This paper investigates the impact of Common Agricultural Policy (CAP) Pillar I subsidies on the environmental and economic efficiency of Italian farms, both directly and indirectly through spatial spillovers. The study uses a spatial stochastic frontier model to analyze data from 2008 to 2018, focusing on the Italian agricultural sector. Key findings include: 1. **Direct Effects of Subsidies**: - **Environmental Efficiency**: Pillar I subsidies help farmers achieve environmental sustainability, particularly after the 2013 reform. - **Economic Efficiency**: While subsidies contribute to environmental sustainability, they also lead to increased economic inefficiency levels. 2. **Spatial Spillovers**: - **Positive and Significant Spillovers**: There are positive and significant spillovers among neighboring farmers, both economically and environmentally. - **Intra-Province vs. Inter-Province Spillovers**: Intra-province spillovers have a more positive impact on environmental efficiency, while inter-province spillovers have a more negative impact on economic efficiency. 3. **Time Dynamics**: - **Economic Efficiency**: The effect of subsidies on economic efficiency is negative and significant between 2010 and 2016 but not significant in the last two years. - **Environmental Efficiency**: The impact of subsidies on environmental efficiency is not stable over time but becomes increasingly negative from 2014 onwards. 4. **Additional Analysis**: - **Different Types of Subsidies**: Coupled and decoupled Pillar I subsidies have similar impacts on reducing inefficiency levels. Pillar II subsidies have mixed effects, promoting environmental efficiency but reducing economic efficiency. - **Geographical and Settlement Typology**: The direct effect of subsidies on economic inefficiency varies by region and settlement typology, with more positive effects in the North and Centre of Italy and for rented farms. 5. **Robustness Check**: - Alternative dependent variables confirm the robustness of the results regarding spatial effects and environmental outcomes, while economic outcomes show some differences but remain consistent with the main findings. The study provides valuable insights for policymakers on the complex dynamics of CAP subsidies and their impact on agricultural efficiency and sustainability.This paper investigates the impact of Common Agricultural Policy (CAP) Pillar I subsidies on the environmental and economic efficiency of Italian farms, both directly and indirectly through spatial spillovers. The study uses a spatial stochastic frontier model to analyze data from 2008 to 2018, focusing on the Italian agricultural sector. Key findings include: 1. **Direct Effects of Subsidies**: - **Environmental Efficiency**: Pillar I subsidies help farmers achieve environmental sustainability, particularly after the 2013 reform. - **Economic Efficiency**: While subsidies contribute to environmental sustainability, they also lead to increased economic inefficiency levels. 2. **Spatial Spillovers**: - **Positive and Significant Spillovers**: There are positive and significant spillovers among neighboring farmers, both economically and environmentally. - **Intra-Province vs. Inter-Province Spillovers**: Intra-province spillovers have a more positive impact on environmental efficiency, while inter-province spillovers have a more negative impact on economic efficiency. 3. **Time Dynamics**: - **Economic Efficiency**: The effect of subsidies on economic efficiency is negative and significant between 2010 and 2016 but not significant in the last two years. - **Environmental Efficiency**: The impact of subsidies on environmental efficiency is not stable over time but becomes increasingly negative from 2014 onwards. 4. **Additional Analysis**: - **Different Types of Subsidies**: Coupled and decoupled Pillar I subsidies have similar impacts on reducing inefficiency levels. Pillar II subsidies have mixed effects, promoting environmental efficiency but reducing economic efficiency. - **Geographical and Settlement Typology**: The direct effect of subsidies on economic inefficiency varies by region and settlement typology, with more positive effects in the North and Centre of Italy and for rented farms. 5. **Robustness Check**: - Alternative dependent variables confirm the robustness of the results regarding spatial effects and environmental outcomes, while economic outcomes show some differences but remain consistent with the main findings. The study provides valuable insights for policymakers on the complex dynamics of CAP subsidies and their impact on agricultural efficiency and sustainability.