JOURNAL OF ENVIRONMENfAL ECONOMICS AND MANAGEMENT 2,75-91 (1975) Biological Interactions and Environmental Effects in the Economics of Pest Control L* G. FEDER AND U. REGEV Department of Agricultural and Resource Economics, University of California, Berkeley, California 94720 ReceivedApril 1, 1975 The problem of pest control is tackled in a context of an ecosystem that consists of prey- predator populations with human interaction through pesticide application. The control, aimed at reducing pest damage, results in two undesirable external effects: reduction of beneficial predator population and environmental contamination. The untapped natural equilibrium is compared with equilibrium resulting from decentralized and centralized economic decision making. It is shown that, under certain conditions, myopic decision rules increase rather than decrease the pest damage. The “user cost” (or benefit) is shown to be crucial in determining the optimal centralized policy, and its relations to the various com- ponents of the system are analyzed. The components of the user cost are analyzed to de- termine the level of taxes or subsidies that will yield the optimal policy. 1. INTRODUCTION “With the slow development of civilisation, so has man gradually realized the extent to which pests harm his crops, annoy him and transmit diseases, both human and those of domestic animals” [6, p. 11. As rapid world population growth emphasizes the need for increased supplies of food and other agricultural resources, the problem is aggravated; and improvement of pest management may become crucial. Pest-borne diseases, which have been almost completely controlled in the developed world, are still a grave problem in the underdeveloped parts of the world. It has been suggested that lO-20% of world crops and stocks are destroyed each year by pests although extensive pest control methods are maintained [2, p. 291. Edwards [6] reports that pest damage in the United States is of the order of $4 billion, while the figure for the world as a whole is $21 billion. Knipling [ 141 has estimated that, in the first decade of the use of DDT, 5 million lives have been saved and 100 million serious illnesses have 1 Giannini Foundation Paper No. 404. 2 This research was supported in part by the National Science Foundation and the Environmental Protection Agency through a grant (NSF GB-34718/BMS 75-04223) to the University of California. The findings, opinions, and recommendations expressed herein are those of the authors and not neces- sarily those of the University of California, the National Science Foundation, or the Environmental Protection Agency. We are indebted to J. K. Oddson, whose constructive criticism substantially improved the quality of this paper. We also benefitted from the comments by G. Brown, R. Cummings, D. Hueth, A. Gutierrez, R. Norgaard, and G. Oster. The authors alone, however, are responsible for any remaining errors. 75 Copyright Q 1975 by Academic Press, Inc. All rigbta of reproduction in any form reserved.