Cost efficient pesticide reductions: A study of Sweden

Cost Efficient Pesticide Reductions: A Study of Sweden

ING-MARIE GREN Beijer International Institute of Ecological Economics, The Royal Swedish Academy of Sciences, Box 50005, 104 05 Stockholm

Abstract. The minimum cost for reducing the farmers' use of pesticides is calculated. The measures include are; (i) a decrease in use of inputs, (ii) an improvement of the insurance system, and (iii) application of an ecotechnology where 5--10 meters along the borders of the fields are left untreated with pesticides. The cost of reducing the use of pesticides is measured by means of pesticide demand functions and the cost for improving an insurance system is measured as the risk premium. The empirical results indicate that the minimum cost for reducing the use of pesticides by 50% in Sweden corresponds to about 6 per cent of farmers' incomes from crop production. A simple comparison of policy instruments shows that the cost of a quota system is about 40 per cent higher than the costs of the charge and permit market systems. The farmers' decreases in incomes under a charge system are twice as high as under the other two policy instruments. The results are, however, sensitive to the levels of the pesticide price elasticities.

Key words. Cost efficiency, pesticide reductions, ecotechnology, insurance, policy instruments.

1. Introduction

Since earliest times farmers have used pest management practices which were largely biological in nature, involving the use of crop rotat ion and timing of planting. The in t roduct ion during the 1940s of chemical pesticides led to a rapid decline of the biological methods in the postwar era. Dur ing the period, farmers experienced high increases in yield due to the new produc t ion technologies. However , at the beginning of 1960s attention was drawn to the negative environmenta l impact of the use of pesticides (DDT), among others, by Rachel Carson in Silent Spring (1962). Today, no one in the industrialized countries should have any doubt about the disadvantages of the overuse of pesticides. In 1990, the Swedish government therefore announced an objec- tive of reducing the use of pesticides by 50%. The main purpose of this paper is to find the allocation of measures which minimizes the cost for reducing the use of pesticides by 50%. However , since the actual costs are also dependent on the choice of policy instruments this study contains a very brief compar i son of the c o m m a n d and control , charge, and permit market systems with respect to cost efficiency and equity.

The cost for reducing the use of pesticides is strongly dependent on what mitigation measures are considered. Three types of measures are included in this study; (i) reduct ions in the use of pesticides as inputs in product ion, (ii)

Environmental and Resource Economics 4: 279--293, 1994. © 1994 KluwerAcademic Publishers. Printed in the Netherlands.

280 lng-Marie Gren

improvement of the insurance system, and (iii) cultivation of border zones, i.e. marginal land around the fields are left untreated. In practice, the most common measures involve controls on the direct use of pesticides such as a ban of the most toxic pesticides and/or an implementation of a charge. The second type of mitigation .measure affects the use of pesticides indirectly. The reason is that the existence of risk plays a role in farmers' production decisions. One important factor is the stochastic nature of weather condi- tions. This is the main source of risk in many industrialized countries where prices of outputs and inputs are determined by negotiations at a national level. Pesticides are perceived to be a risk-reducing mechanism and are therefore partly used for insurance purposes; see e.g. Moffit (1986), Antle (1988). Another way of reducing the use of pesticides is then to reduce the variation in farmers' incomes.

So far, we have considered only measures that either directly or indirectly reduce the farmers' use of pesticides. By asking for what purpose the use of pesticides has to be reduced other measures can be identified. In Sweden, the main negative impacts of pesticides are on the ecosystems surrounding the treated fields (Fogelfors, 1991). The damage caused by the use of pesticides can then be reduced by mitigating the impact of pesticides residues on surrounding fields. One way to do this is by the use of so dalled eco- technologies which make use of nature's self-regulating capacity (Mitsch and J6rgensen, 1989). The third type of measure investigated in this study is the way in which residue transfer can be contained in protection zones around crop fields, i.e. marginal lands along the borders of the fields are left untreated.

It should be noted that there exist several types of measures which are not included in this paper, such as a change in the output prices or a transition from current type of agricultural system to "organic" farming which is defined as agricultural methods not dependent on pesticides. The inclusion of such measures would require the construction of partial equilibrium models which allow for drastic changes in the production technologies. In this paper, simpler quantitative methods are used where the costs are calculated by means of econometric methods. It is also important to note that the methods used allow only the estimation of short-term costs.

The paper is organized as follows. First, the farmer's choice of pesticides is modelled. The next section contains a brief description of the cost functions. In Section 4 the results of the minimum cost for reducing the use of pesticides by 50% are presented and in Section 5 the policy instruments are compared with respect to cost efficiency and income distribution effects. The paper ends with a summary.

2. The Farmer's Pesticides Choice

When making a choice about the use of pesticides, farmer have several types of pesticides to select from. The different pesticides are usually divided into

Cost Efficient Pesticide Reductions: A Study of Sweden 281

three classes depending on the purpose of their use; herbicides, fungicides and insecticides. Herbicides are usually used in Sweden to stop the weeds from going to seed and are applied routinely each year. Fungicides and insecticides should be applied after the forecasted onset of weather condi- tions which favour pest attacks. However, it is doubtful that the farmers have the knowledge necessary to apply insecticides and fungicides properly (Fogelfors et al., 1991). When modelling a representative farmer's use of pesticides it is therefore assumed that the decisions about all type of pesticides are made prior to any information on pest attacks.

In order to determine the relevant cost functions, the farmer's decision problem is formulated as follows. The prices of inputs and the output are assumed to be given to the farmers. On the basis of a production function Q = F ( X , Z, 0 ) , where X = IX 1, X 2 , . . . X hI is a vector of variable inputs, Z = [Z 1, Z 2, . . . Z k] is a vector of fixed factors of production and • is the random parameter, the farmer is assumed to choose variable inputs such that the expected utility of profits is maximized according to

Max e[u(=)] x (1)

where E is the expectation operator and :z -- Pq - Z i v i X ~ - Zj f~ZJ is the random benefits minus the total cost for variable and fixed inputs.

In order to find a measurement of the welfare change in money terms, the standard practice is used by formulating the certainty equivalent, CE, which corresponds to the expected profits minus the risk premium. The risk premium or insurance cost is defined as the maximum amount of money the farmer would be willing to pay in order to obtain a given profit with certainty instead of facing the risk. It then follows that R satisfies

U(EI~ 1 - R ) = EIU(~)I. (2)

The certainty equivalent, CE, is then equal to

CE = E[sz] - R = U-I(E[U(zc)]) . (3)

The certainty equivalent is the amount of money that the farmer would require if he or she were insured against the risk. Since CE is a welfare measure in money terms, choosing X to maximize CE is the same as maximizing E [U(:z)] as long as U -1 is positive.

Note that E[Jr] = p f 2 - Z i v i X i - Z j fJZJ - - where f2 = E[Q]. The first- order condition for maximizing CE with respect to a variable input, X i, can then be written as

O C E / O X i =Pf~x - v i - Rx = 0 (4)

where subscripts denote partial derivatives. Note that if the risk premium is independent of X ~, the input choice problem would be the same for a risk- neutral and a risk-averse farmer, i.e. the expected value of marginal product

282 [rig-Marie Gren

is set equal to the factor price. However, if the choice of input affects the risk premium, i.e. R x ¢ 0, the optimal choice of X i would be higher (lower) than in the risk-neutral case where R x is negative (positive). Following Pope and Kramer (1979), the input is defined as marginally risk-increasing (reducing) if the risk-averse firm uses less (more) of it than the risk-neutral firm. Thus, for our purpose, an input is defined as risk-decreasing when R x < 0.

At a given price of pesticides, v i, the cost for reducing the use of pesticides from the current use, X i', to the required use, X i*, is then calculated as the corresponding decrease in producer surplus which is written as

C i = ~,(p~-'2 x - - l) i -]- R x ) d X i. (5)

Thus, the cost of reducing the use of pesticides from X i' to X ~* is divided into two parts: the value of the decrease in the expected yield, P f ~ x - vi, and the change in risk premium, Rx. The cost for reducing the use of pesticides can then be calculated if we have estimates of the pesticides demand function and of the farmer's attitudes towards risk. Given that we have these estimates, two cost functions for reducing the use of pesticides can be calculated; reduction in profits and improvements of the insurance system. Since the risk premium measures how much farmers are willing to pay to avoid the risk, the cost for improving the insurance system is calculated as the corresponding change in the risk premium.

3. Estimation of Cost Functions

According to (5), the cost for reducing farmers' use of pesticides can be calculated if we have estimates of the pesticide demand function and of the farmers' risk attitudes. The pesticide, demand functions are estimated by econometric methods. Unfortunately there is only one study of the Swedish farmers' attitudes towards risk, the result of which did not verify that farmers are risk averse (Gren, 1992). However, the quality of data was not satisfying in that study. In order to calculate a cost function for improvements of the insurance system results obtained in studies of farmers in other countries are used. The cost for creating border zones are estimated by means of engineering data from experiments carried out in Sweden. In the following these cost functions are briefly described.

3.1. PESTICIDE DEMAND FUNCTIONS

As mentioned in the introduction of this paper, different types of pesticides are used for quite different purposes. Demand functions are therefore estimated for three different types of pesticides; herbicides, insecticides and fungicides. Given that the farmers maximize expected utility according to (1)


the pesticide demand can be specified as functions of the prices of other variable inputs and outputs, and of the quantities of the fixed factors; see; e.g. Lau (1978). Other variable inputs included in the pesticide demand regression equations are nitrogen fertilizers, labour, and the fixed factor included is the supply of arable land. The regression equations thus include the own prices, the price of nitrogen fertilizer, and the supply of arable land. See the Appendix for a further description of the estimation of the demand functions.

According to the results, the constant price elasticities of herbicides, insecticides and fungicides are 0.97, 0.15, and 0.34 respectively in absolute terms. These results of insecticides and fungicides are in accordance with the results obtained in other Nordic studies, while the price elasticity of herbicides is high (Dubgaard, 1987; Johnsson, 1991). The estimated herbicide price elasticity in these studies amounts to 0.4. It should however be noted that the calculation of price elasticities in these studies are based on experiments and not on farmers' actual behaviour. Nevertheless, a sensitivity analysis is carried out in the next section where the price elasticity of herbicides is half of the estimated result.

3.2. RISK PREMIUM

In order to estimate the relation between changes in the use of pesticides and the risk premium information is required on farmers' attitudes toward risk and on the impact of pesticides on the variation in yield. As mentioned above, the Swedish farmers' risk attitudes have been estimated in only one study (Gren, 1992). The estimation approach was based on econometric methods (Antle, 1988). According to the results, the hypothesis of risk neutral behaviour in the use of pesticides could not be rejected. It should however be noted that the study used cross-sectional data at a county level since data on individual farmers were not available. More studies of the Swedish farmers using higher quality of data are therefore needed in order to draw any firm conclusions concerning the Swedish farmers' risk attitudes.

Farmers' risk attitudes in other countries have been estimated in several studies; see e.g. Wilson and Eidman (1983) and Myers (1986). A common result is that the relative risk aversion, mainly for the US farmers, ranges between 1 and 3. This result is 'borrowed' for the calculations in this study. The institutional frames concerning, among other things, the insurance system are, however, different between countries. Calculations of costs are therefore carried out for both the upper and lower values of the relative risk aversion.

Different qualities of pesticides vary in their impact on the variation on yield. Unfortunately, no results are available from experiments investigating the impact of various pesticide doses on yield at the aggregated level used in this study. According to some experiments carried out for the impact of herbicides on wheat, the variance coefficient may decrease at the most by

284 h~g-Marie Glen

50% (Lantbruksstyrelsen, 1991). Calculations of costs are therefore carried out for this result and also for a case when the impact on the variance is reduced by one half. It is then assumed that the variance is a linear function in the use of pesticides and that the impact is the same for all classes of pesticides.

When calculating the cost function it is further assumed that only a proportion of the total pesticide is used for insurance purposes. This proportion is calculated as the risk premium associated with a 50% decrease in the coefficient of variation divided by the weighted price of pesticides. The three weights correspond to the allocation of uses of herbicides, insecticides and fungicides respectively. The proportion then varies between 3 per cent and 15 per cent of the total quantity of pesticides depending on the values of the parameters for risk aversion and variation in income.

Given all above mentioned assumptions, the cost function is assigned a linear form in the quantity of pesticides. The constant marginal cost of improving the insurance system then corresponds to SEK i54 /kg pesticide reduction (1 EC U = 8.92 SEK, Aug. 3, 1993).

3.3. BORDER ZONES

In Sweden and in several other countries field experiments have been carried out for different types of protection zones. Swedish field studies have been undertaken involving two types of protection zones; fixed and variable border zones (Lantbruksstyrelsen, 1991). A fixed zone implies that the areas left untreated remain constant and a variable zone changes its dimensions according to its location. For both types of zones there are three kinds of costs; value of reduced yield, increased cost for controlling pests and increased cost for harvesting. These costs vary for herbicides, insecticides and fungicides. According to results from field experiments, the cost corresponding to a reduction in yield is highest for all pesticides and acounts for at least 60% of total costs.

The cheapest type of border zone is the variable zone, the average cost of which amounts to SEK 800/ha border zone. It is then assumed that the border zone corresponds to 5% of the arable land. If it is further assumed that the use of pesticides is reduced by the same percentage, the constant marginal costs for protection zones correspond to the following costs for reducing the use of different pesticides: SEK 127/kg herbicides, 222/kg insecticides and 80/kg fungicides. The cost functions for protection zones used in the next section are thus linear.

4. Minimum Costs for Pesticide Reductions

In order to find the cost efficient allocation of measures on herbicides,


insecticides and fungicides a simple non-linear programming model is used which is written as

Min Z~ Zg Cig(X ~g) (6)

s.t. Z i Zg X ig = X*

Xig <~ Xi~ '

where C'~(X ig) represent cost functions for the different mitigation measures, g = 1, 2, 3, on the three types of pesticides, i = 1, 2, 3. The required overall reduction, 50%, in the use of pesticides is X*. The maximum possible reduction by each X ig is denoted by X ig'. The programming model includes seven cost functions. The three cost functions for pesticide reductions are non-linear and the other are linear. The software used is Brooke et al. (1988).

In the model the required overall reduction, X*, refers to the entire Sweden and no distinction is made between different regions. One would expect that the damage of pesticide application varies between regions due to differences in application technologies and climate which would imply different requirements of pesticide reductions. Due to the colder climate in the northern Sweden the decomposition of the pesticides requires longer time than in the south of Sweden. However, the use of pesticides is much lower in the north than in the south. In northern Sweden there are thus a few but long lasting pesticide marks and in the southern part there are many more classes of pesticides with a shorter decomposition time. Thus, at the aggregate level the reduction requirements are similar in all Swedish regions (Torstensson, L. pers. comm.).

Before presenting the results it is important to point out some critical assumptions. It is assumed that the environmental damage of all types of pesticides are the same. In practice, however, it is most likely that the environmental impacts differ across different pesticide types. A second critical assumption concerns the "translation" of the creation of protection zones into pesticide reductions. The corresponding pesticide reduction is proportional to the average application rate, which corresponds to 5% of total use of pesticide prior to any regulation. Note that this implies that the environmental improvement of 5% reduction in the use of pesticides is the same as the creation of a corresponding scale of protection zones. One reason for questioning this implication is that protection zones not only reduces the load of pesticides to surrounding fields but also contain phos- phorus and nitrogen which may lead to improvements of eutrophicated water streams and coastal waters. These assumptions are questionable but unfortunately unavoidable since there exist no measurements of the differences in the environmental damage which can be used for the calculations of costs.

286 Ing-Marie Gren

Remember from the foregoing section that the estimated herbicide price elasticity is high as compared to the results from other studies and that the calculations of risk attitudes and variance in yield are very uncertain. We would expect that both the total costs and the allocation of mitigation measures are affected by changes in these parameters. The total costs are higher for a low price elasticity. The importance of an improvement of the insurance system is likely to increase for a high value of the relative risk attitude, and a high variation in yield. For both a high (-0.97) and a low level -(0.48) of the price elasticities results are therefore presented for low and high risk attitudes and variances in yield respectively. The high and low risk attitudes correspond to 3 and 1 of the relative risk aversion respectively. The minimum costs for reducing the use of pesticides by 50%, which, in 1990, corresponds to 1195 tons Of pesticides, in these four cases are presented in Table 1.

Table 1. Minimum costs for pesticide reduction by 50% at different levels of the herbicide price elasticity, risk aversion (RA) and variation in yield (VarY), millions of SEK

High RA and VarY

Low RA and VarY

High price- Low price- elasticity elasticity

86 87

88 136

According to the results presented in Table 1, the minimum cost for pesticide reductions is sensitive to different levels of the risk attitudes and variation in yield when the level of herbicide price elasticity is low, When the price elasticity is high, although low risk attitudes and variation in yield reduce the options of improving the insurance system, the compensating increases in input reductions are obtained at a relatively low cost. This is not the case when the price elasticity is low since then the decreases in profits from reductions in pesticides are relatively high.

It may also be concluded from the results presented in Table 1 that the costs for pesticide reductions are lowest for high price elasticity, risk aversion and variation in yield and that the costs are highest when the price elasticity, risk aversion and variation in yield are low. As mentioned above, the reason is the high costs, i.e. decreases in profit, from reductions in pesticides when the elasticity is low. The optimal allocations of mitigation measures under these two polar cases are presented in Table 2.

Remember from the foregoing section that the calculated marginal cost for improving the insurance system is constant. Differences in risk aversion and


Table 2. Input reductions, improvement of the insurance system, and creation of border zones under two cases

input improvement creation of Total reduction of insurance border zones

system

Case 1": Tonnes 777 300 118 1195 Millions of SEK 38 11 37 86

Case 2**: Tonnes 1000 75 120 1195 Millions of SEK 95 3 38 136

* Case 1. High risk aversion, variation in yield and herbicide price elasticity ** Case 2. Low risk aversion, variation in yield and herbicide price elasticity

variation in yield are therefore calculated as different limits for using this mitigation measure. The major difference in allocation of mitigation measures between the two cases is then, under Case 2, the switch f rom improvement of the insurance system to reduction in the input use. The highest total cost under Case 2 is then explained by the higher costs for the increase in reduction from 770 tonnes of pesticides to 1000 tonnes.

5. Cost Efficiency and Equity of Alternative Controls

Whether or not a cost efficient allocation of measures can be implemented in practice depends on the choice of policy and its enforcement. There is a large body of literature, both theoretical and empirical, on the comparison of policy instruments; see e.g. Tietenberg (1984), Bolun and Russel (1985), and Opschoor and Pearce (1991). The common criteria for comparison are cost efficiency, technological development, income distribution effects and certainty in reaching the target level. In the empirical literature the costs of a system based on economic instruments has often been compared with the costs of a command and control system. It has then been shown that the efficiency losses, costs in excess of the minimum cost, of a quota system can be very high (Tietenberg, 1984). Sometimes income distribution effects have been included as a criterion of comparison and a general result is that the regulated firms' income reductions are highest under a charge system. For analysis of the importance of enforcement strategies used for implementing environmental regulations see e.g. Tietenberg (1992) and Russel and Shogren (1993). In this section very simple calculations are made where the quota, charge and permit market systems are compared with respect to cost efficiency and farmers ' income reductions.

288 Ing-Marie Gren

Due to the uncertainty underlying the calculations of the cost for improving the insurance system, this measure is excluded when comparing different policy instruments. The measures included are therefore pesticide reductions and creation of protection zones. All policy instruments compared are assumed to reduce the use of pesticides by 50%, i.e. by 1195 tons. In order to compare their performance with respect to cost efficiency and income distribution effects certain assumptions concerning the design of the policy instruments must be made. Thus, before presenting the results a description of the policy instruments is given.

A quota system is defined here as a system where each farmer is allowed to use 55% of his previous application of pesticides prior to the regulation. The reduction requirement for each farmer is then assumed to be the following. Every farmer is supposed to create protection zones which correspond to a 5% reduction in his use of pesticides. Then, each farmer has to reduce the use of pesticides by 45% of the level used prior to the regulation. However, in order to calculate the total costs for this system information is required on the demand for each farmer. This is not available and it is therefore assumed that each class of pesticides, i.e. herbicides, fungicides and insecticides respectively, is reduced by 50%.

Under a charge system, an efficient charge is implemented. This charge is found from the dual value of (6) which corresponds to marginal cost at the required reduction level, i.e. at X*. The efficient charge then amounts to SEK 257/kg pesticide. This level of the charge implies an increase in the price of herbicides, fungicides and insecticides by 97%, 99%, and 17% respectively (in 1990).

However, if these prices increases are implemented without any considera- tion of the creation of protection zones such zones will not be created. The farmers must have an economic incentive in order to create the zones. If such an incentive is not implemented the final reduction in the use of pesticides will be 45% and not the required 50%. It is therefore assumed that the farmers receive a subsidy when they create protection zones. In order to obtain a cost-effective outcome, the level of the subsidy should correspond to the level of the efficient charge, i.e. SEK 257/kg.

Under a permit market it is assumed that the permits are distributed so that each farmer receives permits to use 50% of the pesticide use prior to the regulation. The difference with a quota system is that these permits can be traded among the farmers. A permit market is then established where the equilibrium price of permits is determined. A competitive permit market is assumed which implies that the equilibrium permit price equals the efficient charge; for a proof see e.g. Tietenberg (1984).

A further assumption under a permit market system is that the initial permits corresponding to 50% of the use of pesticides prior to the regulation are distributed free of charge. The farmers receive additional permits condi- tional upon their creation of protection zones. Given all these assumptions

Cost Efficient Pesticide Reductions: A Study of Sweden

Table 3. Net value of yield losses and farmers' income reduction under different policy instruments, millions of SEK

289

Quota Charge Permit market

Net value of 138 94 94 of yield losses

Income reductions 184 440 133 % of total income 13 28 8

concerning the design of the policy instruments the results of the calculations of costs and farmers' income reductions are presented in Table 3.

Note that the reductions in yields due to a decrease in the use of pesticides are evaluated at the world market prices when estimating net value of yield losses and at the prices paid to the farmers when estimating farmers' income reductions. The prices paid to the farmers are on average about 25% higher than the world market prices (in 1990).

Under both the charge and permit market systems a pesticide reduction by 50% is obtained at minimum costs. The costs of a quota system is almost 40% higher due to the efficiency losses under this system. The income losses for the farmers are highest under a charge system and correspond to a reduction in income from crop production of 28%. The reduction in farmers' incomes are smallest under a permit market system. It should however be noted that if the initial permits were distributed at the equilibrium permit price the reductions in incomes would be the same as under a charge system.

The results presented in Table 3 are, however, sensitive to the level of price elasticities. When the price elasticity of herbicides is half of the estimated result the minimum cost for reducing the use of pesticides by 50% or 1195 tons of active substance increases by about 50%. The income distribution effects, i.e. the farmers' reduction in incomes, under a charge system corresponds to 53% of incomes from crop production as compared to 28%.

6. Summary and Discussion

The purpose o'f this paper has been to estimate the cost of reducing farmers' use of pesticides. It was assumed that farmers partly use pesticides in order to avoid large income losses caused by pest attacks. Three different types of mitigation measures were then considered: (i) reductions in the use of pesticides under current production technology, (ii) improvement of the insurance system, and (iii) creation of protection zones, i.e. marginal land along the borders left untreated. Different policy instruments designed to

290 tng-Marie Gren

reduce the use of pesticides by 50% were then compared with respect to cost efficiency and farmers' income reductions.

In order to estimate the costs of the first type of measure, econometric estimates of pesticide demand functions were made. According to the results, the price elasticities for herbicides, insecticides and fungicides were -0.97, -0.15 and -0.34 respectively. Since econometric estimations of risk attitudes for Swedish farmers did not verify the hypothesis of risk aversion results from another study was used to calculate costs. The costs for creation of protection zones were based on engineering data.

According to the results from the calculations of total costs, the minimum cost for reducing the use of pesticides by 50% was 86 millions of SEK, which correspond to about 6% of farmers' incomes from vegetable production. It should, however, be noted that the calculation of costs for improvement of the insurance system were based on several simplifying assumptions. This is important since it was shown that the results are sensitive for changes in the parameters of pesticide price elasticities, risk aversion and variation in yield. When the pesticide price elasticity is relatively low variations in the levels of risk aversion and in the variance in incomes have a substantial influence on costs. A better knowledge of farmers' attitudes towards risk and of the relation between yield and pesticides is then needed in order to evaluate improvements of the insurance system as a method for reducing the use of pesticides. It should be noted that other policies reducing the variance in income, such as stabilization of output prices, may have similar elects on the use of pesticides.

When comparing the quota, charge and permit market systems with respect to costs and income distribution effects an improvement of the insurance system was excluded due to lack of appropriate data. The results showed that the costs of a quota system are about 40 per cent higher than the costs of the charge and permit market systems. Farmers' decreases in incomes were highest under a charge system. A simple sensitivity analysis indicated that these results were sensitive to different levels of the price elasticity of herbicides. The farmers' reductions in incomes under a charge system were doubled when the price elasticity decreased by 50%. The impact under the quota and permit market systems was lower;

The simple comparison of policy instruments thus favoured a permit market system. However, due to lack of experiences from this type of policy instrument in Sweden the implementation in practice may be difficult. Other costs associated with the enforcement of such a system may therefore be relatively high. On the other hand, when considering the existence of non- compliance, a permit market system may have an advantage over the other systems. The incentives to violate may be smallest under this system due to the impact of violation on the market clearing price of permits (Andr6asson- Gren, 1992).

When the damaging impact on ecosystems is the main reason for reducing


the use of pesticides a noteworthy aspect is that not only farmers' emissions, but also industrial emissions and atmospheric deposition should be decreased. Chemical pollutants can be transported over long distances and emissions from other countries therefore account for a part of the atmospheric deposition. A Nordic research project was recently started up in order to identify and measure the deposition from these various sources (Torstensson, L. pers. commentary). In the future it will therefore be possible to estimate costs for reductions in the total deposition of chemicals including all emission sources.

Acknowledgements

I am much indebted to two anonymous referees, Hans Andersson, Runar Br/innlund, Bertil Johnsson (The Swedish University of Agricultural Sciences), Karl-G6ran M/iler (The Beijer International Institute of Ecological Economics, Stockholm), Hans Nutzinger (Kassel University, Kassel), and Hans Opschoor (Free University, Amsterdam) for their valuable comments.

Appendix: Estimation of Pesticide Demand Functions

The regression equations are similar for all types of pesticides, which are written as

P = f ( k , p , g, w, A ) (A1)

where k = price of pesticides, p = weighted price of outputs, g = price of nitrogen fertilizers, w = wage rate, and A = supply of land. A time variable, T, was included in order to account for the monotonic change in technology. The same variables are included in the regression equations for insecticides and fungicides, I and F respectively. Time series data were used for the period 1950--1989.

The functional specification of the regression equations is determined by the shape of the concave utility function and on the production technology. If the utility function is known the production technology can be determined from the pesticide demand function. However, since there is no information on the shape of the utility function there is no clear relation between the estimated regression equation for the pesticide demand and the production technology. The logarithmic specification was therefore chosen since this function showed the best result as measured by F-statistics, t-statistics, adjusted R-squared, and the Durbin-Watson test.

In order to account for correlation in disturbances between the three equations, they were estimated jointly by using the SUR-estimator (Seem- ingly Unrelated Regressions). The estimation period is 1950--1989. The regression results as presented in Table A1. Numbers within parentheses denote t-statistics.

292

Table A1. Regression results for pesticide demand functions

ing-Marie Gren

C k g w p A T Adj. DW R 2

Herbicides 9.14 -0.97 -0 .29 0.07 0.01 -0.01 0.06 0.82 1.29 (5.92) (9.40) (1.50) (0.37) (0.15) (0.08) (7.65)

Insecticides 6.30 -0 .15 0.45 -0 .14 -0 .07 -0 .02 -0 .04 0.87 1.85 (2.32) (1.05) (1.27) (0.44) (0.62) (1.25) (2.87)

Fungicides 4.17 -0 .34 0.51 0.20 0.04 -0.01 -0.01 0.66 1.62 (2.47) (4.21) (2.30) (0.98) (0.52) (0.82) (0.20)

During the estimation period, there has been a rapid change in the qualities of different pesticides. Part of this effect is accounted for by the time variable. However, if, as seems to be the case, the change has been more rapid during the last 10--20 years the estimated parameters may not be stable over the entire time period. A Chow-test was therefore undertaken for each of the regression equations in order to test for stability in the parameters. In order to include the rapid change in qualities of pesticides during the last 20 years the sub-periods were divided into 1950--1969 and 1970-- 1989. According to the results of the Chow-test, the hypothesis confirming stability in the parameters during 1950--1989 could not be rejected for any regression equation.

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Documents

Cost efficient pesticide reductions: A study of Sweden