The Effect of Ground Water Regulation on Productivity Growth in the Farm Sector

Abstract

Proper measures of productivity growth are barometers of how well society is allocating its scarce resources. In this context, there is little difference between labor, capital, and material inputs, on the one hand, and air and water resources, on the other. Consumption of any one entails true opportunity costs. The case for expanding the now familiar Total Factor Productivity (TFP) measures to Total Resource Productivity (TRP) is self-evident and compelling.

This paper adopts a TRP growth framework and demonstrates the relative ease with which changing environmental quality can be incorporated into formal productivity modeling. State-specific TRP growth rates for U.S. agriculture for the 1960–96 period are calculated and compared with corresponding TFP growth rates. Annual TFP growth rates across states decreased by an average 0.50 percentage points between 1960–77 and 1977–96 while annual TRP growth increased by an average 0.45 percentage points. Improved risk management of chemical and water use on U.S. farms wholly explains the differential. It not only offset the 0.50 percentage point reduction in annual TFP growth but also added an additional 0.45 percentage points to TRP growth. Without that improvement in water quality, annual TRP growth in the 1977–96 period would have equaled 1.15 percent instead of its measured 2.10 percent rate. The importance of incorporating environmental quality into measures of productivity growth should not be underestimated.