On increasing returns and discrete choice: integrating production ecological principles in economic analysis of crop management

In contrast to conventional inputs (land, labor and capital) pesticides and nutrients act indirectly on output. This paper develops a model of pesticide and nutrient response based on the biological and physical processes that govern agricultural ecosystems. The main implications for pesticides are that the marginal returns for an individual crop depend on three state variables (potential yield level, growth conditions and pest incidence) and on the relative curvature of the control and damage functions. The properties of functional forms commonly used in the literature imply increasing returns to the control input which reduces the control decision to a binary one. When several control methods are available, the choice set consists of discrete options which are site specific because of the interaction with the prevailing growing conditions. The analogous conclusions hold for nutrient inputs when considered jointly. To illustrate the implications of these results for crop management two case studies are presented. The first case study explores economic and environmental performance of alternative farming systems, the second case study assesses options for a pesticide levy system as part of future environmental policy.