4. Decision Making at the Farm Level

A key theme of this book is that producers’ economic choices are the key determinants of water quality problems. Designing and implementing policies that are effective in managing water pollution from agriculture and do so without imposing undue social costs require an understanding of farm decisions making. This chapter introduces economic concepts and tools for analyzing farm decision making affecting key choices determining water quality outcomes. It begins with a brief introduction to key choices and objectives in farm decision making. The chapter then introduces standard economic models used to explain producers’ choice of crops, production inputs, and the spatial distribution of agricultural activity. These models are used to illustrate how various choices affecting water quality outcomes differ between market driven agricultural landscapes in which the costs of water pollution are external to producers, and agricultural landscapes in which choices balance the social benefits and costs of agricultural production. Subsequent sections introduce additional concepts and tools relevant to farm decision making on polluting inputs, crops, the spatial structure of production, and the use of best management practices. Concepts and models are illustrated by simple numerical examples and by empirical applications to significant water quality problems in the Gulf of Mexico and Chesapeake Bay.