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Abstract

The method often proposed to meet environmental goals such as water quality improvement is input restriction, such as reduced fertilizer or pesticide use. Computable general equilibrium (CGE) models are potentially valuable tools to analyze the economic impact of such programs. However, to be useful, such models must approximate reality in the way they deal with input substitution. This report presents elasticity estimates that are consistent both with data on input use and with the assumptions of commonly used CGE models. The report describes the estimation of elasticities of substitution among nine outputs and six inputs, including pesticide and fertilizer. A nested production structure is assumed. The nesting structure employed allows the effects of price changes in agricultural inputs to be broken into stages. An effective 100 percent charge on pesticides goes further toward reducing its use (-17.46 percent) than does a lO-percent charge on fertilizer use (-1.0 percent). However, most of the effect on pesticide use (99 percent) occurs in the bottom nest, while the greatest effect on fertilizer (63 percent) occurs in the higher nests. The report ends with a partial equilibrium analysis of a IO-percent fertilizer charge and a 10-percent pesticide charge.

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