A Regional Bio-Economic Model of Nitrogen Use in Cropping.

We build a bio-economic programming model of crop production at the regional scale to predict the effects of environmental policies on agriculture and the environment. The model is calibrated against economic data on observed crop acreages and yields, as well as predetermined supply responses. In addition, crop-specific production functions are calibrated to exogenous agronomic information on yield responses to nitrogen and irrigation. Observed economic behavior is then rationalized through the use of crop-specific shadow prices for land, fertilizer and water. The calibrated model thus replicates economic information while being consistent, at the margin, with agronomic expectations regarding the responsiveness of yield to intensive margin adjustments. The model is applied to the study of a nitrogen tax in Yolo County, California, intended to mitigate non-point source nitrogen pollution from field crops. At low tax levels, the behavioral and environmental responses to the nitrogen tax appear to be largely due to changes in the intensive margin. As the tax level increases, intensive margin responses start to level out and acreage reallocation among crops begins to play a sizable part in the total response. Overall, the environmental effects of the policy can only be captured if intensive margin adjustments are correctly accounted for.