Agricultural Trade, Biodiversity Effects and Food Price Volatility.

Summary We examine the importance of production risks in agriculture due to biotic elements such as pests in determining the pattern of trade and the distribution of prices in a Ricardian two-country setup. These elements create biodiversity eff ects that result in an incomplete specialization at the free trade equilibrium. Their influence on idiosyncratic production risks evolves depending on the countries' openness to trade. Pesticides allow these eff ects to diminish but they are damaging for the environment and human health. When regulating farming practices, governments have to counterbalance these side-eff ects with the competitiveness of their agricultural sector on international markets. Nevertheless, restrictions on pesticides under free trade are generally more stringent than under autarky.