Agriculture and the Environment

Econ 4300

2008

Agriculture and Environment

• Is dependent on the environment– Climate– Precipitation– Heat units

• Can impact the environment– Micro scale: micro climate, run-Off, sediment

– Macro scale: greenhouse gases (CO2, CH4, N20)

Agricultural Production

• All production sytems produce a set of outputs, using a set of inputs– Outputs of economic importance are yield,

livestock gain, etc.– Outputs that can impact others but not a

private benefit are nutrient leaching, pesticide run-off. These are “negative” or “bad” outputs

Why the concern?

• Outputs that impact others are externalities

• They typically impose an additional cost onto someone else– Resource use and allocation will not be

Pareto Optimal– Examples: sediment from erosion, reduced

water quality,

World Wide Environmental Issues

• For over 200 years, the concern that population will outstrip food supply– Increased land under cultivation, increased

productivity, increased input use, new technologies

• Club of Rome in 1972 and Limits to Growth– Economic activity is putting a strain on the

plant’s resources

Ecological Footprint

• Concept is to measure ecosystem services demanded by humans, and the services that can be supplied

• To address the debate on the earth’s human carrying capacity

• “How large of an area is required to support a particular population?”

• Measures global resource uses

EF – Rees’ article

• Every human imposes some footprint• Land is used as the measure, all services

are converted to a land area– Land area is adjusted for productivity around

the world

• Use only major categories of consumption and waste

• Is a function of population, standard of living, efficiency, productivity of ecosystem

EF – Rees’ article

• Based on final demand for goods, services– Consumption=production+imports-exports– Covert consump. to land/water area required– Sum footprints of individual consump. And

waste categories– Obtain a per capita measure

• (see Figure 1 of handout)

EF – Rees’ article

• To bring the world up to North American standards, would take 4 more planets like earth

• Many highly populated, small countries live at several times their domestic capacity (import goods and services)

• High income countries extend their EF into exporting nations

Nonrenewable Resources

• How fast should society use these resources?– Depends on:

• Technology – changes the technical feasibility• Time preference – value place on the future

– The discount rate: private vs. society– Sustainability and future generations

• Extract at a rate such that the value of the resource increases at the discount rate

Renewable Resources

• Flow of the resource will depend on the stock, the growth rate of the stock, technology (capture and growth)

• Stock will decline if harvested flow is greater than growth

• Growth of the stock will depend on the size of the stock

Renewable Resources

• What is the value of the resource?– The current value associated with harvesting

the stock– The value associated with the stocks impact

on growth in the stock, and the future harvest of the stock

Deviations from Optimal Use Rate

• Market Failure– Resources might be depleted too fast

because the future generation has no say in conserving resources to their use

– Policies can emphasize the present over the future

Deviations from Optimal Use Rate

• Externalities– Outputs for which there is no market, but the

outputs do impact others– Most externalities have a negative impact– Producers of externalities are not covering

their total production costs. They only consider their private costs, which are lower than private plus social costs

Correcting for Externalities

• Internalize all costs so that the producer considers both direct (private) and social costs– Need to create a market for the externality

• Not an easy action

– There is an incentive for the producer to reduce the externality

– The market determines the value/cost

Correcting for Externalities

• Impose a tax– Theoretically attractive

• Set the tax equal to the marginal external (social) cost

– Applied to a measurable output or input– What is the appropriate tax rate?– There is limited incentive to reduce the

externality because the tax is not directly tied to the externality

Correcting for Externalities

• Regulation– Limit the application or use of an input, or

emissions of an output– Used with it is difficult to monitor the

externality, uncertainty about the input-output relationship with the externality, high variability in externality production

– Easy to implement and enforce– No incentive to reduce the externality

Property Rights

• Property rights impact resource use and externalities

• Property rights need to be:– Well defined– Tradable– Secure– Enforceable

Property Rights

• In agriculture, these 4 conditions hold

• For most land-based resources, these 4 conditions hold

• Some natural resources do not have well defined property rights– They are non-excludable resources

• Example – fish in the ocean, it is difficult to exclude fishermen from fishing

• No incentive to conserve the resource

Property Rights

• Can some non-excludable resources be converted to excludable resources?

• For some goods, property rights can be defined to accomplish this– Patents on manufactured goods to exclude others

from its production– Could fishing areas be assigned to exclude other

fishermen?

• Some goods with wide-spread benefits are non-rival and non-excludable

Common Property

• The tragedy of the commons – common resources are typically over used

• Four property regimes– State property – grazing leases– Private property – private land– Common property – group ownership– Open access property – first to use

Measuring Exernalities

• Externalities do not have a price

• Two possible approaches to measure– Willingness to pay – how much would one pay

not to have the externality – Willingness to accept – how much would one

need to be compensated to accept the externality

Non-Market Goods

• What is the price of non-market goods?– Use a substitute good for which there is a

market– Travel Cost Method – used as a proxy for the

willingness to pay– Contingent Valuation Method (CVM) – in a

controlled setting, determine how much one would be willing to pay to obtain some environmental good or service

Ecological Goods and Services

• Agricultural land owners supply ecological goods and services, but no compensation

• Producers compensated only for food and fiber produced and marketed

• EG&S – private benefits related to maintaining land productivity

• EG&S – social benefits related to those received by society

Ecological Goods and Services

• EG&S – argument is that there is a market failure, and the market does not compensate the producer for the EG&S

• Can society expect agricultural producers to continue producing EG&S without compensation?

• EG&S are non market goods, so there is no market price for these goods

Ecological Goods and Services

• Valuation methods for non market goods:– Value of services that increase productivity– Damage cost avoidance, replacement cost– Travel Cost Method (recreation services)– Contingent Valuation Method (survey of

willingness to pay for specific services)– Contingent Choice Methods (survey of trade-

off selections to determine value)

Ecological Goods and Services

• Can not include value in the market price of commodities, EG&S are non market goods

• The approach is one of compensating producers for using specific practices– Example: Ducks Unlimited and practices that

increase duck habitat

• A tax approach might be possible, but not a part of the current EG&S work

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