Reallocation Effects of Internalizing Externalities: Evidence From China's Straw Burning Ban

ABSTRACT This paper examines the reallocation effects of a typical environmental policy aiming to internalize externalities: the straw burning ban across China. The ban prohibited the traditional farming practice of burning straw while compelling the labour‐intensive practice of straw utilization. We show that the legislation banning straw burning led to an increase in local land renting activities. Our results indicate that implementation of the ban resulted in a within‐village land redistribution, encouraging the exit of less‐productive farmers while promoting land expansion by more‐productive farmers. Consequently, village‐level aggregate agricultural output and productivity increased by 5% and 3%, respectively. A complementary policy instrument to the command‐and‐control ban—establishing biomass power plants to incentivize farmers to collect crop residues—led to a greater land redistribution in villages with a nearby biomass power plant after the ban is imposed, relative to before.