation. At the regional and mu-
nicipality level we chose Southern-Finland as the
study area.

The findings of this paper can be condensed
as follows. First, all area-based income support
measures entail low PRTCs. This holds not only for
Finland but also for all Nordic countries, the Neth-
erlands and the UK. Thus, we can conclude that the
administration in Finland seems to work efficiently
in implementing these income support measures.
This conclusion is also conformed by the facts that
there are no reported problems in transferring pay-
ments to farmers. Moreover, reported cases where
farmers falsely claim for certain crop area-based
supports are extremely rare, which indicates that
the monitoring effort and PRTCs associated with
it are at an efficient level.

Second and quite surprisingly, PRTCs in the
Finnish agri-environmental programme turned out
to be low, too. Within the agri-environmental pro-
gramme, the share of PRTCs increases with tar-
geted and differentiated agri-environmental meas-
ures. For the basic measures that are common to
all farmers who participate in the Finnish Agri-En-
vironmental Programme PRTCs are even slightly
lower than PRTCs for the area-based income sup-
port measures. As regards the most differentiated

policy measures, such as conservation of special
biotopes or establishment of riparian buffer zones,
PRTCs increase considerably. The same pattern can
be observed for other countries, too.

Thus, the administrative efficiency in im-
plementing the agri-environmental protection
measures seems to be good. However, this is not
necessarily true. Recall, the main goal of the agri-
environmental program is to reduce nutrient run-
off. Thus, the low PRTCs must be contrasted with
the fact that nutrient runoff reduction targets have
not been achieved. Our figures showed that the ad-
ministrative efforts in monitoring and enforcement
were fairly low. Moreover, PRTCs revealed that
in the division of labour inside administration, the
local authorities do not have a key role in monitor-
ing farms despite the fact that their possibilities for
this function are the best. While the latter feature
may be an integral part of the agri-environmental
programme that the administration cannot change,
the former aspect shows weakness in allocating the
administrative efforts.

The low monitoring rate can also be linked to
the high participation rate of farmers to the vol-
untary agri-environmental program. The high par-
ticipation rate can be regarded as an indication of a
generous compensation for environmental protec-
tion (compensating just for the average compliance
costs would reduce the number of participants, as
evidence from other EU countries shows). Gener-
ous compensations associated with low enforce-
ment may indicate that the Finnish agri-environ-
mental support has a flavour of an income support
that is given in a “green package”. In any case, our
analysis demonstrates that the further development
of the Finnish agri-environmental programme re-
quires improving enforcement and the division of
labour inside administration. Moreover, the exami-
nation of the transaction costs accruing to farmers
and the ability of current agri-environmental meas-
ures to promote the desired environmental goals is
needed to complement the analysis presented in
this paper.

Acknowledgements. This paper was part of the project
“Multifunctional Agriculture and Policies” funded by
the Ministry of Agriculture and Forestry. This funding

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209

is gratefully acknowledged. We are grateful to Jarmo
Salonen for helping to frame the research idea. We thank
Catherine Moreddu for insightful advice and comments.
The comments by two anonymous referees are gratefully
acknowledged.
Disclaimer. The views are those of the authors and do
not reflect the official view of the OECD or its member
governments.

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Appendix

Policy measures
Support area

A
Support area

B
Support area

C1
Support areas

C2-C4

CAP 295 €/ha 243 €/ha 243 €/ha 200 €/ha

LFA 150 €/ha 200 €/ha 200 €/ha 210 €/ha

National support
74–215 €/lu
73–392 €/ha

74–215 €/lu
73–392 €/ha

251–410 €/lu
69–185 €/ha

251–1042 €/lu
30–185 €/ha

Agri-environmental support Same level of payments in all support areas

Basic measures 93–117 €/ha

Additional measures 13–24 €/ha

Special measures 65–450 €/ha, 168–360 €/lu
lu=livestock unit

Table A1. Agricultural support payments in different support areas in Finland (Niemi and Ahlstedt 2005, the Finnish
Ministry of Agriculture and Forestry).

C2 north

Fig. A1. Agricultural support areas in Finland
(Niemi and Ahlstedt 2005).

Policy-related transaction costs of agricultural policiesin Finland
Introduction
Framework and overview of policy measures
Levels of administrations and generation of data
Policy-related transaction costs for the Finnish agricultural policy
Comparison of policy-related transaction costs in some countries
Conclusions
References
Appendix