Infectious disease, productivity, and scale in open and closed animal production systems

Trade in feeder animals creates externalities when animal diseases can spread beyond the purchasing farm. If growers choose between open and closed production systems, then Nash equilibrium likely involves excessive trading. While first-best equilibrium involves market-wide adoption of either an open-trade or closed-farm system, equilibrium may entail heterogeneous systems. If so, then the feeder trade should be restricted. Supply response to an increase in marginal costs may be positive. Within a farm, infectious disease risk can create decreasing returns to scale when the technology is otherwise increasing returns. Contractual procurement and damage control technologies will likely increase scale in finishing.