Introducing a New Utility Function Capturing Economic Gains and Environmental Benefits

The agricultural economics literature has overlooked the development of a normative approach to describe farmers’ non-monotonic behavior and preferences toward environmental strategies. This gap has become increasingly important as emerging global paradigms related to nitrogen planetary boundaries and the Sustainable Development Goals (SDGs) call for nitrogen regulatory policies that promote pro-environmental behavior. Consequently, any disruption to farmers’ utility may significantly hinder the implementation of strategies based on Less Environmentally Impactful Diets (LEID-based strategies). This study introduces a novel utility function and extends the normative approach for describing farmers’ preferences regarding the trade-off between economic gains and environmental benefits. The performance of the proposed approach is evaluated using metadata from 421 studies conducted on corn farms in the United States and Canada. The utility function and the marginal rate of substitution between corn yield and the LEID index identify four assumptions underlying farmers’ behavioral rules: (i) the marginal utility of crop yield increases as yield rises but declines through its interaction with nitrogen leaching; (ii) the marginal utility of nitrogen leaching increases as leaching intensifies, although this effect is moderated by its interaction with crop yield; (iii) the marginal utilities of crop yield and nitrogen leaching exhibit a negative interaction, where the inverse relationship indicates substitutability between economic gains and environmental benefits; and (iv) nitrogen leaching exhibits diminishing marginal utility as it approaches the drainage-discharge threshold. The results show that the estimated marginal utility of leid, an index representing the production of less environmentally impactful diets, has an inverse relationship with the elasticity between yield and nitrogen leaching. This finding supports the positive effect of pro-environmental behavior on farmers’ utility among those who successfully reduce nitrogen leaching through LEID-based strategies. The structural properties of the proposed utility function therefore provide theoretical support for analyzing farmers’ behavioral responses to LEID-based strategies.