Reducing Water Pollution from Nitrogen Fertilizer: Revisiting Insights from Production Economics

Nitrogen sourced from agricultural fertilizers is a major contributor to water pollution. Despite policies targeting a range of farming practice changes, the goal of substantially reducing nitrogen losses from farms remains elusive. We highlight three empirical results from production economics that appear to provide untapped opportunities for policies to reduce nitrogen rates. First, many farmers apply more nitrogen than required to maximize expected profits or utility. Second, contrary to the perceptions of some farmers and farm advisers, nitrogen fertilizer is a risk- increasing input. Third, over wide ranges of nitrogen fertilizer rates, the relationship between rate and profit is remarkably flat, meaning that farmers can reduce fertilizer usage substantially at minimal private cost. We discuss a variety of policy options for efficiently exploiting these insights.