State Mediated Trade, Distortions and Air Pollution

Abstract

Can government imposed market integration and resultant specialization contribute to a large-scale negative environmental externality? I compare agricultural fire activity and air pollution levels in districts where the government interferes in the local grain markets with districts without such interference to establish a robust link between food prices and air pollution in India. This link comes about due to higher prices leading to increased agricultural fire activity in districts where the government procures foodgrains from the local markets. Estimates suggest a 21 percent increase in morbidity and a 19 percent increase in out of pocket medical expenditure associated with procurement led air pollution. The mortality cost of resultant pollution is USD 1 billion larger than gains to producers from higher prices.

Keywords: fires, air pollution, price floor, distortion, India

JEL Classification: F14, Q11, Q52, Q53