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This time we're going to talk about water pollution again.

We've covered it in a previous segment.

But we're going to look at in a different way.

We're going to ask the question, how much does

the possibility of water pollution resulting from use

of an input affect the optimal decision-making about the level

of that input that a farmer should be using?

And we're going to use water pollution resulting

from fertilizers as the example.

So there are many examples around the world of fertilizers

causing water pollution in nearby water bodies.

And it's not hard to find photos on the internet of really

green and ugly bodies of water.

So it's an issue that's a very important issue and one

that governments are concerned about.

And one that is worth asking, well,

what are some of the things that we could do about it?

So in the last segment, we showed

how economists can identify the optimal rate

of an input such as a fertilizer,

and optimal in the sense that it maximizes the farmer's profit.

But in doing that, we've really ignored

these other non-profit factors such as fertilizer.

So we've ignored the possibility of an increasing

risk of water pollution at higher fertilizer rates.

So we can account for that if we can estimate

what that relationship is between fertilizer

rates and pollution.

So let's assume that we can.

We have the information that identifies

what's the cost, the additional cost,

related to water pollution that will result

from using higher and higher levels of fertilizer

in a particular farm and paddock.

And in this diagram, I've assumed

that we have that information.

And just to illustrate it at least,

I've assumed that it's linear.

It may or may not be linear.

If we know that it's not linear, that's fine.

We can include a non-linear function.

But just for this example, I've graphed it

as a linear function.

Once we have that information, what we can do

is add it on to the cost function for the farmer.

So that's what I've done in this graph.

The dotted line-- the dashed line in this graph

is the profit function for the-- I'm

sorry, not the profit function, the cost function

for the farmer due to the cost of purchasing and applying

the fertilizer.

It doesn't factor in the pollution cost.

But the next line above that, the solid line,

is the addition of the farmer's cost plus the pollution cost.

And then we can go through the same sort of process

that we went through in the previous segment of trying

to identify the optimal level of application of fertilizer.

And you can see that moving the cost curve up, effectively

rotating it around in that way, indicates

that the optimal level of fertilizer input

should be slightly reduced or somewhat reduced.

Now, the extent to which it's reduced

will depend on the shape of both the production function,

and that's the revenue curve, and the level of cost

that the fertilizer is causing, and that's

a case-by-case thing.

But in this example, you can see that we've

reduced the optimal level of fertilizer by a bit.