Pesticides are a central input in modern agricultural production, yet their use generates a set of interrelated externalities that evolve over time. Chemical applications affect not only contemporaneous crop yields but also the accumulation of pest resistance, the exposure of workers and consumers to toxic residues, and the degradation of environmental quality. A key feature of these processes is their dynamic interaction. Current pesticide use alters both the future effectiveness of chemical control and the magnitude of associated external damages. As a result, the design of optimal pesticide regulation is inherently dynamic. A large literature studies the external costs of pesticide use and the role of corrective policy instruments such as taxes and input regulations . A parallel strand examines the economics of resistance, emphasizing how repeated chemical applications select for resistant pest populations and reduce long-run control effectiveness. While these contributions highlight important mechanisms, most analyses either treat resistance as exogenous or abstract from the fiscal and institutional constraints that shape policy implementation. This creates a gap between the biological dynamics of pesticide use and the economic environment in which policy is implemented.
This paper develops a dynamic framework in which pesticide use, resistance accumulation, and health and environmental damages are jointly determined, and in which policy is subject to a balanced-budget constraint. The key observation is that resistance affects both the marginal external damage from pesticide use and the feasibility of corrective intervention. On the one hand, higher resistance amplifies effective chemical exposure through an endogenous scaling mechanism, increasing marginal social damages and strengthening the Pigouvian case for taxation. On the other hand, resistance induces substitution away from chemical inputs, shrinking the tax base that finances corrective policy and thereby limiting the regulator's ability to implement first-best instruments.
This interaction gives rise to a central mechanism that we term fiscal attenuation. As resistance accumulates, the corrective motive for pesticide taxation becomes stronger, while the fiscal capacity to implement it becomes weaker. The resulting divergence between the Pigouvian benchmark and the constrained-efficient policy generates a state-dependent policy wedge that evolves over the resistance cycle. Efficient regulation therefore requires a coordinated and dynamically adjusted policy mix in which the relative roles of taxes and subsidies respond endogenously to the biological state. We formalize this mechanism in a dynamic model of agricultural production with chemical and non-chemical pest control. Resistance evolves according to a biological law of motion driven by effective pesticide exposure, while health and environmental damages depend on the same exposure channel. The regulator chooses a tax on chemical inputs and a subsidy for non-chemical control subject to a balanced-budget constraint that incorporates administrative costs. We characterize both the Pigouvian benchmark and the second-best policy rules and show how resistance alters their relationship through both damage amplification and fiscal effects.
The analysis delivers three main results. First, resistance amplifies effective exposure and raises marginal external damages, increasing the Pigouvian benchmark tax. Second, it reduces equilibrium chemical use, shrinking the fiscal base and raising the marginal cost of public funds. Third, these effects jointly widen the gap between Pigouvian and second-best policies, shifting implementation toward non-chemical control. These results highlight that the effectiveness of corrective policy depends not only on the magnitude of external damages, but also on the endogenous response of the tax base and the fiscal structure of policy implementation. To quantify these mechanisms, we complement the analytical results with a simulation-based approach that constructs a global mapping from policy instruments and biological parameters to steady-state outcomes. Using a structural steady-state representation of the model, we solve for decentralized equilibria across a wide range of policy and biological configurations and approximate the resulting equilibrium correspondence with a metamodel (surrogate model), following the statistical emulation literature. This approach allows us to characterize the global properties of the model without repeatedly solving the full nonlinear equilibrium system and to evaluate how optimal policy varies across the resistance cycle and across alternative biological environments.
The paper contributes to three strands of the literature. First, it extends the economics of pesticide regulation by integrating resistance dynamics directly into the design of policy under fiscal constraints. Second, it contributes to the broader literature on dynamic externalities by introducing a mechanism through which evolving biological states affect not only the magnitude of external damages but also the implementability of corrective policy. Third, it relates to the literature on second-best environmental regulation by showing how fiscal and administrative constraints shape the composition of policy instruments in dynamic settings. This contribution is also connected to the literature on environmental regulation with stock externalities, where current actions affect future outcomes through evolving state variables.
