Do Farmers Internalise Environmental Spillovers of Pesticides in Production?

Pesticides are used in agriculture to protect crops from pests and diseases, with indiscriminate pesticide use having several adverse effects on the environment and human health. An important question is whether the environmental spillovers of pesticides also affect the farmers' production environment. We use a model of optimal pesticide use that explicitly incorporates the symmetric and asymmetric effect of pesticides' environmental spillovers on crop production. The application focuses on panel data from Dutch cash crop producers. We show that pesticides have a positive direct impact on output and a negative indirect impact through their effects on the production environment.