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4.6. Economics of public pest management programs
4.6.1. Public policy -- dealing with externalities
4.6.1.1. Until now we have dealt only with microeconomics at the farm level
  • Pest control decisions based only on factors internal to that system (usually those affecting profits of the enterprise)

  • However, net private benefits and net public benefits may be divergent
4.6.1.2. External costs
  • Examples:

    • Increased unemployment resulting from increased mechanization of farming practices

    • Pollution of lakes and streams with runoff from agricultural lands

  • Public agencies can internalize external costs by levying taxes or fines on them

    e.g., Base real estate taxes on the amount of silt in the runoff water or exact fines for excessive pesticide residues on marketed produce

4.6.1.3. External benefits
  • Examples:

    • Reduced pesticide residues resulting from the adoption of biological control

    • Reduced consumer prices resulting from increased production efficiency

  • Public agencies can internalize (and thus encourage) external benefits by subsidizing them

    e.g., SCS payment for soil conservation measures or IPM program supported by public funds

4.6.2. Cost and benefit analysis of public programs
4.6.2.1. In broad outlines the same general procedures (marginal analysis, optimization, etc.) used for private decisions can also be used for decision making in the public sector -- with some important differences
Consider the following hypothetical example: Suppose we have a highly hazardous pesticide for which we are considering regulation. A study of the risks gives:

Risk Analysis (Hypothetical Example)
Deaths/year Probability Expected
loss
00.500
50.301.5
100.151.5
200.051.0
Average expected loss:4.0

Would you ban the pesticide?

Of course, to answer this question we cannot look only at the risks of the pesticide; we must also consider its benefits. Suppose that in addition to an outright ban on the pesticide we are also considering a 50% restriction in the use of this pesticide, which reduces the average expected deaths per year to 1.

Risk/Benefit Analysis (Hypothetical Example)
Average expected
benefit
(crop loss prevented)		 Average expected
cost
(accidental deaths)
No restriction$10,000,000 4
50% restriction$1,000,000 1
Outright ban0 0

With this information, would you restrict the pesticide or ban it altogether?

4.6.2.2. We have to deal with the lack of commensurability of the costs and benefits
  • The actuarial approach is to reduce everything to commensurable units -- a human life is worth its average expected total income (about $250,000)

  • The decision is not a technical one but one of values
4.6.2.3. Cost/benefit analysis of public programs is as much a political problem as it is an economic one
  • In microeconomics decisions are usually based solely on their impacts on one individual or the enterprise

  • Cost/benefit analysis of public programs requires a broad look at the sectors of the economy affected
Hypothetical Summary of Net Benefits of an Outright Ban of a Hypothetical Pesticide
Pesticide
Manufacturer		 Pesticide
Dealer		 Grower Farm
Laborers		 Food
Processor		 Consumer General
Public		 Totals
Revenue from
pesticide		 -10,000,000 -5,000,000
.
.
.
.
.
 -15,000,000
Revenue from
crop
.
.
 -10,000,000 -1,000,000 -5,000,000
.
.
 -16,000,000
Food Prices
.
.
.
.
.
 -1,000,000
.
 -1,000,000
... ... ... ... ... ... ... ... ...
Toxicity
to user
.
 +1,000,000 +1,000,000 +8,000,000
.
.
.
 +10,000,000
Toxicity to
consumer
.
.
.
.
.
 +100,000
.
 +100,000
Environmental
pollution
.
.
.
.
.
.
 +500,000 +500,000
Totals -10,000,000 -4,000,000 -9,000,000 +7,000,000 -5,000,000 -900,000 +500,000 -21,400,000
4.6.3. The "fallacy of composition" -- what's good for the group is good for the individual
4.6.3.1. Functional relationship of price and quantity
  • Demand: buyers competing in the market place are willing to pay a higher price for a product as the available quantity decreases

  • Supply: suppliers competing in the market place are willing to enter the market and produce more as the price increases

  • Total revenue -- the product of quantity and price
4.6.3.2. Any technological advance (such as a new pest management technique) that increases yield or decreases production costs reduces the slope of the supply curve
  • The equilibrium price and the total revenue are reduced

  • The benefactors (among the growers) of new technological advances are the early innovators who can make larger profits before the supply adjusts to the new equilibrium

  • Consumers benefit from the lower equilibrium price

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