AbstractAgriculture and the environment are linked by a mutual reliance on scarce resources and prevalent market distortions. In this paper we examine the efficiency costs of policies that correct distortions in one sector while ignoring those in another. The dual distortions of an environmental externality and water subsidies are studied in the context of irrigated agriculture in California. The welfare costs associated with independent action by either a water agency or an environmental authority when that policy maker attempts to correct the respective market distortion without consideration of the distortion in the other market are estimated. Policies to correct the two distortions are found to be complementary. Under these conditions, the independent correction of either distortion improves welfare by at least $@@‐@@118 per acre. In most cases, the simultaneous adoption of various second‐best policies further reduces welfare losses associated with these distortions.