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Pesticide Resistance: Strategies and Tactics for Management. 1986. National Academy Press, Washington, D.C. Econorn~c Issues in Public and Pnv ate Approaches to Preserving Pest Susceptibility JOHN A. MIRANOWSKI and GERALD A. CARLSON Because of pest mobility, pesticide resistance is not easily managed by individualfarmers. Pesticide manufacturer incentives in attempt- ing to prolong the electiveness of pesticides are influenced by the level of competition and likely new pesticide discoveries. There is little evidence in pesticide prices that pesticide companies expect rapid increases in pesticide scarcity due to resistance. Depending on market and pest mobility situations, various groups can best combat resistance development. INTRODUCTION Unlike most other resources used in world agriculture, synthetic pesticides are a relatively new development. Creation of social institutions to protect public safety, to encourage new pesticide discoveries, and to use effectively the stock of pesticides now available are critical for the long-term productivity of pesticides (Carlson, 1977~. The private companies and individuals involved include pesticide manufacturers, formulators, retail firms, custom applica- tors, pest-control consultants, and farmers. Public agencies vary from country to country. The legal institutions include national and local pesticide safety regulations and pesticide use and patent protection laws. Many resources in agriculture are allocated by the choices of farmers purchasing in unfettered markets. Because of the potential off-farm damage by pesticides, however, there are regulations concerning maximum dosages, restrictions on location of use, and other safety requirements. Economically these regulations can sometimes be justified because producers may not consider off-farm costs (health, wildlife, and environment) in their pesticide . . use decisions. 436

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ECONOMIC ISSUES 437 When one farmer harbors or creates pests or conditions conducive to pest population growth with adverse effects for surrounding and even distant farmers, the free choices of farmers become nonoptimal (Regev, 19844. Since many insects, weed seeds, and pathogens are highly mobile, the pests are considered "common property." No single farmer owns the pests, and one farmer's pest-control decisions affect other producers. A pesticide company may behave as the owner of a mobile pest population if the company produces the major pesticide used to control this pest pop- ulation. The company will have an interest in the efficacy of the pesticide in the future and will price the product and promote its use to maximize long-term (discounted) net returns. With fewer close pesticide substitutes or longer patent protection, a pesticide manufacturer is more likely to act as a long-term manager of pest susceptibility. Pests that are or might become resistant to one or more pesticides are the main focus of this conference. When pests lose their susceptibility to pesticide materials, they depreciate the value of these pesticides. Many types of ag- ricultural resources depreciate in value over time: equipment wears out, land is eroded, energy stocks are drawn down, and farmers' skills and knowledge can decline. Individual farmers have long had the responsibility of deciding the rate at which they use their resources over time. When mobile pests develop resistance to currently available pesticides, however, groups of farm- ers, government agencies, or other social units may need to take action. A single farmer cannot decide how long the effectiveness of a given pesticide should be maintained on his farm because the pesticide-use practices of all farmers with whom he shares the particular pest population determine its susceptibility to his pesticide applications. With mobile pests, just as with pesticide movement off the farm, there "may be" an economically superior way to organize pest control than through individual farmer decisions. The "may be" refers to the costs and special problems associated with collective pest-control actions. Actions by pesticide manufacturers, government agencies, or groups of farmers may not slow resistance development sufficiently to pay these additional costs, or the added benefits may not justify the added costs. We plan to show how the presence of mobile, resistant pests and pesticide market structure influences pesticide companies and farmers; how one can gauge current and future scarcity of pesticides; and how to determine what factors favor various groups in managing pesticide resistance. We conclude with some implications for policy changes. PEST SUSCEPTIBILITY: OPTIMAL USE OVER TIME One primary economic objective in pesticide resistance management is to achieve the socially optimal amount of pest susceptibility to pesticides over time. Although the objective is relatively straightforward, the dimensions of

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438 MANAGEMENT OF RESISTANCE TO PESTICIDES \ ,: \ // - ,~ A'- 'b . ,.~- Id .# .# MSB, S O q2 q. q1 MSC MSB MUC MCC MCC FIGURE 1 Optimal use of pest susceptibility over time: costs and benefits. the process are complex, and the optimal solution will vary by pest and pesticide. To simplify this decision process and to help interpret specific cases, we present an analytical framework. The analytical framework is drawn from the natural resource economics literature that helps to explain the optimal intertemporal use of scarce re- sources. The natural resource here is pest susceptibility to pesticides. Pest susceptibility is a renewable resource that can be harvested repeatedly, but through repeated use of specific chemicals and groups of chemicals, the stock of susceptibility gradually reduces and eventually is depleted or exhausted. For simplicity we will consider the depreciation of pest susceptibility as a function of the number of exposures or applications of pesticides. Pest sus- ceptibility then becomes a nonrenewable stock resource that is depleted with repeated applications of a particular pesticide or pesticide group (Hueth and Regev, 19741. Susceptibility is a common property resource of varying degree. The pri- vate versus common nature of the pest will depend on pest mobility between farms and regions. Like the commons, one individual's harvest of the stock may reduce the resource stock (susceptibility) available to other potential users. Thus, a "public" decision may increase society's welfare relative to that achieved in private optimizing decisions. Figure 1 is a two-period graphic illustration (McInerney, 1976) of the economic dimensions of the optimal intertemporal allocation of pest suscep

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ECONOMIC ISSUES 439 tibility when the stock is limiting. Although a two-period analysis may not appear appropriate, it illustrates the concept without the complexity of a mathematical presentation (Hueth and Regev, 1974~. In Figure 1 the fixed stock of the resource, OS, is given by the length of the horizontal axis. The curves MSB ~ and MSB2 represent the marginal social benefits from utilizing the stock of susceptibility in periods to and t2. (Alternatively, the level of susceptibility is inversely related to the number of pesticide applications.) MSB2 is reversed to illustrate that future resource use in period t2 is con- strained by the stock remaining after period to. MCCOY and MCC2 are the marginal pesticide costs in periods to and t2. Note that MCC2 is lower than MCCOY. Both MSB2 and MCC2 have been discounted to translate all costs and benefits into present values for direct comparison. In a static model, MSB~ = MCCOY; thus, qua would be the optimal level of pesticide use in period to. But in a dynamic context, the allocation decision becomes more complex. The static solution, MSB~ = MCCOY, leaves an insufficient stock of susceptibility to satisfy the optimality conditions in period t2, that is, MSB2 = MCC2. A reallocation of the existing stock between the . . two Perot s Is now necessary. The cost of utilizing susceptibility in period to in terms of foregone net benefits in t2 is the marginal user cost, MUC, or the difference between MSB2 and MCC2. The marginal social cost (MSC) of using pest susceptibility in period to is the sum of MUC and MCCOY. The optimal intertemporal allocation of the stock of susceptibility is at the point where MSB~ = MSC. This allocation uses Oq* of the stock of sus- ceptibility in period to and q*S in period t2. By allocating susceptibility such that MSB ~ = MSC, the present value of marginal net benefits at q* are equal in periods to and t2, or ab = cd. This presentation does not include the environmental costs associated with pesticides. With some minor modifications such costs could be included. Yet even if we concentrate only on the production-related costs and benefits, private decisions can deviate from the socially desirable outcome if (1) pest susceptibility is a common property resource, or (2) the supplier of the pes- ticides exhibits monopolistic behavior. To evaluate common property, the interpretation of Figure 1 has to be modified. The MSB curve becomes the marginal private benefit (i.e., mar- ginal value product) curve for the individual producer. Likewise, the constant MCC curve applies to the private producer as well as in the aggregate social context. If each producer has sole ownership rights in the pest susceptibility on his farm and pests are immobile, then the producer's profit-maximizing behavior in allocating susceptibility between periods to and t2 will parallel the social decision sought by society. No government intervention to slow the spread of pesticide resistance can be rationalized. If each producer has open access to the common pest susceptibility, assuming that the pest is

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440 MANAGEMENT OF RESISTANCE TO PESTICIDES highly mobile among farms, then each producer in period It will equate MCCl and the average private benefits, APBl, which is above and to the right of the MSB~ curve. With common property, OqO would be used in period It and only qOS would remain for t2. The private operator has no incentive to conserve susceptibility because it will simply be extracted by other operators who are using the pesticide to control their pest problem. Thus, the common stock of susceptibility will be overexploited in the early periods relative to the socially desirable pattern of use. Only public inter- vention, such as regulations or price incentives (Regev, 1984), can move the equilibrium from qO toward q*. Achieving q*, the socially optimal al- location of susceptibility between the two periods, is both complex and administratively difficult. The competitive structure of the pesticide industry may have a major impact on the allocation of the susceptibility stock between the two periods. Mo- nopolistic control of a resource generally leads to underutilization of the resource in the early years relative to the later years (Dasgupta and Heal, 19791. The initial price established by the monopolist is higher than the price that would prevail in a competitive market environment. To meaningfully analyze the pesticide market structure, often dominated by a few companies, we must confine our discussion to a single pest and the pesticides available for its control. Two cases need to be considered: (1) monopolistic marketing of a pesticide for a particular pest with no close substitutes available or easily capable of being developed, and (2) monopolistic marketing of a pesticide with close substitutes for the control of a particular pest. In the first case, with no close substitutes, the monopolist can manage pest susceptibility over time. The pesticide firm would equate its marginal revenue and marginal cost curves to determine the profit-maximizing price and quantity combination. Because the marginal revenue curve lies below the demand curve, the optimal quantity of pesticide marketed would be less and the price would be higher than for perfect competition. This combination would tend to retard resistance development to the particular pesticide being considered. In terms of Figure 1 the optimal use of the stock of susceptibility will be less than Oq* in period to but the MUC curve will shift to the right, partly offsetting the incentive to overconserve the stock of pest susceptibility in period to. Figure 2 more clearly illustrates the monopolistic management of the stock, with Oqm used in period to and qmS used in period t2. From society's viewpoint, pest susceptibility would be overconserved and pesti- cides would be underused in period to, and the stock of susceptibility may not be fully used. The monopoly situation could develop if patent protection was afforded the manufacturer and no close substitutes were available to control a specific pest. In the second case, with the availability of close substitutes, the monopoly

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ECONOMIC ISSUES o 441 MSC ~ \ - - ~ , >< , .. . . . . . ... . ~ . . . . . : . . . . .. ' qm MCC, i\ q. - MR 1 go S FIGURE ~ Monopolistic management of pest susceptibility over time: costs and benefits. faces a more elastic demand and a marginal revenue curve for its particular pesticide. As the competition from substitutes increases, the monopoly ad- vantage will disappear. But if some monopoly advantage persists and this pesticide is marketed at a higher price than would prevail in a more com- petitive market situation, resistance development for the monopoly product may be retarded and hastened for the close substitutes, which are competi- tively marketed. RESISTANCE MANAGEMENT: INCENTIVES AND CONSTRAINTS The only economic justification of public resistance management is that the intertemporal added social benefits outweigh the added social costs. If proposed resistance management schemes (e.g., regional pest-management cooperatives, pesticide application restrictions, education programs) cost more to implement, administer, and enforce than their potential benefits, then these proposals will reduce overall social welfare even though particular producer groups may gain. If new pesticide products become more scarce over time, the practice of adopting a new pesticide when resistance develops becomes less viable. Alternatively, if new discoveries are adding compounds fast enough, farmers may have little or no incentive to spend time and resources in slowing resistance development. Chemical firms have economic incentives to search

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442 MANAGEMENT OF RESISTANCE TO PESTICIDES TABLE 1 Indices of Prices Paid by Farmers, U.S. Average Production Year Items Pesticidesa Fuel Fertilizer Tractors Labor 1977= 100 1968 50 64 50 52 44 48 1972 61 65 54 52 54 63 1976 97 111 93 102 91 93 1980 138 102 188 134 136 126 1981 148 111 213 144 152 137 1982 150 119 210 144 165 143 1983 153 125 202 137 174 147 aComposite index of agricultural chemicals. SOURCE: U.S. Department of Agriculture (1984a). for compounds in areas where resistance to currently used compounds is developing, since a new chemical will become more valuable as pests become resistant to old compounds. Over the past 40 years commercial agriculture, with minor exceptions, has had moderately priced replacement pesticides available when resistance has developed. Therefore, why should farmers expect that the pesticide in- dustry will fail to develop new economic alternatives in the future? If new pesticides are not expected to be readily available in the future, we should see higher relative pesticide prices to reflect the increasing scarcity. Although agricultural chemical prices were increasing between the years 1968 to 1983, the rate of increase was substantially behind all other production input prices (Table 1~. A more detailed breakdown of price increases paid by major pesticide categories is provided in Table 2. The statistical series may be shorter, and variation in the number of chemicals included over time may reduce comparability, but the implications are very similar to those contained in Table 1. Additionally, the price increases that did occur for pesticides may have been more related to current market features, such as higher energy prices, more stringent environmental regulations, and general inflation as opposed to the increasing future pesticide scarcity. Thus, based on expec- tations of future pesticide scarcity, the aggregate market evidence does not indicate the need for overwhelming concern over future pesticide availability and pest susceptibility. Pesticide companies have incentives to monitor resistance and deploy prod- ucts to maintain product life (Delp, 1984~. Although higher pesticide prices, especially by firms with large market shares, may encourage lower pesticide- use rates and lower resistance development rates, most chemical companies are striving to maintain and expand market shares. Thus, conflicts with business objectives are not uncommon when pursuing joint actions to prolong the effectiveness of pesticides (Delp, 19841.

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ECONOMIC ISSUES 443 Decisions to develop new chemical-control alternatives and to price ex- isting products are influenced by patents, the ability to maintain trade secrets, and safety test requirements. The first two influences encourage the devel- opment of new compounds; the last factor decreases effective patent lives and reduces incentives to invest in additional pesticide research. These factors should lead to higher pesticide prices, thus discouraging use and reducing resistance buildup. Pesticide firms may also use marketing practices to reduce resistance buildup. For example, resistance has not developed with pesticide mixtures as opposed to a single compound formulation. Selling mixtures is not without costs, especially to the firm and the environment. Integrated pest management (IPM) activities, community pest-control or- ganizations, and other attempts to regulate entire pest populations could have major impacts on pesticide resistance development. Yet such actions have problems. These actions are usually costly to organize, administer, and en- force (Rook and Carlson, in press). Enforcement may be difficult to ensure. Such actions may be difficult to expand to many crop-pest situations, and they may be unnecessary if the pest species has limited mobility. For example, resistance in corn rootworm control may be largely endogenized into the individual farmer's decision-making process with few external impacts. National, state, and local laws may restrict the frequency of pesticide use and the actual chemicals selected. Australia has initiated a program to vol- untarily limit pyrethroid use on cotton to a particular period of cotton growth. Although this cooperative program between farmers and industry has been successful, it is difficult to agree on such restrictions until resistance problems become quite serious. Unless the rates and consequences of resistance de TABLE 2 Estimated Increases in Average Prices Paid by Farmers for Selected Pesticides Year Herbicides Insecticides Fungicides (Percent) 19754331 40 1976- 14 11 1977- 9- 4 5 1978- 64 6 197935 7 1980710 22 1981158 7 198226 4 1983- 48 3 1984- 61 NA 1985* 0 - 3 - 1 *Projected. SOURCE: U.S. Department of Agriculture, 1975, 1977, 1979, 1980, 1982, 1983, 1984b.

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444 MANAGEMENT OF RESISTANCE TO PESTICIDES velopment are known, opposition from farmers and pesticide firms may be strong, especially if the pest is not highly mobile between farms. ORGANIZATIONS TO MANAGE RESISTANCE It is in the self-interest of various economic agents to manage pests and protect the future productivity of pesticides. Because of the differences in pest mobility, detection of pests, farm sizes, and arrays of chemical and nonchemical controls, there may be several social institutions for managing resistance. The simple scheme outlined below considers six different man- agement configurations: none, farmers, groups of farmers, chemical com- pany, groups of chemical companies, and government units and laws. These units range from small to large spatial areas of influence. The importance of resistance management for a particular pesticide will increase when few substitute chemical or nonchemical controls are available. The extra resources expended for maintaining susceptible pest populations may be considerable. Monitoring resistance development, switching compounds, rotating compounds, changing sales efforts, and other actions call for high levels of scientific and managerial manpower. Coordination costs between groups of farmers or several chemical firms will increase as the spatial area increases. As benefits from resistance management diverge, the ability to reach agreements will decline. Thus, government agencies may need to expand their role or governments may need to enforce mandatory laws or regulations. The effectiveness of such laws and regulations will be limited by their ability to be enforced. Conditions Favoring No-Resistance Management Little evidence of or very slow resistance development. Substitute pesticide and nonpesticide controls are available and com- petitive with current pesticide control. New substitute compounds are readily developed. Conditions Favoring Resistance Management by Farmers Very low pest mobility, with the farmer "raising" and "owning" his pests. Substitute pesticide and cultural controls are far more costly, and com- petitive replacement pesticides are not forthcoming, that is, specialized crop with limited pesticide market; unique pest lacking susceptibility to other compounds. High-value crop subject to large pest damage in absence of control.

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ECONOMIC ISSUES Conditions Favoring Voluntary, Multifarm Resistance Management (Cooperative, Community, Consultants' Clients) 445 Pests are sufficiently mobile within a confined region so that multiform coordination of resistance management is beneficial. Economics of size can be realized in resistance management while maintaining low coordination costs. Benefits and costs are proportional to level of participation. Minor benefits accrue to free-riders; these individuals impose minor costs on the coordinated effort. Conditions Favoring Resistance Management by a Single Chemical Company Possession of a highly profitable compound with no potential or actual close substitutes. Monitoring of resistance is not costly. Strong monopoly position permits the company to market the compound so as to manage resistance. Pest is sufficiently mobile so that incentives for voluntary management by growers are uneconomic. Conditions Favoring Resistance Management by Multiple Chemical Firms (Contracts, informal Agreements) Resistance can be easily managed by mixtures of compounds owned by several firms. Resistance monitoring information is valuable for several products sold by several firms, either from potential cross-resistance or by multiple pro- ducers of the same compound. Coordination of selective pressure on a pest population can be achieved by joint action such as rotation of compounds over time and space. 1 Conditions Favoring Use of Government Pest Control, Regulatory Agency, or Laws for Resistance Management Free-ridership by one chemical firm or a few farmers can jeopardize a regional coordination effort, typically characterized by a highly competitive pesticide market and a highly mobile pest. Coordination between firms is costly, such as might occur when many companies or farmers with widely different interests manage resistance for a given pest population.

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446 MANAGEMENT OF RESISTANCE TO PESTICIDES Governmental unit that is responsible for pest control in an area (e.g., public health, Forest Service) can be responsible for resistance management. Government agencies can use existing regulations to respond to resis- tance by quickly making new compounds available. Section 18 of the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA) allows the U.S. En- vironmental Protection Agency (EPA) to speed the clearance process for new pesticides when resistance is a serious problem. These approaches are not mutually exclusive, and it may be helpful to have several groups attempting resistance management. The main limitation of having several approaches is that each approach will require scarce re- sources to preserve susceptible pests. The overlapping efforts may require more total resources to accomplish a given end relative to a coordinated effort. POLICY IMPLICATIONS What policy implications can be drawn from the above analytical frame- work with respect to resistance management? If the pest being considered is rather immobile and if farmers are in- formed on pesticide resistance development, then the optimal allocation of pest susceptibility over time can be achieved through farmers maximizing their long-run returns. Public information (education) programs may be needed to create an awareness among farmers of pesticide resistance development. If the pest being considered is mobile, optimal management of pest susceptibility may require some form of organization or regulation, given the "common property" nature of pest susceptibility. Yet some form of intervention can be justified only if the added benefits outweigh the added costs. Lazarus and Dixon (1984) evaluated a regional program for control of corn rootworm pesticide resistance and concluded that the potential gains were very small relative to farm incomes. Such a result can be expected when the pest exhibits limited mobility and when viable substitute controls such as crop rotations are available. Additionally, the magnitude of control program costs should be an important factor in the decision to organize or regulate. The attractiveness of resistance management to the pesticide industry will depend on market structure. In a relatively competitive pest-control situation with many close substitutes, there would be little incentive for resistance management. If there were few substitutes and few firms competing in the marketplace to control a particular pest, industry pesticide resistance management would be more viable given the lower transaction costs involved. But oligopoly theory would imply that an equilibrium management strategy may be difficult to achieve in a dynamic market situation. Government

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ECONOMIC ISSUES 447 intervention, including a tax solution, to allocate susceptibility is possible, but it would be extremely difficult to achieve an optimal allocation even if pesticide resistance could be retarded. A monopolistic market situation can lead to an industry solution to resistance management if no close substitutes are available. Where the mo- nopolist provides the only efficacious control alternative, pest susceptibility will only be allocated optimally by coincidence. More likely, susceptibility will be overconserved. Yet the costs of public intervention may easily out- weigh the benefits in this situation, especially if external environmental costs are considered. If close substitutes are available the monopoly-controlled compound will incur slower rates of resistance development, but resistance development may be hastened for the close substitutes produced more com- petitively. DDT resistance development in the 1960s and early 1970s may be a good illustration of such competitive market consequences. CONCLUSION In summary the development of pesticide resistance is not an argument for resistance management in and of itself. The best group to implement resistance will depend on market and pest mobility conditions. REFERENCES Carlson, G. A. 1977. Long run productivity of insecticides. Am. J. Agric. Econ. 59:543-548. Dasgupta, P. S., and G. M. Heal. 1979. Economic Theory and Exhaustible Resources. Welwyn, England: Nisbet/Cambridge. Delp, C. J. 1984. Industry's response to fungicide resistance. Crop Prot. 3:3-8. Hueth, D., and U. Regev. 1974. Optimal agricultural pest management with increasing pest resis- tance. Am. J. Agric. Econ. 56:543-552. Lazarus, W. F., and B. L. Dixon. 1984. Agricultural pests as common property: Control of the corn rootworm. Am. J. Agric. Econ. 66:456-465. McInerney, J. 1976. Natural resource economics: The basic analytical principles. J. Agric. Econ. 27:31-53. Regev, U. 1984. An economic analysis of man's addiction to pesticides. Pp. 444-453 in Pest and Pathogen Control: Strategy, Tactical, and Policy Models, Gordon R. Conway, ed. New York: John Wiley and Sons. Rook, S. P., and G. A. Carlson. In press. Farmer participation in pest management groups. Am. J. Agric. Econ. U.S. Department of Agriculture. 1975. Evaluation of Pesticide Supplies and Demand for 1974, 1975, and 1976. Agric. Econ. Rep. No. 300. U.S. Department of Agriculture. 1977. Evaluation of Pesticide Supplies and Demand for 1977. Agric. Econ. Rep. No. 366. U.S. Department of Agriculture. 1979. Evaluation of Pesticide Supplies and Demand for 1979. Agric. Econ. Rep. No. 422. U.S. Department of Agriculture. 1980. Evaluation of Pesticide Supplies and Demand for 1980. Agric. Econ. Rep. No. 454.

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448 MANAGEMENT OF RESISTANCE TO PESTICIDES U.S. Department of Agriculture. 1982. Farm Pesticide Supply and Demand Trends, 1982. Agric. Econ. Rep. No. 485. U.S. Department of Agriculture, Economic Research Service. 1983. Inputs Outlook and Situation. June. U.S. Department of Agriculture. 1984a. Agricultural Statistics 1984. Washington, D.C.: U.S. Government Printing Office. U.S. Department of Agriculture, Economic Research Service. 1984b. Inputs Outlook and Situation. August.