Resource Management under Production and Output Price Uncertainty: Implications for Environmental Policy

Abstract Various environmental policies have been proposed to control agricultural runoff of nutrients and pesticides. The impacts of these policies on input use are complicated because of the various sources of uncertainty farmers face and the precise nature of farmers' risk attitude. A risk‐averse farmer's response to changed profit, input, and output taxes under output price and production uncertainty is examined. The impact of these policies on input use depends on the form of production uncertainty, risk‐input relationships, risk attitudes, and degrees of output price and production uncertainty. These results have implications for the design and implementation of environmental and other production‐related policies.