Socially Inefficient Use of Pesticides due to Negative Externalities: A Case of Indonesian Rice Agriculture

Abstract

Pesticides provide economic benefits for the farmers in terms of saving yield loss; but also provide adverse impacts. It is therefore economically inefficient to totally ban the use of pesticides. Consequently, it is required to investigate the efficient level of pesticide use. This paper aims to determine the efficient use of pesticides by internalising the costs of externality, and estimates the monetary value of net welfare loss. The benefit of pesticide use is estimated using a production function, and the economic value of the adverse impact on human health and the environment are represented by a health cost and consumers’ willingness to pay for reduction in pesticide use. Panel data on rice production used in this paper is compiled from publications of Indonesian Statistics Agency. The costs of externality are adopted and adjusted from previous researches. The socially efficient use of pesticides is determined when the marginal benefit is equal to the marginal social cost. The results of this study indicate that the socially efficient use of pesticides is lower than that of actual use. Consequently, there is welfare loss imposed on farmers and other community.