Chapter 8 - Berck _ Helfand

Chapter 8 - Berck _ Helfand - Chapter 8. Producer...

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Chapter 8. Producer Decisions: Inputs OBJECTIVES OF THIS CHAPTER Producers have a number of decisions to make before a good gets to market. In this chapter, we focus on the production process itself: how a producer makes a good. In some 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 damages. 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 problem. 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 observed. 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
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This note was uploaded on 03/03/2009 for the course ECON 370 taught by Professor Helfand during the Winter '08 term at University of Michigan.

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Chapter 8 - Berck _ Helfand - Chapter 8. Producer...

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