Do Farmers Internalise External Impacts of Pesticides in Production?

In modern agriculture, pesticides feature so prominently in growers’ arsenal to reduce crop damage caused by various pests and diseases. But their indiscriminate use can harm human health and the environment and, eventually, impact agricultural productivity negatively. In an era of an increasing public awareness on the external effects of pesticides, the EU is trying to update its pesticide policy by establishing tax and levy schemes. An important question is whether the external impacts of pesticides are also affecting the farmers’ production environment. A damage abatement specification is used consisting of a potential output function and a damage abatement function. The damage abatement function considers both high and low toxicity pesticides, and variables reflecting pesticide impacts on biodiversity and operator’s health. The application focuses on panel data of Dutch cash crop producers. The pesticide contribution on some biodiversity categories are found to impact farm output significantly. The outcome is important for designing tax systems that aim at socially optimal use of pesticides.