Dynamic Adjustment in Agricultural Practices to Economic Incentives Aiming to Decrease Fertilizer Application

Input- and output-based economic policies designed to reduce water pollution from fertilizer runoff by adjusting management practices are theoretically justified and well-understood. Yet, in practice, adjustment in fertilizer application or land allocation may be sluggish. We provide practical guidance for policymakers regarding the relative magnitude and speed of adjustment of input- and output-based policies. Through a dynamic dual model of corn production that takes fertilizer as one of several production inputs, we measure the short- and long-term effects of policies that affect the relative prices of inputs and outputs through the short- and long-term price elasticities of fertilizer application, and also the total time required for different policies to affect fertilizer application through the adjustment rates of capital and land. These estimates allow us to compare input- and output-based policies based on their relative cost-effectiveness. Using data from Indiana and Illinois, we find that input-based policies are more cost-effective than their output-based counterparts in achieving a target reduction in fertilizer application. We show that input- and output-based policies yield adjustment in fertilizer application at the same speed, and that most of the adjustment takes place in the short-term.