This paper investigates how Pillar I CAP subsidies influence the environmental and economic efficiency of farms in Italy, considering both direct and indirect effects, including spatial spillovers from neighboring farms. The study uses a spatial stochastic frontier model to estimate the impact of subsidies on efficiency, differentiating between economic and environmental outcomes. The results show that subsidies help farmers achieve environmental sustainability, especially after the 2013 CAP reform, but also lead to increased economic inefficiency. Spatial effects are significant, with positive spillovers occurring between neighboring farms in both economic and environmental contexts. The analysis focuses on Italy from 2008 to 2018, highlighting the role of subsidies in shaping efficiency levels and the importance of spatial interactions. The study finds that Pillar I subsidies have a significant impact on both economic and environmental efficiency, with direct effects on efficiency and indirect effects through spatial spillovers. The results suggest that subsidies contribute to environmental sustainability but may not always improve economic efficiency. The study also examines the impact of different types of subsidies and their effects on various farm characteristics, providing insights for policymakers on how to design effective agricultural policies. The findings emphasize the need for a balanced approach to agricultural policy that considers both economic and environmental outcomes.This paper investigates how Pillar I CAP subsidies influence the environmental and economic efficiency of farms in Italy, considering both direct and indirect effects, including spatial spillovers from neighboring farms. The study uses a spatial stochastic frontier model to estimate the impact of subsidies on efficiency, differentiating between economic and environmental outcomes. The results show that subsidies help farmers achieve environmental sustainability, especially after the 2013 CAP reform, but also lead to increased economic inefficiency. Spatial effects are significant, with positive spillovers occurring between neighboring farms in both economic and environmental contexts. The analysis focuses on Italy from 2008 to 2018, highlighting the role of subsidies in shaping efficiency levels and the importance of spatial interactions. The study finds that Pillar I subsidies have a significant impact on both economic and environmental efficiency, with direct effects on efficiency and indirect effects through spatial spillovers. The results suggest that subsidies contribute to environmental sustainability but may not always improve economic efficiency. The study also examines the impact of different types of subsidies and their effects on various farm characteristics, providing insights for policymakers on how to design effective agricultural policies. The findings emphasize the need for a balanced approach to agricultural policy that considers both economic and environmental outcomes.