Societal Cost of Pesticides

Suppose the repeated application of a pesticide used on orange trees contaminates groundwater. The pesticide is applied annually in almost all of the orange groves throughout the world. Most orange growers regard the pesticide as a key input in their production of oranges.

Tasks:

Use a diagram of the market for the pesticide to illustrate the implications of a failure of the orange producers' costs to reflect the social costs of groundwater contamination.

Use the diagram to explain a government policy that might be effective in achieving the amount of orange production that fully reflects all social costs.