In the late 1960s, after cotton pests developed pesticide resistance, cotton growers in Texas successfully made a shift to biological pest control methods.

Government infrastructure support (predator rearing, education) was critical in this effort. InMexico, with no similar support, the cotton industry collapsed.

How could this phenomenon be explained using the cost function above?

Biological pest control has high fixed costs associated with machinery and predator rearing; farmers experience substantial ‘‘learning by doing’’; and farmers also depend on ‘‘network externalities’’—information gained from fellow farmers and extension agents. Finally, if neighboring farmers are spraying pesticides, the pesticides will also kill off natural predators. Given these factors, assume we can write an average cost function per ton of output for an individual farmer using biological methods that looks like this:
ACb = $200 − 01Xb − 1yb + 0.01Xc where:
Xb = is tons of biological production in the region Xc = is tons of chemical production the region yb = is tons of the farmer’s production