A General Equilibrium Model of Ecosystem Services in a River Basin

This study builds a general equilibrium model of ecosystem services, with sectors of the economy competing for use of the environment. The model recognizes that production processes in the real world require a combination of natural and human inputs, and understanding the value of these inputs and their competing uses is necessary when considering policies of resource conservation. We demonstrate the model with a numerical example of the Mississippi‐Atchafalaya river basin, in which grain production in the upper basin causes hypoxia that causes damages to the downstream fishing industry. We show that the size of damages is dependent on both environmental and economic shocks. While the potential damages to fishing are large, most of the damage occurs from economic forces rather than a more intensive use of nitrogen fertilizers. We show that these damages are exacerbated by increases in rainfall, which will likely get worse with climate change. We discuss welfare effects from a tax on nitrogen fertilizers and investments in riparian buffers. A 3% nitrogen tax would reduce the size of the hypoxic zone by 11% at a cost of 2% of Iowa's corn output. In comparison, riparian buffers are likely to be less costly and more popular politically.