Adaptation to environmental change can exacerbate existing externalities in common-pool natural resources. We document one such case: Farmers in California respond to heat and drought by extracting more groundwater, lowering the water table, and harming access to drinking water for nearby residents. Using yearly variation we show that surface water scarcity and heat increase agricultural well construction, groundwater depletion, and domestic well failures, and that well construction accounts for a large share of the latter effects. In our setting, adaptation also exacerbates inequality: Effects on domestic well failures are concentrated in low-income and Latino communities.

Nonpoint source pollution from agriculture is the leading cause of nutrient pollution in the US. This paper addresses whether localized, farmer-led programs can cost-effectively reduce nonpoint source pollution by increasing the adoption of agricultural conservation practices. We study this in the context of an innovative program in Wisconsin that incentivizes farmers to take collective leadership of improving water quality in their local watersheds. Using a shift-share instrumental variables design, we find that a 10 percentage point increase in farmer participation in these programs leads to a 0.03 mg/L reduction (14%) in ambient phosphorus concentrations in local streams and rivers. We also show that this change causes an increase in the adoption of cover crops, conservation tillage, and more diverse crop rotations. Importantly, this localized approach achieves water quality and conservation improvements at a substantially lower cost than existing federal subsidy programs, demonstrating the potential for bottom-up approaches to address nonpoint source pollution in other contexts.

Firms may under- or over-invest in risk management from the social planner’s perspective, resulting in a negative externality on other economic agents in the supply chain. The externality of risk management provides justification for policy intervention and is particularly relevant for agrifood supply chains that constantly experience shocks and play a primary role in preventing major social losses from food insecurity. We build a theoretical model to characterize such externalities in US food supply chains where intermediary firms choose the quantity of output and the investment in managing risks. The model allows for flexible market structures and interdependence of risk management among firms. Risk interdependence captures the unique feature of biotic hazards (e.g., animal and plant diseases) in agrifood supply chains, where the effectiveness of a firm’s risk management depends on peer firms’ behavior. We offer novel insights on the role of risk interdependence in driving the externality in risk management under different market structures. We show that private firms invest less than the socially optimal level under perfect competition, but risk interdependence and market power introduce complex incentives in risk-reducing investment that shape the externality. The critical implications for the social efficiency of policy interventions are demonstrated via simulations based on the model and empirical literature on biotic hazards in agrifood markets.

Nitrate contamination of drinking water is a widespread concern and threatens human health. The magnitude of the health consequences depends on individuals’ ability to avoid exposure. This paper uses an event-study framework to uncover avoidance behavior and infant mortality outcomes following public notifications required by the Safe Drinking Water Act. Using store-level scanner data, I estimate that consumers spend $4.5 million annually on bottled water to avoid nitrate-contaminated drinking water. This protective behavior leads to 20 avoided infant deaths per year or $223 million in monetized benefits. These results underscore the benefits and role of environmental information policy in inducing avoidance of environmental hazards.