Economic ncentives for Farm-Leve
Resource Conservation
Resource conservation at the farm level has posed a management problem
since systems of husbandry began. Economic agents are guided in their
choices and behaviour by the incentives made available to them. Natural
resource economists have examined a range of policy options to
encourage the conservation of agroecological resources at the farm level.
Some incentives have been used with more success than others and some
promise to be effective tools, even though they have not yet been well
tried. Some incentives have had unfortunate and unforeseen outcomes.
DIANA J BEAL
Faculty of Commerce, Universiry of
Southern Queensland
Introduction
The problem of resource conservation at the farm level has been
apparent in various civilisations since systems of animal and crop
husbandry began. Historical examples of degradation are available from
most parts of the globe. In Australia, cases of resource depletion can be
cited from the first few years of European .occupation. Indeed, the
exhaustion of seemingly lush pastures which inexplicably did not
regenerate in the same way as European pastures forced pioneer
pastoralists to push beyond the New South Wales government's restrictive
"Nineteen Counties", despite the passing of four Acts of the British
Parliament to restrain them.'
Where economic agents such as the pioneer pastoralists were able to
exhaust resources and move on, resource depletion was of little consequence to them personally because there was little cost, with the exception
perhaps of some physical discomfort. Until the 1970s, the economics
profession in the main appeared to take the same view that natural
resources were virtually unlimited, and that depletion in one location
merely implied relocation to start the process again. A more sophisticated
view (the Julian Simon school) was that technological improvement and
substitution of other types of resources would compensate for depletion
with the market mechanism chipping in to assist the process.
Unfortunately, the farm sector in developed countries usually does not
enjoy the luxury of being able to deplete resources and move on.'
Additionally, whilst technological improvement unquestionably has occurred and will, no doubt, continue to happen, the infinite substitution of
other resources or inputs for degraded land, water supplies and
biodiversity appears highly unlikely.
These Acts were 4 Will IV 10 of
1833,7 Will IV 4 of 1836, 2 Vic 19 of
1838 and 2 Vic 27 of 1839.
2 In some lesser developed economies, this still occurs. In parts of Africa,
for example, the chitimene, or slash and
bum, system causes short-tenn environmental damage. In Australia some horticultural producers are still able to grow
high-value crops on land until nematode
populations increase to an uneconomic
level, then move their operations to fresh
earth. Where land tenure and social
systems allow shifting agriculture, it
may
be an optid system- However, it is not generally an option in
developed counVies
it may be
argued, ag*cultura~ lands am fully
settled.
I
Ecologists and the environmental movement have raised awareness of
the need to protect ecosystems to ensure that the earth may continue to
support humankind at a reasonably sophisticated level. he concept of .scalugic~~3y
.,ustinif8rc &velo*~;g6fiEbk&uce@1372~gi - the;- Uriiied Natioi!s conference in S t o c ~ o l m ' ~given
d greater promiience
subsequently in the Bruntland Report in 1987.
was
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During the last decade or two, the construct of "sustainability" has
migrated from reports and scientific journals to the more popular press,
and during that time it has come to mean many things to a variety of
people. An ecologist may see sustainability as the ability of a system to
maintain productivity, to withstand collapse under stress and to recover
once the stress is removed. Putting an economist's viewpoint, Rose
defined an economically sustainable agricultural system as one where the
A
social costs of all the resources used in the system are fully re~ognised.~
Food and Agriculture Organisation (FAO) (1989) definition is that
sustainable agriculture "enhances'the environmental quality and resource
base on which agriculture depends; provides for basic human food and
fibre needs; is economically viable and enhances the quality of life for
farmers and society as a ~ h o l e " . ~
Izac and Swift argued cogently for the need to bring the sustainability
debate to a more pragmatic level so that it could be put into operation by
land managers.' Using the region of sub-Saharan Africa as a case study,
they adopted the village ecosystem as the unit of analysis and proposed
that a sustainable agroecosystem is one which retains the capacity to
respond to exogenous change as well as to internal disruptions by
maintaining non-declining trends in its resources and amenities over a
period of at least one decade.
Sustainability is viewed as a desirable goal of agricultural ecosystems.
Conservation of resources, on the other hand, may be considered as a
necessary condition to attain sustainable systems. Sustainability is not
necessarily achieved by being somewhat conservative, but a conservative
attitude by agricultural operators is more likely to assist in developing
sustainable systems than short-term profit maximisation coupled with an
absolute neglect of longer term social needs and aspirations.
The objectives of this article are, first, to analyse the economic forces
which have induced the generally recognised depletion of agroecological
resources, both in Australia and internationally and, secondly, to review
the literature to ascertain just how successful various economic incentives
have been found to be in practice in promoting resource conservation.
This article is structured so that in the next section an economic
rationale underlying resource depletion on farms is examined and in the
following section economic incentives are introduced. The remainder of
the article reviews some of the published farm-level findings involving the
application of incentives and the fortune of many resources, including
biodiversity."he final section draws together the findings from the earlier
discussion.
3 R Rose, Economics of a Sustainable
Agriculture" in Natural Resource Management: An Economic Perspective
(ABARE. Canberra, 1992). p 127.
FAO, Sustuinable Agricultural Production: Implications for International
Agricultural Research (Technical Advisory Committee, CGIAR, FA0 Research
and Technical Papers No 4. Rome,
1989).
A-M N Izac and M J Swift, "On
Agricultural Sustainability and its
Measurement in Small-Scale Farming in
Sub-Saharan Africa" (1 994) 11 Ecological Economics 105- 125.
Biodiversity is defined as the variety
of all life forms and their life processes.
It includes the whole spectrum of biological variety, from the genetic level
through species and communities to systems and landscapes.
An economic rationale for depletion of natural resources
on farms
Economic Incentives for Farm-Level
Resource Conservation
Degradation of natural resources at the farm level has occurred through
information deficiencies, economic pressure. faulty market signals and
inappropriate government policy. Unwise government policies, to a large
degree, were the culmination in the public policy sector of the same forces
of information deficiencies and economic pressures, together with political
pressures. For many years, for example, wholesale clearing of land was
government policy spurred by dreams of rapid economic development and
encouraged by taxation incentives. It has been since shown, however, to
be an inappropriate policy which took no account of other values. For
nature conservation, it was a perverse incentive.
Historically, the first generations of pastoralists and farmers in Australia
did not understand the ecosystems they were using and did not appreciate
the long-term effects of their management practices. Pastoralists overestimated the ability of perennial grasses which had drawn them to such
places as Mitchell's "Australia Felix", the Liverpool Plains and the
Darling Downs to regenerate after heavy stocking. Early farmers found
Australia's climate of uncertain rainfall was a difficult companion
resource to her "unfruitful" soils, as a brief scan of contemporary diaries
and newspapers shows. Politicians and bureaucrats generally endorsed
similar over-optimistic views, and together put in place policies which
promoted resource degradation. Reeve7 in his A Squandered Land noted
the celebrated case of the 1930s Victorian politician who came back from
a trip to the mallee, the soil of which was by then blowing away in huge
dust-storms, and told reporters: ' 'I saw no erosion."
More recently (at least since the 1950s), declining terns of trade have
reduced primary producers' margins significantly on each unit of produce.
Consequently, many producers have sought to make their land produce
more so that a minimum net income and standard of living may be
maintained. Sometimes, the extra output has been produced without
permanent damage to the natural resource base. More often, however,
degradation of the resource base has occurred, because more than
sustainable use has been made of resources. In many lesser developed
countries (LDCs), food shortages as well as low prices exacerbate
resource degradation.
The supply of agricultural resource inputs is inextricably linked to
agricultural land. Hence, it might be expected that the quantity and quality
of those resources would be reflected in land prices, and that management
which encouraged resource conservation or enhancement would be
rewarded with a market premium. Unfortunately, this has generally not
been the case, as many authors have shown, As prices in agricultural land
markets can act as an economic incentive to conservation, this factor will
be discussed further later in the article.
Economists use the concept of efficiency as one criterion against which
dge whether an economic system or, indeed, a part thereof is working
The nub of the concept of efficiency, at the highest possible level,
stemming from the concept as understood by mechanics science. is
that there should be an equality between what is produced ?nd the volume
- of resources used tg praduce it. T& iiirpii@iaIioioni$3Bat allEi@e
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value or benefits from a given output should be matched against all the
costs of that production, so that a valid analysis may be undertaken.
BEAL
population of the whole world is potentially involved as in the case of
ozone-depleting production. Because the efficiency notion, to be valid,
must comprise all benefits, all costs and all people potentially involved,
economists use the concepts of social benefits and social costs, meaning
benefits and costs to the whole of engaged society. Socially efficient
output will thus occur when marginal social benefit equals marginal social
cost.
However, where potential benefits and costs to parties not directly
involved in a transaction must be identified, there are likely to be
identification and valuation problems. If benefits and costs are consequently underestimated, production is not likely to be at optimal levels. If
benefits are underestimated, production will be less than optimal. If costs
are underestimated, production is likely to be greater than optimal. These
are the classic cases of market failure.
In a market economy, the benefits derived from production of market
goods are relatively easy to measure. The market in which goods are sold
sets their value to society at that time. Hence, a monetary value for
production is established. In addition, there may be some other benefits in
the form of positive externalities. Costs comprise the cash costs of
production, plus any negative externalities of production. Estimation of
the value of externalities is likely to prove somewhat difficult.
In relation to agriculture, negative externalities rather than positive
externalities of production immediately spring to mind. Negative
externalities include soil erosion, reduction of soil fertility, degradation of
soil structure, depletion of soil organic matter and water-holding capacity,
decrease in soil micro-flora and fauna, chemical pollution of waterways,
water turbidity, algal blooms in waterways, depletion of water resources,
loss of vegetation, salinity, acidification, loss of biodiversity and so on.
The list is long.
Positive externalities of agriculture exist, but the list is surely somewhat
shorter. Agriculture contributes managed open space as a recreational
resource for city dwellers. In addition, it keeps alive the rural heritage,
albeit in a modified contemporary form, which non-farm dwellers of many
developed countries appear to value.qn Australia, it might be argued that
primary producers provide uncompensated benefits to the nation in being a
resident population in rural and remote areas. As such, producers are able
to assist defence and customs personnel in stemming illegal landings.
Additionally, producers are able to assist unprepared tourists who get
bogged, stranded or lost.
On balance, it is likely that negative externalities far outweigh positive
externalities. Economic theory indicates that output in these circumstances
will be greater than the long-run optimum. The historical record of
agricultural production in Australia certainly suggests that output has been
consistently greater than it would have been if all costs and benefits had
been accounted for.
a M Lockwood, P Tracey and
N Klomp, "Analysing Conflict between
Cultural Heritage and Nature Conservation in the Australian Alps" (1996)
39 Journul of Environmentul Planning
cmd Mtinugement 357-370. These
authors used the contingent valuation
method to analyse conflict between cultural heritage in the form of seasonal
grazing and nature conservation in the
Australian Alps and found a positive
preference for retention of grazing.
+
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Economic Incentives for Farm-Leve!
Resource Conservation
People as economic agents make decisions on production (and conmption) within the confines of the economic and social institutions of
eir community. "Institutions" include the agents, structures and
ractices that make up the business and social environment, such as
ivate and public organisations, the legal system and generally-accepted
ectations. These institutions provide the bases or
es that lead people to make decisions one way or
1
An incentive is something that provokes people to modify their
behaviour in some way. Thus an economic incentive encourages producers
or consumers to behave in a certain fashion. Ideally, incentives are put in
place by society as a framework to encourage the community to behave in
uch a fashion that social objectives are achieved. Equally ideally, the
policies that are instituted should not contain incentives which inadvertently encourage private choice behaviour which militates against the
achievement of society's goals.
Communities have a range of policies to consider when attempting to
change private choice. These policies include prohibition of an activity,
setting maximum limits to the activity, regulation, voluntary payments,
taxes, subsidies, and tradeable property rights. Prohibition, maximum
tion are not economic incentives in the sense that they set
lawful individual choice? Some of the remaining options
itability than others to the farm-level choice .problem.
ents, for example, may have only limited applicability,
leaving taxes, subsidies and tradeable property rights as apparently
appropriate incentives. Apart from these largely institutional-framework
incentives, prices and costs which stem from market conditions and debtlevels act as incentives.
I
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Incentives for farm-level conservation
Taxation, subsidies and tradeable property rights at the farm level are
considered in this section, together with prices for produce, prices for farm
land and debt levels.
Taxation and subsidies
Regulatory taxes are taxes imposed as an incentive to limit or dampen
down some economic behaviour. Subsidies, on the other hand, may be
viewed as negative taxes which act as an incentive to promote the
production of desirable outcomes. Regulatory taxes operate as a cost
allocation system, which attempts to ensure that the resource user pays for
his or her use. Additionally, such taxes are a method of cost internalisation
which implies higher cost in line with true social cost, greater economic
efficiency, higher market prices and reduced output. Theoretically managers will choose to limit private cost (and social cost), and thus limit
resource depletion or degradation. ,
The Polluter Pays Principle (PPP) embodies the regulatory tax philosThey could be said to be economic
ophy, and includes a provision that polluters should not be granted any incentives
if an individual
up
government assistance in any form whatever. It was adopted by the 12 the expected value of the fine against the
European Union (EU) member states under the Maastricht Treaty in 1992. benefit for transgression.
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apply to primary industries.
Tobey and Smets examined the operation of PPP in relation to
agriculture and found the complexity of non-point pollution coupled with
institutional arrangements in industrial countries endows agricultural
managers with comprehensive "rights to p~llute".~~'
Consequently, the .
incentive for cost internalisation on farms in industrial countries is
insignificant. Despite the principles of PPP, the agricultural agreement
resulting from the Uruguay Round of General Agreement on Tariffs and
Trade (GATT) and measures adopted by the EU under the Common
Agricultural Policy (CAP) allow subsidy of producers up to the full cost of
compliance with environmental measures. Tobey and Smets further found
that the use of subsidy schemes to reduce non-point pollution is
widespread and increasing so that such payments could replace production
subsidies. In common with other authors, they concluded that consideration for the survival of the family fa&, the principal business
organisational arrangement in agriculture in many countries, has inhibited
the implementation of more stringent and costly resource degradation
control measures.
Hilgard wrote perspicaciously that irrigators were foolish "to hope that
natural laws would be waived in favour of [them and their unwise
irrigation practices]"." Following Hilgard's predictions, Caswell and
Zilberman12 have been keenly interested in investigating the choice of
irrigatiqn technologies in California, given the scarcity of water and the
likelihood of water pollution. The misuse of groundwater and the
exhaustion of its quality attributes have become major issues in California
where saltwater, seepage of solvents, toxic wastes and agricultural
'O J A Tobey and H Smetss "The
chemicals have contaminated some groundwater basins to the extent that
water is suspected to be the cause of chronic health problems in some ~ f ~ , " f ~ ~ ~~ ~i y~ s ~ i n , " ,
communities.
( 1996) 19 World Economy 65.
l1
Hilgard*Irrigation andA1kuli
Caswell, Lichtenberg and Zilberman l3 showed that a tax on tailwater, a
in India, Report to the President of the
pollution tax, would encourage the adoption by competitive farm firms of University
of
(Bulletin
drip technology in place of furrow or flood irrigation. This measure would NO 86, Berkeley, 18861, 34.
conserve water and minimise pollution, even though the drainage tax
12 M F CasweIl and D Zilberman,
would be difficult to administer. Additionally, they argued that the optimal "The Choices of irrigation Technologies
solution may not be politically feasible, because the charge would impact
most on heavily-indebted farmers, most of whom run family farms.
224-234;
M F Caswell and
Just and Zilberman l4 examined the equity implications of both taxes on D Zilberman, "The Effects of Well
pollution and imposing a pollution. standard by regulation of agricultural Depth and Land Quality on the Choice
of Irrigation Technology" (1986) 68
operations which impose environmental risk such as pesticide contami- American Journarcfl Agricultural Econnation of water resources. They were especially interested in the omics 798-8 11.
13 M F Caswell, E Lichtenberg and
distributional effects among small family farms and larger farms.
Incorporating consideration of risk and credit availability, they found D Zilberman, "The Effects of Pricing
Policies on Water Conservation and
equity effects to be variable. Absolute equity was improved by the Drainage"
(1990) 70 American Journal
imposition of taxes and standards on activities of high pollution intensity, of Agriculturcrl Economics 883-890.
but pollution standards alone improved relative equity in low pollution
14 R E Just and D Zilberman, "A
Methodology for Evaluating Equity Imindustries.
plications of Environmental Policy ConBiological diversity is important for maintaining the resilience of siderations in Agriculture" (1988) 64
ecosystems to changing environments and as a source of genetic patterns Land Economics 37-52.
'
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~,~?~~
for improvements in food, fibre and other species used by humankind. To
depart from the utilitarian viewpoint, there is growing acceptance that it
has value in its own right.
Declining biodiversity at the farm level may be manifest, for example,
by increasing dryland salinity caused by the lack of deep-rooted vegetation
species ro pu111p groundwater in conjunction with appropriate geology,
loss of species locally, larger pest insect populations due to declining
numbers of natural predators, and inadequate nutrient absorption by crops,
due to declining soil microflora and microfauna.
Whilst incentives to ameliorate irrigation-induced salinity appear to
have been a pre-occupation of American resource economists, the
examination of dryland salinity appears to be a particular Australian
interest. Just as turbidity of watercourses is an externality and consequence of soil erosion and non-point groundwater pollution an external
cost of poor irrigation practices, dryland salinity is predominantly an
artefact of inappropriate clearing of vegetation. Often the clearing has
taken place in recharge zones many kilometres distant from the eventual
saline outbreak. Wholesale clearing of vegetation was actively encouraged
by government in Australia until 1983 by the incentive of tax deductibility
of expenditure on clearing, even though initial clearing of land is clearly a
capital expense.
Growing concern over this land management issue is understandable,
given that the estimated area in Australia affected by dryland salinity has
tripled in the decade to 1993 to 1.2 million hectares, and the area at risk is
very large." Initial indications of salinity include poor germination of
crops, altered soil structure of cropping lands and changed mix of species
in pastures. As the problem worsens, production may drop to zero, except,
ironically, in the very driest seasons when the water table drops
significantly to allow some useful vegetative growth. Biodiversity suffers
in grasslands which suffer saline outbreaks as the vegetative mix declines
to salt-tolerant species or the earth becomes totally bare.
In common with many other conservation issues, dryland salinity is an
example of market failure, in that private and social costs are not equal.
Farmers clear land for private gain, and inflict costs on other members of
the community. As outbreaks of dryland salinity spread, costs are imposed
on an ever widening circle of community members. Currently in Australia,
that circle has been seen to include other farmers through lost production,
townspeople through degrading foundations of buildings, local authorities
through disintegrating roads, and future generations. Future generations
may lose through many routes, including lost production, more expensive
services, lost amenity and lost biodiversity. Greig and Devonshire argued
for a tax on clearing whilst Hodge countered that farm-level transferable
rights to clear land would provide a more efficient and useful economic
incentive to reduce clearing in catchments which were not already overcleared.
In a substantial review of the Australian state of rural land management,
Cameron and Elix l7 conceded that taxation incentives (in effect, subsidies
delivered through the taxation system) can reduce the divergence between
'"
Economic Incentives for Farm-Level
Resource Conservation
"5 R Greiner, "On-Farm Costs of Soil
Salinisation: a Case Study for the
Liverpool Plains in New South Wales"
(1996) 64 Review of Murketing cmd
Agriculturcll Economics 60-74.
'6 P J Greig and P G Devonshire,
"Tree Removals and Saline Seepage in
Victorian Catchments: Some Hydro1og;ic
and Economic Results" (1481) 35
Allrtruliun
ufAEriculrurul E~(),,.mi,, 134-148; I Hodge. "Rights to
Cleared Land and the ~ o n i o l of
Salinity" (1982) 26
1 rf Agriculturul Econ-
.
December 1997
.
benefit from tax deductions and may indeed see no benefit in carryforward tax credits.
Despite endorsement by the community in many nations that soil
erosion is an undesirable effect of agricultural production, and despite
awareness-raising projects and technical and financial assistance to
farmers, soil erosion world-wide has not been significantly mitigated.
Various reasons have been advanced for the lack of adoption of land
conservation measures.
One such reason is the inability of many farmers to observe insidious
losses of productivity. Whilst an insidious loss might be inconceivable to
non-farmers, it is more understandable when one considers that farmers
must examine the effects of numerous inputs to production on an achieved
yield to trace a shortfall to expectations. Those inputs include rainfall
distribution and total amount received, stored soil moisture at planting,
seed variety, planting rate, planting time, germination rate (a result of seed
quality, seedbed preparation and planting technology), inherent soil
fertility, added nutrients, pest and disease management, as well as
harvesting time and-harvesting techniquekkill. Which of these contributed
to the lower yield? Was it the reduced soil depth, fertility and waterholding capacity which stem from soil erosion? Nevertheless, numerous
authors lR have estimated the annual costs of soil degradation in specific
areas.
Some nations have resorted to coupling farm assistance programs with
adoption of either soil conservation strategies or indicators of conscientious land management such as farm plansin order to achieve a desirable
balance. Linking the two has been called "cross-compliance" (CC). In the
United States of America, farmers in receipt of some government loans are
required to have a farm plan endorsed by the Soil Conservation Service."
This policy was extended by the Food Security Act 1985, which expanded
publicly-financed soil conservation incentives. Similarly, in Australia,
l
farmers applying for government assistance under the ~ u r a Adjustment
Scheme have been required to show that farm development planning has
taken place.
Ervin, Heffernan and Green examined the anticipated efficiency and
distributive impacts of such CC programs. The guiding principle of CC is
that only land managers who achieve stipulated soil conservation
standards or management requirements receive benefits under aid
programs. The specification of the land management standard is obviously
an important variable, as is the identification of the aid program to which
to link the goal. Using a theoretical model incorporating private costs and
benefits as well as public on-site and off-site benefits of erosion control on
increasingly erosive lands, Ervin et a1 found a CC program may have
unintended and unwanted effects.
Specifically, these authors concluded that owners of land with least soil
erosion potential and thus least cost remediation would be able to meet the
conservation standard more easily and thus earn the greatest rent."' In
regions where larger and more profitable farm units occupy less sloping
lands and smaller farms lie on surrounding slopes and foothill country, the
program would not operate as intended. Data from a random sample of
BEAL
l8
See, for example, B S Alcock, The
Costs of Soil Erosion (Economic
Services Branch, QDPI. Toowoomba,
1980); M Blyth and A McCallum,
"Onsite Costs of Land Degradation in
Agriculture
and
Forestry"
in
A Chisholm and R Dumsday (eds),
Environmentul Studies (ANU, Canberra,
1987).
l9D E Ervin, W D Heffernan and
G P Green. Cross-Compliance for
Erosion Control: Anticipating Efficiency
and Distributive Impacts" (1984) 66
Americun Journttl cf Agriculturul Econ0mic1273-27820 In economics, rent is defined as a
pa,,ment emed by a fador in excess of
,he minimum required to bring it into
production.
Missouri farm managers provided empirical evidence for this conclusion.
Older and higher-equity land managers ownecfthe least erosive large farm
units, whilst younger lower-equity farmers occupied sloping, more erosive
lands. Hence, whilst CC appears both efficient and equitable in principle,
it may prove difficult to target precisely in practice.
Economic
for Farm-Level
Resource Conservation
Tradeable property rights
--
- -- - ..
Johnson" reviewed extensively the nature of property rights in land and
examined options to redistribute those rights so that incentives to improve
land management would be provided. He argued that the Torrens system
of title registration in Australia and New Zealand has been too successful
in achieving security of title, in that it assures holders of title that they can
do what they like with their freehold land and there is no incentive to
manage externalities properly. This belief is characterised as a state of
LLunattenuated"rights, a concept discussed by Q~iggin.'~
The attenuation
of a bundle of rights will usually reduce their aggregate value to the
owner,23 but rights are attenuated to prevent costs being imposed by
proprietors on others and society as a whole. Johnson argued that the
existing property rights systems do not protect the rights of others,
especially in relation to the natural environment, and that administrative
solutions incorporating transferable rights must be devised so that farm
managers come to regard themselves first as responsible land managers.
Zilberman, MacDougall and Shahz4examined water allocation mechanisms in California, in the light of growing water scarcity and increasing
awareness of environmental issues. They concluded that transition from
water rights to water markets through transferable rights systems would
induce farmers to adopt water conservation technologies and may not
disadvantage holders of historic rights to water for farm use. Moreover,
they contended that a net transfer of water away from agriculture coupled
with improved irrigation technologies may not leave individual
Californian farmers worse off and would have considerable social
benefits.
At farm level in Australia, the development of tradeable rights to
resource use appears to be an area where government is actively
developing policy, especially in relation to water rights. The theory behind
the development of a transferable water market is that allocation efficiency
will improve over time as water is directed to enterprises with the highest
rates of return (highest marginal revenue product). At the farm level, the
opportunity cost of water will encourage farmers to improve distributional
efficiency and conservation.
James2' identified Victoria as the most advanced with a water market in
operation since December 1990. The experience with this incentive in that
State is that it has not lived up to its promise. Most trades have been for
temporary rather than permanent transfers, and prices generally have
fallen rather than risen. Whilst the general malaise in Australian
agriculture due to continual decline of the terms of trade, seemingly
continuous drought in some areas, ageing farm population and so on may
well be involved in this result, some reforms such as widening the market
to encompass all States involved with a large water system would
probably allow the system to work better. Other States are investigating
-- the fqejlitstion ofwater-m,prkets,. In Qlreensland, for example; the author
'-+--c~~~personaHy
cttcsttk* the Department of Natural-Resbbices-is currently
December 1997
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2' R W M Johnson, "Resource Management, Sustainability and Property
Rights in New Zealand" (1992) 36
Ausrruliun Journul of Agriculturul Economics 1 67- 1 8 5.
22 J Quiggin, "Common Property,
Private Property and Regulation: The
Case of Dryland Salinity" (1986) 30
Austruliun Journul rfAgriculturu1 Economics 103- 1 17.
23 So long as a proprietor has not
extinguished or used up completely his
or her right (to clear or to pollute, for
example) then, like any other asset, each
bundle of rights will have positive value
where a system of transferable rights is
instituted.
24 D Zilberman, N MacDougall and
F Shah, "Changes in Water Allocation
Mechanisms for California Agriculture"(1994) XI1 Contemporury Economic Policy 122- 133.
25 D James, Environmentul Incentives
(Environment' -~ustralla,' -Canberra,
.*..:
1937).
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Apart from the incentives imposed by policy prescription in order to
encourage socially desirable outcomes, there are market-determined
incentives such as prices of output, costs of inputs and the final "golden
handshake" when the farm is sold, and other factors such as debt levels
which may influence farm decision-making. Whilst it might appear at first
consideration that the effects of these incentives on decisions regarding
resource conservation is unambiguous, the literature does not reveal clear
direction.
~ u r t ~ v o u nthat
d relatively high grain prices were an incentive which
exacerbated soil erosion in eastern Washington and western Idaho.
Choosing to ignore the issue of externalities and social costs caused by
sedimentation and pollution of streams caused by agricultural soil ingress,
he used depth of topsoil and percentage of organic matter in the top 15
centimetres of soil as two variables which captured the most essential
information in a dynamic optimisation problem set in the Palouse area. He
concluded resource degradation was generally within "economic limits"
but that localised Severe degradation required specialised management
techniques.
In Australia, a lively debate developed between LaFrance and clarke2'
whether increased commodity prices and subsidies acted as incentives to
more or less soil degradation. LaFrance initially maintained in agreement
with Burt that soil conservation efforts are negatively related to increased
revenue. Clarke, on the other hand, held that increasing profitability from
favourabre product prices or changes in input factor prices provide an
incentive for profit-maximising farmers to increase their investment in the
conservation of soil quality when appropriate technologies exist. LaFrance
countered with a more sophisticated dynamic model to conclude that
higher profits do not increase the incentive to farmers to take better care of
the soil. Further, he argued that whilst subsidising conservation expenditure may increase soil conservation, subsidising other farm inputs, such as
irrigation water of the Murray-Darling Basin, is likely to promote soil
degradation through overuse. Subsidisation of commodity prices is likely
to increase degradation, whilst a tax on soil loss is likely to promote soil
improvements.
Research by Barbier developed and adapted McConnell's basic farrnlevel soil conservation model to the situation in an LDC.2HThe location is
the highly-populated uplands of Java in Indonesia, where holdings average
less than 0.4 hectares, and subsistence households use cropping systems
which result in severe erosion. Erosion is increasing at the rate of 1-2 per
cent per annum. Barbier considered economic incentives and other factors
which influence farmers' decisions to undertake soil erosion control
measures including soil types, prices and profitability of current crops,
input subsidies, availability of finance, off-farm employment and land
tenure. He concluded that upland subsistence farmers will not modify their
land management practices without appropriate economic incentives, and
that many government programs such as maintaining relatively high prices
for cassava and vegetables and subsidies for fertilisers are antagonistic to
the social goal of soil conservation.
26 0 R Burt, "Farm Level Economics
of Soil Conservation in the Palouse Area ,
of the Northwest" (1981) 63 American
Journal elf Agricultural Economics
83-92.
27 J T LaFrance, "Supply Response
and Soil Conservation are Negatively
Related" (1990) Mimeo, Montana State ,
University; J T Lsrance, "A Dynamic
Model of Soil Conservation and Prices",
Paper presented to the Workshop on
Land Degradation and Sustainable Agriculture, AAES Annual Conference, '
Armidale, (1991); I T LaFrance, "Do
Increased Commodity Prices L e d to
More or Less Soil Degradation? (1992) '
36 Australian Journul of Agriculturul
Economics 57-82; H R Clarke, "Land
Degradation and Prices", Paper
presented to the Workshop on Land
Degradation and Sustainable Agriculture, AAES Annual Conference,
Armidale, (1991); H R Clarke, "The
Supply of Non-Degraded Agricultural
Land" (1992) 36 Austruliun Journal of
Agricultural Economics 3 1-56.
28 K E McConnell, "An Economic
Model of Soil Conservation" (1983) 65
Americun Journul elf Agriculturul Econontics 83-89; E B Barbier. "The F m Level Economics of Soil Conservation:
The Uplands of Java" (1990) 66 htno
Economics 199-2 1 1.
Land prices as ml irtcerztive
Economic Incentives for arm-L~V~I
Resource Conservation
Generally the condition or quality of a traded good will have a bearing
on the price it can command in the market. Thus it is to be expected that a
well-kept or high quality good will command a higher price than a
degraded, ill-maintained or poor quality good. Agricultural land
theoretically should not be an exception, because the quality of the land
(soil depth and structure, inherent fertility and organic matter content) has
a direct bearing on the quality and yield of produce grown on it. Even so,
the findings of published studies have not been unequivocal.
United States studies by Ervin and Mill and Gardner and ~arrows,"for
example, of farm land- prices in Iowa and Wisconsin respectively
conciuded that a link could not be found between the use of conservation
practices and structures and the prices of the land, when eventually sold.
In contrast, King and sinden"' analysed the farm land market in Manilla
Shire in central New South Wales and concluded that the market clearly
recognised the condition of the land and accorded a premium to land of
higher quality.
In the first of two studies of the formation of price in the rural land
market, King and Sinden employed the hedonic approach, which uses the
relationship between attributes of a good and observed prices to explain
differenced in market prices. Several variables which were theorised as
significant attributes of rural land were defined, measured and tested in
two model specifications. Among these variables were several which
related to land productivity, cost of recommended remedial action, slope,
soil loss and priority for receipt of government soil conservation funding.
These authors found that land condition influenced price more profoundly
than immediate expectations of higher yields. Other influences may well
have been the desire to acquire productive and better managed soils (the
stewardship ethic) and a wish to avoid future costs of rectification of
symptoms of land degradation.
In the course of completing this research task, King and Sinden realised
the land market was more complex than they had initially envisaged.
Some other issues which had to be considered and incorporated into
models, if possible, were the relative influence or market power of buyers
and sellers, characteristics of the market, the differential values placed on
land characteristics by buyers and sellers, and the influence of the
bargaining or sale process. Four models were specified and estimated.
'Among other findings not relevant to this article, King and Sinden
concluded land in better condition sold for higher prices and buyers valued
soil conservation more highly than did the sellers. In terms of the
usefulness of economic incentives, it appears sellers generally did not
incorporate a land price premium into their consideration of soil
conservation activities.
Insights gained from this research spurred Sinden and ~ i n g ) 'to
consider the usefulness of education of buyers and the provision of
information on the erosion status and environmental quality of sale
I
29 1, E Ervin and J w Mill,
"Agricultural Land Markets and Soil
Erosion: Policy Relevance and Concep-
~
~
~ ~~ ~~ ~ ' ~ , "
r A ~ n~ ~ $ ~u r f ~
938-942: K Gardner and R Barrows,
"The
of Soil Conservation ~ n :
vestments on Land prices" (1985) 67
American
(?fAgricufturaLEconomics 943-947.
I, A King and
A Sinden,
"Influence of Soil Conservation 'on
Farm Land Values" (1988) 64 Land
A King and
Economics 242-255;
J A sinden. "Price Formation in Farm
Land ~ a r k & " (1994) 70 lrutd Econ-
mia act
,
-
-
-
-
,
-
for a scheme based on this incentive
December 1997
22 1
i
I
Debt-levels as an incentive
High levels of farm debt have been implicated, together with small farm
size, with increasing resource degradation. These factors, it has been
argued, are especially relevant when coupled with declining terms of farm
trade.
Biological degradation of arid rangelands is of concern in most
continents. Focusing on the over-grazing and consequent degradation of
the 19 million hectares of the mulga (Acacia aneura) zone in south-west
Queensland, Passmore and ~rown'' developed a dynamic optimisation
model incorporating the initial state of the pastures, the financial position
of the operator, expectations of market prices and rainfall, attitude to risk,
planning horizon and business objective. They concluded that high
stocking rates were positively related to small property size, the fine wool
effect?4 debt levels and current financial needs, a lesser degree of risk
aversion, and short planning period.
The dominant constraint on more optimal stocking rates was found to
be small property size. Policy-makers may promote property build-up with
the incentives of subsidies and taxation concessions but, in the absence of
appropriate ecological information and a change in attitude of individual
operators, these incentives may merely prolong the financial survival of
smaller properties, an outcome which may not be consistent with the longterm health of the agroecosystem.
Small property size in many regions of Australia is a legacy of a past
policy which is no longer appropriate. Historically, Australian governments were committed to "closer settlement", a policy which placed
settlers on the land with minimum "living areas" at the time. Because
agricultural terms of trade have declined virtually in a steeply linear
fashion since the 1950s, properties subdivided with a minimal allowance
for declining financial margins have become too small to support a family
without degrading the natural resources.
Small property size and over-use of resources are related. Sinden and
Jones3' considered the problem of eucalypt dieback in the southern New
England district of northern New South Wales. The immediate effect of
death of the trees and reduction of the tree biomass was an increase in
pasture production, a consequent increase in canying capacity and an
increase in farm income. There was thus an observable short run gain at
the expense of biodiversity.
At that time, scientists had no explanation for the dieback phenomenon,
although it was suspected that biological simplification was implicated.
ow ever, it had been observed that eucalypts were least affected by
dieback in patches which retained a wide variety of species including
trees, shrubs and herbs. Thus, although graziers were not able to pinpoint
the exact management practice which would maintain their mature trees,
they could manage their properties to retain their mature eucalypts by
cutting stocking rates and fencing off remnant forest patches.
s2 That is, prices unE&stic in
of productive potential. There may well
be a future subdivision premium.
G Passmore and C Brown,
"Analysis of Rangeland Degradation
using Stochastic Dynamic prop--
~ ~ ~ ~ c ~ ~ ~ ~ ~
Of
w~
i stocfing
~
h tend
~ to~lead
less well fed sheep which may produce finer wool- Fier wool is of higher
to
2
~ ~ g , " ' e ~ n ~ ~ V ~ g ~~
vressure to underfeed sheep to produce
and likely to produce costly sheep
deaths and l&d degradation, as well &
being unethical.
~~~~~~k
aiiA$t
E: Stc!)gJgs
in
New England, New
wales" (1985) 29 Australian joum1 of
Agricultural Economics 149- 156.
I
Conclusion
Agricultural producers decide on the crops to grow and the animal
species to husband, and these decisions are accompanied by decisions on
the types and levels of inputs necessary to their production. A further
complication of primary production is that the inputs of natural capital,
soil, water and biological resources, may be used up and, unlike in many
other productive processes using man-made capital, exhausted without the
scope for easy replacement.
Economic incentives are part of the framework within which primary
producers operate. The imposition of tax and subsidy regimes by
governments to try to change community behaviour has generally found
considerable support among economists. The evidence from the literature
suggests that, whilst subsidies have been used, seldom have taxes been
imposed on activities causing degradation at the farm level. One of the
most important reasons for this is the lack of political will of governments
to impose additional cost burdens on the often financially-faltering family
farm.
Some incentives have worked as intended and channelled industry
towards resource conserving practices. Other incentives have had
unintended effects and many have been difficult to administer at the
practical level. Specification of land management standards and focusing
programs towards the regions and landscapes which would yield the most
efficient results have been offered as policies. However, research results
have suggested that such transfer payments may be earned inequitably by
those most able to afford unaided conservation efforts. 1n the final
analysis, it appears that the extent of conservation activities depends on
the degree of altruism in managers' outlooks, rather than on economic
incentives currently available.
-
Economic Incentives for Farm-Level
Resource Conservation