Agriculture and the Environment Econ 4300 2008

Agriculture and the
Econ 4300
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,
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
• 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
• Club of Rome in 1972 and Limits to
– 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
• 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
– 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
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
– 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)
– 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
• 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
• Some goods with wide-spread benefits are nonrival 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
Non-Market Goods
• What is the price of non-market goods?
– Use a substitute good for which there is a
– 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
• 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 tradeoff selections to determine value)
Ecological Goods and Services
• Can not include value in the market price
of commodities, EG&S are non market
• 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