An economic model of a genetic resistance commons: Effects of market structure applied to biotechnology in agriculture

Abstract

Genetic resistance resources represent an emerging class of environmental resources. These resources are the subject of increasing public interest, especially for resistance in agriculture and antibiotic use. This paper models genetic resistance resources as common-pool resources. The static model applies directly to the case of Bt corn, whose seeds are bioengineered to contain a pesticide. Firms produce an agricultural output, corn, using two inputs: Bt corn seeds and refuge areas. Production also depends on the common stock of environmental resistance. Seed use contributes to greater resistance, while refuge areas abate resistance. This costly form of abatement represents another (positive) externality, which allows for the optimal seed use to be greater than the competitive level. The use of seeds and refuge areas by other firms can be shown to be substitutes and compliments in production, respectively, for each firm. This simple model of externalities is complicated by introducing another important feature common to genetic resistance resources: monopoly supply in the biotechnology factor market. Monopoly provision of seeds, with imperfect price discrimination, leads the monopoly to act as a gatekeeper of the commons who tries to maximize its own rents rather than the rents from the resource. This divergence in interests leads to a deadweight loss as seed use is curtailed through higher monopoly prices. This equilibrium is compared to the competitive and the optimal cases. The way in which the resistance externality operates, through damaging others’ output or through affecting their marginal productivities, suggests whether the monopoly improves the efficiency of the seed market. Further consideration is given to the possibility that the monopoly determines the firms’ level of abatement. Assuming some enforcement mechanism, the monopoly chooses higher abatement levels to increase factor demand for seeds and increase its rents. The Under some plausible conditions, a monopoly supplier of the input that accesses the genetic resistance commons can be shown to actually improve welfare by mandating a higher level of care that also maximizes its profits. The distributional consequences of the different market structures are shown, noting how gains for the monopoly come at the expense of firms. In 2000, the EPA and Monsanto required purchasers of Bt corn to plant specific refuge areas in order to forestall resistance. This approach is readily extended to other cases, such as pesticides more generally or antibiotic use in the production of health services by households.