Efficient Waste? Why Farmers Over-Apply Nutrients and the Implications for Policy Design

Understanding why farmers over-apply fertilizer is essential to designing effective agro-environmental policy. If farmers are simply inefficient, possibilities exist for simultaneously improving farm profits and the environment. If not, costly trade-offs are necessary. This article examines why farmer perceptions of agronomic advice, input substitutability, hidden opportunity costs, uncertainty, and risk aversion can make it economically rational to "waste" fertilizer by applying it above agronomically recommended rates. I use this information to evaluate the relative merits of policy responses such as insurance, education, cost-shares, regulation, taxes, and land retirement.