The Economic Approach to
Environmental and Natural
Resources, 3e
By James R. Kahn
© 2005 South-Western, part of the Thomson Corporation
Part IV
Further Topics
Chapter 17
Agriculture and the
Environment
© 2004 Thomson Learning/South-Western
4
Introduction
 Although our society tends to view agriculture as
both a noble and a "green" lifestyle, the agricultural
industry has a profound environmental impact.
 Soil erosion has been of historical concern in the U.S. and
the loss of soil productivity has become life-threatening in
many developing countries.
 Agriculture is a major contributor to the decline in water
quality through agricultural run-off and irrigation.
 Conversion of forest, prairie, and wetlands to farmland
reduces biodiversity.
 Environmental degradation also has important
effects on agriculture.
 Tropospheric ozone reduces the growth of crops and trees.
5
Introduction
 This chapter will examine the impact of
environmental degradation on productivity.
 Then the impacts of agricultural activity on
environmental quality will be examined,
along with the nature of the market failures
that lead to these impacts.
 Finally, current policies to deal with
environmental externalities will be
discussed.
6
The Effect of Environmental Quality on
Agriculture
 An activity that generates an effect that adversely
affects agriculture will generally reduce the yield per
acre of a crop or group of crops (as illustrated in
Figure 17.1).
 Because agricultural markets are interrelated, it is
important to consider the indirect effects on other
markets as well.
 A farmer whose soybeans are affected by ozone
could choose to plant corn.
 When economists measure the effects of impacts on
agriculture, they model both the farmers' and the
consumers' decisions, and look at the demand and
supply for all substitute crops throughout the United
States.
7
8
The Effect of Environmental Quality on
Agriculture
 In Figure 17.2, the left-hand panel shows the reduction of
consumers' and producers' surplus (dark shaded area) in the
soybeans that are affected by pollution.
 The indirect effects through related markets are represented by
the right-hand panel, which shows the increase in consumers'
and producers' surplus in the market for a substitute crop.
 Estimates of this type of change in consumers' and producers'
surplus due to the effects of tropospheric ozone on agriculture
are presented in Tables 17.2 and 17.3.
 Table 17.3 shows actual and predicted changes associated with
the reductions in concentrations generated by the Clean Air Act
Amendments.
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10
11
12
The Effect of Environmental Quality on
Agriculture
 While an increase in pollution always hurts consumers, this is
not true for producers.
 Price increases associated with the reduction in supply more
than compensate for the loss in quantity supplied. However, the
elimination of agriculture price support programs would result
in a different outcome.
 Global warming and the increase in carbon dioxide emissions
that will generate the global warming problem also have both
positive and negative effects on agriculture.
 Increased temperature and rainfall generally have positive
effects, although rainfall redistribution may cause localized
negative effects. Increased temperature can also generate
costs as new areas become too hot for existing cropping
patterns.
13
The Effect of Agriculture on the
Environment
 Agriculture has several important effects on the
environment.
 Soil erosion reduces the productivity of the soil and
leads to water quality problems.
 Runoff from agricultural fields leads to the transport
of fertilizers, pesticides and herbicides into ground
and surface water.
 Irrigations reduces river flow, depletes aquifers, and
increases salinity of surface water.
 Conversion of habitat to agriculture leads to
reductions in biodiversity.
14
Soil Erosion
 In the 1930s, intensive plowing and cropping of the
land led to the soil being exposed to water and
(especially) wind, which led to a massive loss of
topsoil and the Dust Bowl.
 There are two major types of water-related soil
erosion.
 Sheet erosion is when the water moves across the
land in a uniform fashion, in a thin sheet. This water
movement removes a very thin layer of soil from the
land.
 Rill erosion occurs when the path or the water is
more concentrated and cuts gullies through the land.
These gullies then capture more of the rainwater and
the gullying is intensified.
15
Soil Erosion
 Soil erosion is a problem for two major reasons.
 First, as topsoil, which is the layer containing
organic matter and nutrients, is lost the soil
becomes less productive.
 Second, the roots of most crops extend 1 meter into
the soil, if the top soil is not 1 meter deep, then the
roots penetrate less productive subsoil, and
productivity declines.
 Public policy has changed from earlier concerns of
declining productivity due to soil erosion to current
concerns on external effects of soil erosion, such as
water quality impacts.
16
Soil Erosion
 Even though the farmer has private property rights,
market failure can result in a choice of policy
concerning soil erosion.
 Imperfect knowledge about the impact of soil
erosion may lead to choices which result in excess
soil loss.
 The farmer may be faced with the need to meet
current cash flow problems and may not have the
option to consider the long-term impact of
production decisions.
 As indicated in earlier chapters, the higher the rate
of time preference, the less weight future costs and
benefits will have in determination of farm
production.
17
Soil Erosion
 The problem of soil erosion and loss of soil
productivity is probably worse in developing
countries.
 Imperfect information is more likely because it is
more difficult to get information into the hands of
farmers.
 A greater percentage of farmers are illiterate and
mass communication, such as radio and
newspapers, is less available.
 Agencies which correspond to the United States
Cooperative Extension, Land Grant Universities and
Soil Conservation Service, do not exist in other
countries.
18
Soil Erosion
 In developing countries the imperfect information problem is
exacerbated because population pressures lead to cultivation
of types of land that previously have not been intensively
cultivated, such as steep hillsides and rain forests.
 Traditional cultivation techniques are much more corrosive in
these environments.
 The pressure to meet daily living needs are also more severe.
 The banking systems are less developed.
 The "social safety net" is absent in most developing countries, i.e.
food stamps and welfare.
 As a result, there is a tremendous push to expand the
production capabilities of the country's resources.
19
Soil Erosion
 Soil erosion has very detrimental effects on water
quality.
 Suspended sediment particles block light from
reaching aquatic plants, generate bottom sediments
that change the nature of the stream or lake bottom
and suffocate bottom life, and interfere with the
respiratory function of fish and other aquatic
animals.
 Sediments lower the quality of drinking water and
necessitate additional treatment before the water
can be used.
 When suspended sediment precipitates to the
bottom of a stream or lake, it can clog harbors and
fill reservoirs with silt.
20
Soil Erosion
 A major environmental problem associated with soil
erosion is that nutrients, pesticides, and herbicides
are carried into the surface water along with soil
particles.
 Pesticides and herbicides are toxic substances and
they interfere in aquatic life.
 Nutrients from fertilizers have a number of effects,
but of primary concern is the effect on dissolved
oxygen.
 Nutrients lead to the growth of algae, which dies and
decays and removes dissolved oxygen from the
water.
21
Agriculture, Habitat, and Biodiversity
 Agricultural land is established when land is
converted from other uses.
 Although both agricultural areas and natural habitats
(such as forests, wetlands, prairies, and other
ecosystems) are green, they are not equivalent.
 Each contributes to wildlife habitat, biodiversity,
recreation, watershed protection, and existence
values in very different ways.
 A farmer who is contemplating converting the land
only compares private costs and benefits of
conversion but does not consider social costs.
22
Agriculture and Greenhouse Gases
 Agricultural activities lead to increase in carbon
dioxide, methane, and nitrous oxide emissions.
 Methane comes from a variety of agricultural
sources, including manure piles, wet rice cultivation,
and the digestive processes of ruminants, such as
sheep, goats, and cattle.
 Carbon dioxide originates in the combustion of
fossil fuels used in farm machinery and from the
cutting and burning of forests to clear them for
agriculture.
 Nitrous oxides are released by chemical and organic
fertilizers.
23
Agriculture and Public Policy
 The most important difference between agriculture pollution of
surface and groundwater and other sources is that agricultural
pollution originates from non-point sources, rather than
originating from point sources.
 Point sources are sources of pollution where the pollution is
released into the environment at a distinct location, such as the
end of an effluent pipe.
 Paper and pulp manufactures and municipal sewage are point
sources of pollution.
 In contrast, rather than pollution entering at a specific location,
non-point source pollution flows into the environment over a
large area.
 For example, soil, nutrients, pesticides, and herbicides are
carried by rainwater run-off into lakes and rivers. The run-off
enters the lakes and rivers along the entire length of the
interface between land and water.
24
Agriculture and Public Policy
 The significance of the pollution being generated by non-point
sources is that it is much more difficult to monitor and measure
the release of pollution by a particular polluter.
 In addition, it becomes much more difficult to implement
economic incentives, such as per unit pollution taxes or
marketable pollution permits.
 Policy incentives could focus on command and control
techniques or on economic incentives that are oriented
towards inputs.
 Another possibility is for the government to encourage
research and development of new agricultural techniques,
combined with programs to disseminate information about
these techniques and encourage their use.
25
Agriculture and Public Policy
 Another difference between agriculture and other
pollution activities is that agriculture is often a pricesupported industry.
 As illustrated in Figure 17.3, price supports can take
one of two forms.
 The government can maintain a price of P1 by buying the
quantity Q2 minus Q1 (purchase-based price support).
 Or, the government could pay the farmer to not grow Q2
minus Q1 units of the crop (quantity-based price
support).
 Figure 17.3 illustrates that in the absence of
pollution, there are equal social losses associated
with price-supports which raise prices from
equilibrium to P1.
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27
Agriculture and Public Policy
 Figure 17.4 illustrates a purchase-based price
support program when there is a divergence
between private and social costs due to pollution.
 Purchase-based price support results in Q2 being
produced and at this output level, MSC is greater
than MSB (demand curve).
 The shaded area between Q2 and Q* represents the
excess social costs.
 In addition, since the consumers do not consume at
Q*, there is a loss of consumer benefits equal to
shaded area A.
 The losses from pollution in combination with a
purchased-based price-support system are equal to
the areas of triangles A and B.
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29
Agriculture and Public Policy
 Figure 17.5 illustrates a quantity-based price
support program when there is a divergence
between private and social costs due to
pollution.
 Because production is reduced to Q1, the
only loss associated with this program is
that associated with loss of consumer
benefits (shaded area A in previous graph).
 Environmental externalities are less severe
under this type of price support program.
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31
Agriculture and Public Policy
 More recently, agricultural policies have taken the form of
income supports which are based on the difference between
the market price and the support price, where quantity is
determined by historical production levels.
 The effect of the income support, as illustrated in Figure 17.6, is
to shift the marginal private cost curve to the right.
 Additional producers are present in the industry than would be
with the absence of income supports.
 Because marginal social costs do not change, the divergence
between marginal private and social costs expands under this
program.
 The presence of price supports and associated welfare effects
should be kept in mind when analyzing the efficiency of
potential environmental policies for agriculture.
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33
Past and Currently Employed Policies
 Modern awareness of the problems associated with
soil erosion emerged in 1928, when Hammond
Bennett published a U.S. Department of Agriculture
report entitled "Soil Erosion: A National Menace."
 In 1935, after soil erosion and dust storms led
portions of the western United States to be known as
the "Dust Bowl," Congress established a permanent
program of direct soil conservation aid under the
auspices of the Soil Conservation Service of the U.S.
Department of Agriculture.
 Initial policies were designed to reduce erosion out
of concern for the on-site impacts of soil erosion and
thus were designed to provide information about
less erosive agricultural techniques.
34
Past and Currently Employed Policies
 Until the mid-1990s, the Conservation Reserve Program (CRP),
was designed to take highly erodible land out of tillage and
establish vegetative cover to control erosion.
 The Conservation Reserve Program did not promote low tillage
or no-tillage agricultural techniques, which do not plow the soil
or remove the previous season's crop residues, so erosion is
diminished.
 In addition, the CRP does not attempt to preserve areas of
important ecological. significance.
 Despite the above drawbacks, the CRP does generate net
benefits for society.
 A program that promotes habitat restoration is found in the
Wetlands Reserve Program, which provides incentives for
farmers to restore wetlands that were converted to agriculture
before this type of conversion became restricted.
35
Past and Currently Employed Policies
 The 1996 Farm Bill generated important changes in
the orientation of the CRP and the policy of the US
Department of Agriculture.
 In this Farm Bill USDA programs in general were
directed to target the off-site environmental benefits
associated with farm programs.
 Farms chosen to participate in the CRP were chosen
based on broadly defined environmental impacts
including potential impact on habitat, water quality
and biodiversity.
36
Past and Currently Employed Policies
 An example of a more comprehensive environmental
policy for agriculture is the Chesapeake Bay
Agreement, which is an agreement between
Maryland, Virginia, Washington, D.C., Pennsylvania,
the U.S. EPA, and the Chesapeake Bay Commission.
 Approximately 15,000 projects covering 300,000
acres of agricultural land have been implemented to
encourage farming practices to control nutrients and
erosion.
 These practices include no-till farming, contour
plowing, manure storage facilities, and other Best
Management Practices (BMPs).
37
A Comprehensive Set of Environmental
Policies for Agriculture
 Environmental policy for agriculture should attempt
to accomplish several goals.
 It should seek to discourage erosion and the on-site
and off-site impacts of erosion.
 It should discourage the excessive use of fertilizers
and pesticides.
 It should increase food safety.
 It should restore marginal farmland to natural habitat
and protect existing habitat.
 It should also help ensure the adequacy of food
supplies, the well-being of the consumer, and the
profitability of farmers.
38
Fertilizer and Pesticide Taxes
 Because fertilizer and pesticide run-off associated with
agriculture is non-point source pollution, the development of a
pollution tax or a system of marketable pollution permits
cannot easily be accomplished.
 The development of fertilizer and pesticide taxes in some states
have tended to be token taxes which are designed to fund farm
programs rather than internalize the full social cost of pesticide
and fertilizer use.
 An advantage of a pesticide tax is that it will encourage a
practice called integrated pest management to control insects
and other agricultural pests, where a full portfolio of techniques
are used, including biological control of pests.
 Because excessively high taxes would over control
applications of these chemicals and lead to social losses, it is
necessary to estimate the marginal benefits to farmers and the
marginal damages to the environment in order to determine the
appropriate tax levels.
39
Promoting “Green” Farming Methods
 One of the most important ways of promoting green farming
methods is by providing information on how to engage in these
methods.
 This may require additional training for agricultural extension
agents who do not have the appropriate knowledge to pass on
to farmers.
 Some green methods are privately more efficient and therefore
information about these techniques will promote their adoption.
 Those green methods which result in a higher marginal private
cost will not be adopted without additional incentives.
 One option would be command and control regulations which
require or prohibit certain agricultural methods.
 An example would be prohibition of cultivation within a certain
distance of bodies of water and prohibition of filling in wetlands.
 A certain percentage of the farm area can be required to be
covered by natural vegetation.
40
Promoting “Green” Farming Methods
 An alternative would be compensation for engaging in "green"
techniques.
 This would be similar to programs which limit eligibility for
price support payments.
 Here eligibility would hinge on the use of best available
methods to protect critically important habitat.
 Environmental subsidies would result in the protection and
provision of environmental public goods.
 Ideally, consumers could make market decisions to support
green agriculture.
 However, while there are regulations regarding the labeling of
foods “organic”, there are not eco-certifications for products
grown without irrigation or using best practices to preserve
habitats, which makes it difficult for consumers to make
consumption decisions to support agricultural methods which
improve environmental quality.
41
Adequately Priced Water
 One of the biggest environmental impacts of
agriculture is its effects on water scarcity,
particularly in the west.
 As discussed in Chapter 15, this problem is
caused by water being priced at a fraction of
its true social cost.
 The problem can largely be eliminated by
requiring farmers (and other water users) to
pay the full social cost for the water that they
consume.
42
Protecting Habitat and Biodiversity
 Since the cultivation of land requires a conversion from natural
habitat, farmers' profit incentives lay toward clearing habitat.
 A policy to protect habitat and biodiversity could be undertaken
using either direct controls or economic incentives.
 Conversion of certain types of habitat can be banned.
 However, generating protection by banning agricultural
activities in some areas places the financial burden of meeting
social’s goal entirely on the backs of farmers.
 One possible alternative would be for government agencies or
nongovernmental organizations to buy critical habitat from
farmers. Another would allow farmers to retain ownership, but
be paid to leave these areas undisturbed.
43
Protecting Habitat and Biodiversity
 In addition, many people suggest that
abandoned or marginal agricultural land
should be restored to natural habitat.
 Farmers could be paid to reintroduce native
species on former farmland.
 There is broad "grassroots" support for the
conversion of a large proportion of failed and
marginal Great Plains farmland into natural
prairie.
44
Summary
 Agriculture is impacted by environmental
degradation, but agriculture is also a significant
source of environmental degradation.
 Past agricultural policy toward the environment has
focused on soil erosion, but this policy needs to be
broadened to reduce other types of environmental
degradation.
 A combination of direct controls and economic
incentives can be used to promote the utilization of
greener agricultural methods.
45