The economics of nitrogen in agriculture and in the environment

David J Pannell

University of Western Australia, [email protected],



The economics of nitrogen in farming systems are complex, multifaceted, fascinating and sometimes surprising. Economic insights are crucial for making sound decisions about farm-level management of nitrogen, and also about regional or national policy, such as for water pollution. In this paper I present key insights from a large and diverse literature. Issues covered include: the economics of nitrogen as an input to production; nitrogen and economic risk at the farm level; the economics of nitrogen fixation by legumes; the existence of flat payoff functions, which often allow wide flexibility in decisions about nitrogen fertilizer rates; explanations for over application of nitrogen fertilizers by some farmers; and the economics of nitrogen pollution, at both the farm-level and the policy level.

Insights, evidence and principles from economics are of central relevance to management, policy and research related to nitrogen. Important results that have been known to economists for decades, such as flat payoff functions, remain unknown to most agronomists and scientists. Accounting for these economic issues has the potential to substantially increase the benefits to farmers and to society as a whole.

Key words

Economics, policy, optimisation, profit, risk, pollution