Mining the Soil: Agricultural Production System on Peatland RENAN U. GOETZ* and DAVID ZILBERMAN Federal Institute of Technology, Department of Agricultural Economics, ETH-Zentrum, CH 8092, Ziirich, Switzerland; (* Present address: University of California at Berkeley, Department of Agricultural and Resource Economics, CA 94720, U.S.A.) Abstract. Soil is usually considered as a renewable resource for dynamic crop and production management decision problems. For peatland, however, soil should be regarded as an exhaustible resource. This paper determines the optimal utilization of peatland for agricultural production within a dynamic context and it also presents an empirical study where the quasirent function is convex in the input and not concave as assumed in many economic studies. As a result of this convexity a comer solution is obtained. Moreover, the study demonstrates that there is only a slight difference between short- and farsighted behavior, and that both lead ultimately to an accelerated exhaustion of the resource. Private optimization leads to intensive use of the peat in the production of high value crops, which depletes the peat in a relatively short period of time. However, peatland also posseses a value as an environmental asset. The study provides a benchmark for the decision as to whether to convert peatland into productive agricultural land or to conserve it. Key words: Exhaustible resource, peatland, optimal control, groundwater 1. Introduction Farmers producing crops on mineral soil face the problem of soil erosion. If the rate of soil loss exceeds the rate of soil genesis, soil productivity will inevitably be reduced in the long run. Agricultural economists therefore rec- ognize that soil management is a dynamic process that has to be adjusted continually to changes in the stock, i.e. in the depth of the top soil layer. The resulting concern stimulated studies modeling the optimal private agri- cultural utilization of the soil. Past research, including that of Burt (1981), McConnell (1983), and Miranowski (1984), treats soil as a renewable resource and focuses on the consequences of decreasing soil productivity for agricul- tural production. This paper introduces the case of peatlands. Throughout history, peatlands have been marginalized and not integrated into agricultural production. This is mainly due to the fact that only particular grasses, shrubs and trees will grow under the wet conditions typical of peatlands. As a result of the develop- The financial support of the Department of Environment, Forest and Landscape of Switzerland is gratefully acknowledged. The authors are also grateful to Michael Caputo for helpful suggestions. Environmental and Resource Economics 6:119-138, 1995. © 1995 Kluwer Academic Publishers. Printed in the Netherlands.