OBJECTIVES OF THIS CHAPTER
Producers have a number of decisions to make before a good gets to market.
chapter, we focus on the production process itself:
how a producer makes a good.
cases, producers face very strict recipes when making a good.
In many other cases, though,
producers have choices in how to produce.
Here we will examine
the relationships between inputs, technology, and production
how a producer decides what inputs to use in the production process
what happens when input prices or technologies change
how input and technology decisions translate into costs of production
As we will see, these decisions not only have major effects on producer profits, but they can also
have significant environmental impacts.
Much environmental policy has focused on how to get
producers to be more environmentally friendly, both in their production activities and in the
products they produce.
By understanding how producers make decisions with environmental
impacts, policy makers can design policies to change those production decisions to reduce
Agricultural Pollution in the Salinas Valley of California
The Salinas Valley of California is a very fertile area, producing highly valued crops,
including strawberries, artichokes, broccoli, cauliflower, and lettuce.
Two major inputs to
production for all these crops are nitrogen fertilizer and water:
agriculture in the area is irrigated,
because rainfall only occurs in the winter.
One adverse consequence of farming, though, is that
the nitrogen seeps into the groundwater of the area.
Because the groundwater is a source of
drinking water in the area, contamination of the water by nitrogen is potentially a serious
In the 1990s, the state of California sought ways to reduce nitrogen leachate (nitrogen
fertilizer that the water leaches from the soil and carries away) into groundwater.
Some pollution, such as that from factories, is termed “point source,” because it is easy to
identify the source of the pollution and how much that source pollutes; it is possible, often, to
point to the specific smokestack or effluent pipe from which the pollution flows.
It is relatively
easy for a pollution control agency to know who is polluting, to measure the pollution, and to
determine if a polluter reduces its emissions.
Leachate from agriculture, though, is hidden: the nitrogen dissolves into water and sinks
into the soil, and it enters groundwater or rivers through subsurface flows that cannot be
Additionally, because subsurface flows can cover distances, it is usually impossible to
link the pollution to its sources.
Since nobody can see how much nitrogen came from a specific
farm, it is not possible to set design policies, such as a pollution limit, that require measuring the
runoff from a farm.
Instead of taking direct action on pollution, a regulator can only take
indirect actions, like limiting the use of inputs that contribute to pollution.
Thus, controlling this