Wednesday, March 4, 2009

Are Iowans Causing the Dead-Zone in the Gulf of Mexico?

An area in the Gulf of Mexico about the size of New Jersey is an aquatic dead-zone, where there are virtually no fish present. The reason for the dramatic declines in fish stocks is that oxygen levels in the dead-zone are significantly lower than what is found normally in the water in the Gulf. So why are oxygen levels so low? It is because farmers in Iowa and the Midwest use nitrogen and phosphorous to increase corn yields. Some of the nitrogen and phosphorous fertilizer ends up in rainwater runoff. The runoff fertilizer ends up in the Mississippi and eventually the Gulf of Mexico. With more fertilizer in the Mississippi this leads to an overgrowth of algae and when the algae die they decompose, using up oxygen in the water, leading to the decline in fish stocks.

Here we have (unfortunately) an excellent example of a negative externality. The actions by Midwest farmers are negatively affecting Gulf of Mexico fisherman and seafood processors.

Gulf fisherman are estimating that it is costing an additional $450 per day in fuel costs to travel to areas outside of the dead-zone. The added costs are reducing the amount of fishing in the Gulf which is also negatively affecting seafood processors by forcing some to shut down.

The classic solution in economics to a negative externality is to tax the output of the good that is causing the negative externality. So possible tax solutions would be to tax corn, tax agricultural fertilizer or tax farm land. Each has benefits and costs, but to reach the socially optimal solution it is necessary to internalize this negative externality, and taxes are a straight forward mechanism to achieve that goal.

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