An analysis of agricultural crop residue burning and urban air pollution in New Delhi, India

A farmer in Haryana, a state neighboring the capital city of New Delhi, India, burns agricultural crop residue which leads to an increase in air pollution and gives rise to extra costs for a small business owning representative citizen in New Delhi. We theoretically analyze this farmer/citizen interaction. We first determine the optimal amount of crop produced when the farmer disregards the negative externality he imposes on the representative New Delhi citizen. Second, we study the equilibrium that emerges when the farmer must pay a fine to compensate the New Delhi citizen for the negative externality he causes. Finally, we compare the outcomes in the preceding two cases and then explain the differences that arise.