AGRICULTURE IN ECONOMIC
DEVELOPMENT:
AN INTERNATIONAL PERSPECTIVE
WEEK 10
Agriculture, natural resources and the
environment
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Agriculture, natural resources and the
environment: outline
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The problem: resource degradation and the tragedy of commons
 Dimensions
The root cause of the problem: market failure
 The extensive margin - open access – private property
 Common property resources and institutions
The theoretical analysis
 Output oriented model
 Input oriented model
Alternative policies to address environmental problems of agriculture
 Use of market incentives for stewardship of resources
 Price effects, expectations and price incentives
Governance issues and endogenous institutions
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Bibliography
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Lichtenberg, E. (2000) Agriculture and the environment, in
HBAE, Chapter 23
Hardin, G.(1968) Tragedy of the Commons, Science, Vol. 162,
pp. 1243-1248
Ostrom, E. (1990) Governing the Commons: The Evolution of
Institutions for Collective Action. Cambridge University Press,
UK
Olstrom, E. (2001) Common-pool resources and institutions:
Toward a revised theory in HBAE
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The links between agriculture and the
environment
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Resource base and conservation
Agriculture involves extraction of yield from renewable resources
 Productivity depends on natural resource base
 Economic incentives for conservation
 Intensification – weakening of incentives – break down of conservation
Positive externalities - Environmental amenities
 Open space and scenery
Negative externalities – Environmental problems
 Nitrate and chemical run-off
 Degradation of habitat and loss of wetlands and wildlife
 Animal waste
 Erosion – sedimentation of waterways
 Chronic illness from pesticide exposure
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The problem
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The root cause of the problem :
Common Property Resources and
the tragedy of commons
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Elinor Ostrom won the Nobel Prize in Economics in 2009 for her work in
the economic governance of the commons
A “commons,” or more precisely “common-property resource” or
“common pool resources” (CPR) as Ostrom refers to it, is a resource
environment or domain that is characterized by an open access problem.
It is difficult to effectively bar other users from accessing and benefitting
from that resource.
A “CPR is sufficiently large that it is difficult, but not impossible, to define
recognized users and exclude other users altogether”
Hardin (1968) The tragedy of commons, Science
The importance of institutions to ensure sustainable resource management
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The Tragedy of Commons
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In 1968, Garrett Hardin published an influential paper
outlining a problem that he called “Tragedy of Commons”
Hardin described the “tragedy of the commons,” in which
humans overuse and deplete a CPR even though it is not in
their best interest to do so.
This trend of over-exploitation of CPR is due to lack of
individual ownership
The inability to restrict usage incentivizes actors to consume as
much as possible of the shared resource before others do.
This race to consume traps actors in a vicious cycle of
mismanagement and over-consumption that ultimately leads to
irreversible environmental degradation.
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The theory : market failure
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Two formal models:
An output oriented model with natural resources entering implicitly
An input-oriented model which incorporates resources explicitly
Environmental spillovers (externalities) can be considered as arising from
a multi-output production process ( agricultural products and environmental
quality) produced simultaneously from the same vector of inputs.
Then, the problem is on the choice of technology that provides the socially
desirable level of both outputs
The problem arises from the fact that prices exist for the first output but not
for the second
Thus, producers have no incentive for the second output
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Output oriented model
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Agricultural technology is then a set T = {(y,q,x): x can produce (y,q)}.
The output-oriented model represents this technology using a joint cost
function
Cost function : C(y,q,w) = min{wx: (y,q,x) E T}, w : input prices.
Let U(y,q) society’s gross benefit from consumption of agricultural output
and environmental quality. We assume benefits strongly separable
Optimal joint production of agricultural products and environmental
quality is found by
choosing (y,q) to maximize net benefits U(y,q)-C(y,q,w).
Necessary conditions are: (Subscripts denote partial derivatives.)
Uy(y,q)– Cy(y,q,w) = 0
Uq(y,q)– Cq(y,q,w) = 0,
i.e., the marginal benefits of agricultural output and environmental quality
should be equated to their marginal costs.
If markets (prices) exist, both outputs will be optimal.
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Market failure – lack of property rights
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If market (inverse) demands for agricultural output and environmental
quality equal U y (y,q) and U q (y,q), respectively, then perfectly
competitive markets will generate the socially efficient levels of
agricultural output and environmental quality in equilibrium.
Problem arises because of market failure for environmental products
Examples
Farmers are not required to pay for disposal of sediment of nitrate, or
pesticides into surface or ground waters. Similarly, farmers cannot charge
for the open space, greenery, and scenic views their farms provide
Both the environmental resources farmers provide and those they use are
thus subject to open access exploitation.
At bottom, the lack of markets for these environmental resources is due to
the extreme difficulty, or impossibility, of establishing and enforcing clear
property rights.
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Agriculture’s public goods
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Most scenic amenities from agriculture are public goods.
The consumption of farm scenery is non-exclusive and non-rival.
Moreover, since the marginal cost of providing scenery to an additional
consumer is minimal, leaving these scenic amenities unpriced can be
efficient at the margin.
But leaving such amenities unpriced fails to provide farmers with
incentives to forego development of their land, even when doing so is in
the public interest.
Open access occurs in water pollution from agricultural emissions of
nutrients, sediment, or pesticides for a somewhat different reason.
Emissions of agricultural pollutants are diffuse and enter water bodies at
numerous different points.
Furthermore, it is difficult to distinguish agricultural emissions of nutrients
and sediments from those that occur naturally. It is impossible to restrict
access to these water bodies, and hence impossible to levy charges for
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access to them.
Lack of a market means zero price and
zero price means free disposal
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In the absence of markets for environmental quality, farmers tend to treat it
as freely disposable.
In the multi-output production technology given previously, as represented
by the cost function, assuming an unregulated market, the joint production
of agricultural output and environmental quality will be characterized by
the FOC of the cost minimization problem that are:
U y (y,q)– C y (y,q,w) = 0
C q (y,q,w) = 0,
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which imply too much agricultural output and too little environmental
quality.
In other words, the level of agricultural output generated by competitive
markets exceeds the socially optimal level, while the level of
environmental quality generated by competitive markets falls short of the
socially optimal level.
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Input oriented model
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Often, environmental effects associated with specific inputs (fertilizers, etc)
Let z be specific input(s) of interest and v be the associated price(s).
Let e(z) represent the environmental effects of input use, where e z > 0.
Let the agricultural output technology be represented by a revenue function
R(p,w,z) = max x,y {py– wx: (y,x,z)  T).
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Decreasing marginal productivity of z implies increasing marginal income
foregone due to reductions in z. Formulation equivalent to one with
increasing marginal cost of producing environmental quality.
Let S(p,e(z)) be the social surplus accruing when the price of agricultural
output is p and the level of environmental quality is e(z).
Under standard assumptions, S p = -y, that is, the derivative of S with
respect to p equals the negative of demand for agricultural output, and S pp
= -y/p > 0. S e is negative for adverse environmental effects and positive
for beneficial ones.
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Input oriented model (cont)
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The socially optimal usage level(s) of z and agricultural output price(s) p in
this case maximize net social surplus S(p,e(z)) + R(p,w,z) – vz and is
characterized by the necessary conditions
S p (p,e(z)) + R p (p,w,z) = 0
S e (p,e(z)) e z + R z (p,w,z)– v = 0.
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The first condition is the market clearing condition that the quantity of
agricultural output demanded (-S p )equals the quantity supplied (R p ).
The second condition says that the value of the marginal product of z (R z )
should equal its unit price (v) plus (minus) the marginal social cost
(benefit) of environmental effects arising from use of the input(s).
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Stewardship incentives -input-oriented model,
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Social surplus from consumption into three components:
 off-farm surplus from the consumption of agricultural
output, CS(p),
 off-farm damage from use of the input of interest, D(e(z)),
and
 on-farm surplus from consumption of agricultural output
and goods associated with the resource base of agriculture,
L(p,e(z)), L p > 0, L e < 0.
In soil erosion z represents the erosion rate, e(z) denotes the
long-run reduction in soil depth associated with erosion rate z,
and D(e(z)) represents off-farm damage from sedimentation
and nutrient pollution of waterways.
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Stewardship incentives -input-oriented model,
(cont)
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Assuming stationary prices for agricultural output, the value of agricultural
productivity in the future can be written as L(p,e(z)).
When markets for agricultural land are well developed, L(p,e(z)) equals the
price of farmland
In case of drinking water quality, z might represent fertilizers or pesticides
and e(z) the corresponding concentration in well or stream water, while
L(p,e(z)) represents farm families’ surplus from consumption.
In case of pesticides and farmer health, z would represent the toxicity,
frequency of application, and/or pesticide application rate, e(z) the
corresponding applicator exposure, and L(p,e(z)) the farm household’s
combined demand for agricultural output and health status.
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In the absence of explicit markets for environmental quality,
equilibrium is
CSp + Lp + Rp = 0 (1) and Leez + R z – v = 0 (2)
Farmers’ unit cost of using the input z, v-L e e z , exceeds the
market price v by an amount equal to the marginal reduction in
land value. It is conceivable that these incentives for
stewardship are strong enough to replicate the social optimum.
Social optimum: CS p + L p + R p = 0 and [L e – D e ]e z + R
z – v = 0.
The social and private optima coincide if D e (e(z)) = 0 at the
profit-maximizing level of z, that is, if profit-maximizing offfarm damage remains below a threshold level
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Alternatively, incentives for stewardship arise from
complementarity between environmental quality and
agricultural output in production (C yq < 0) or in consumption
(U yq > 0).
If environmental quality and agricultural output are
complements in production, farmers will have incentive to
increase environmental quality as a means of lowering the
marginal cost of agricultural output.
If demand for agricultural output is greater when
environmental quality is greater (environmental quality and
agricultural output are complements in consumption), then
there will likely exist equilibria in which improvements in
environmental quality support increased agricultural
production.
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Policy design directions for policy intervention
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Identifying the drivers of resource degradation
Improving agricultural water management
Greening the green revolution
Managing intensive livestock systems
Reversing degradation in less-favored areas
Providing payment for environmental services
Helping adaptation to and mitigation of climate change in
agriculture
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Drivers of resource degradation
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Overcoming environmental problems requires a good understanding of
private incentives of resource users and ways to manage resources more
successfully from society’s point of view.
Many factors affect private incentives for managing resources, including
information, prices, subsidies, interest rates, market access, risk, property
rights, technology, and collective action.
Often resulting in both, onsite and offsite resource degradation, these
factors can be modified through policy changes and public investment,
although global forces are changing the drivers of resource degradation in
new ways.
Global markets can leave a global environmental footprint, such as the
impact of Asian demand for soybeans for livestock on deforestation in the
Amazon.
Furthermore, climate change is increasing production risks in many
farming systems, reducing the ability of farmers and rural societies to
manage risks on their own.
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Poverty and population
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Two difficult drivers to manage are poverty and population.
When suitable technologies and institutions are available , population
growth can lead to adoption and sustain improvements in resource
conditions and yields.
Because many natural resource management technologies are labor
intensive (for example, terracing or contouring land, building irrigation
structures), population growth can actually assist their uptake because it
lowers labor costs.
When population pressure is combined with high initial levels of poverty
and few technology options for boosting productivity, degradation and
poverty can spiral downward. This is happening in some areas of Africa,
where many farms are now too small to support a family, yield growth has
stagnated, and job opportunities off the farm are rare.
These distressed areas can become breeding grounds for civil conflict,
displacing environmental refugees and disrupting efforts to reach the very
poor and vulnerable.
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Increasing productivity without producing
environmental problems
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Productivity increase in irrigated agriculture and intensive farming systems:
both are associated with severe environmental damages
Irrigated agriculture: Use less water, growing water scarcities; stop
unsustainable mining of groundwater; and prevent the degradation of
irrigated land through water logging, salinization, and nutrient depletion. In
intensive farming areas in general (irrigated and high potential rainfed
areas), modern inputs like seed, fertilizer, pesticides, and water need to be
managed to sustain high yields without damaging the environment.
Intensive livestock systems. Management of wastes and disease risks.
In less-favored regions with extensive farming systems, development needs
to support the livelihoods of local people and still be compatible with other
environmental services on a fragile resource base.
In both high-potential and less-favored areas, payments for environmental
services can be used when national and global social benefits exceed the
opportunity cost of current land use and the management costs of the
program.
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Improving agricultural water management
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Agriculture uses 85 percent of water consumed in developing countries,
mainly for irrigation.
Even though irrigated farming accounts for only about 18 percent of the
cultivated area in the developing world, it produces about 40 percent of the
value of agricultural output.
Moving toward integrated water management in irrigated agriculture
Improving productivity of irrigation water -institutions
Institutional reform of large-scale irrigation schemes is a challenge
everywhere, but subsidies for canal irrigation, power, and fertilizer in India,
abetted by state procurement of output at guaranteed prices, led farmers to
overproduce rice, wheat, and other low-value crops, using water-intensive
cultivation and making excessive withdrawals of groundwater
Using water markets when water rights are secure
Seizing windows of opportunity and making reforms happen
Reforming irrigation systems and water allocations is inherently a political
process.
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Make intensive production
environmentally friendly
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Strong shift to high-input farming is behind agriculture’s intensification in
transforming and urbanized countries.
Example, green revolution, high-input farming typically involves
monocropping + package “new varieties, fertilizers, water, mechanization”.
Despite its success in increasing food production and avoiding the
conversion of vast amounts of additional land to agriculture, high-input
farming has produced serious environmental problems.
Alarming is mounting evidence that productivity of many of these intensive
systems cannot be sustained using current management approaches.
Strong evidence that soil degradation and pest and weed buildup are
slowing productivity growth.
The environmental cost of pollution can be reduced by better management
of these inputs without sacrificing yields.
Integrated pest management, increase yields, reduce environmental damage
Knowledge based management changes are win-win for farmers (e.g., pestresistant varieties, better timing and application of fertilizer and water,
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precision use, etc.)
Managing intensive livestock systems
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Strong growth in demand for meat, milk, and eggs.
Graduation effect, rising per capita incomes and urbanization ..
Push for intensive livestock systems , large scale production units
This intensification has been assisted by technological change, particularly
in animal breeding, nutrition, and health.
The results—more productive animals; larger production units that capture
economies of scale; greater integration within the market chain, improving
quality and lowering the costs of marketing and transport.
Environmental problems are linked to the move from dispersed production
in rural areas to specialized livestock units in urban and peri-urban areas
Major environmental threats are: pollution of water and soil with nitrogen,
phosphorous, and highly toxic heavy metals , risks of spreading animal
diseases, also a threat to humans, especially where dense populations of
animals and humans are close contact.
Policy measures include administrative directives, market-based
instruments –incentives, cap-trade systems, etc
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Strategies for less-favored areas
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Public policy interventions to reduce poverty and preserve the environment
are warranted in many less-favored regions.
Many such interventions are neglected because of returns on public
investments are better in high-potential areas
This was true during the early phases of green revolution in Asia and it is
true in Africa today.
Public investments in roads, education, irrigation, and some types of R&D
can produce competitive rates of return and positive outcomes for poverty
and the environment in less-favored areas.
The form of policy interventions should depend on the type of less-favored
region targeted and on the national economic context
Options include encouraging more out-migration, promoting income
diversification into nonfarm activities, increasing recurrent expenditure on
safety nets, and introducing payments for environmental services.
Nonagricultural options more viable in transforming and urbanized
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countries
Payment for environmental services –
positive externalities
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Agricultural landscapes in both less favored and high-potential areas
produce a wide range of valuable environmental services, such as
sequestering carbon, harboring biodiversity, regulating water flows, and
providing clean water downstream.
Farmers receive no compensation for providing these services (public
goods) and so they tend to be under produced.
Many approaches to increasing environmental services are based on
demonstrating to farmers the “right thing to do”—forgetting that it’s the
“right thing” for others and not necessarily for the farmers.
Other approaches have attempted to regulate what farmers can and cannot
do. Neither approach has worked well nor been sustained over time.
Occasionally, win-win technologies can generate both high returns for
farmers and high levels of environmental services, but these are few and far
between, and may not remain win-win over time as prices change.
Need to introduce incentives for producing these public goods
The emerging approach of payment for environmental services (PES) aims
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to address this problem.
Governance issues and
endogenous institutional change
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Environmental problems induce institutional innovation
The problems become the engines of institutional change
Market incentives are used to encourage individuals to
produce public goods
Environmental taxes also are market based instruments that
bring the desired result
Communal institutions are designed to address the market
failure of Common Property Resources
Privatization can provide property rights for better resource
use
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