Agriculture and the Environment

Econ 4300 2008

Agriculture and Environment

• Is dependent on the environment – Climate – Precipitation – Heat units • Can impact the environment – Micro scale: micro climate, run-Off, sediment – Macro scale: greenhouse gases (CO 2 , CH 4 , N 2 0)

Agricultural Production

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

– Outputs that can impact others but not a private benefit are nutrient leaching, pesticide run off. These are “negative” or “bad” outputs

Why the concern?

• Outputs that impact others are externalities • They typically impose an additional cost onto someone else – Resource use and allocation will not be Pareto Optimal – Examples: sediment from erosion, reduced water quality,

World Wide Environmental Issues

• For over 200 years, the concern that population will outstrip food supply – Increased land under cultivation, increased productivity, increased input use, new technologies • Club of Rome in 1972 and Limits to Growth – Economic activity is putting a strain on the plant’s resources

Ecological Footprint

• Concept is to measure ecosystem services demanded by humans, and the services that can be supplied • To address the debate on the earth’s human carrying capacity • “How large of an area is required to support a particular population?” • Measures global resource uses

EF – Rees’ article

• Every human imposes some footprint • Land is used as the measure, all services are converted to a land area – Land area is adjusted for productivity around the world • Use only major categories of consumption and waste • Is a function of population, standard of living, efficiency, productivity of ecosystem

EF – Rees’ article

• Based on final demand for goods, services – Consumption=production+imports-exports – Covert consump. to land/water area required – Sum footprints of individual consump. And waste categories – Obtain a per capita measure • (see Figure 1 of handout)

EF – Rees’ article

• To bring the world up to North American standards, would take 4 more planets like earth • Many highly populated, small countries live at several times their domestic capacity (import goods and services) • High income countries extend their EF into exporting nations

Nonrenewable Resources

• How fast should society use these resources?

– Depends on: • Technology – changes the technical feasibility • Time preference – value place on the future – The discount rate: private vs. society – Sustainability and future generations • Extract at a rate such that the value of the resource increases at the discount rate

Renewable Resources

• Flow of the resource will depend on the stock, the growth rate of the stock, technology (capture and growth) • Stock will decline if harvested flow is greater than growth • Growth of the stock will depend on the size of the stock

Renewable Resources

• What is the value of the resource?

– The current value associated with harvesting the stock – The value associated with the stocks impact on growth in the stock, and the future harvest of the stock

Deviations from Optimal Use Rate

• Market Failure – Resources might be depleted too fast because the future generation has no say in conserving resources to their use – Policies can emphasize the present over the future

Deviations from Optimal Use Rate

• Externalities – Outputs for which there is no market, but the outputs do impact others – Most externalities have a negative impact – Producers of externalities are not covering their total production costs. They only consider their private costs, which are lower than private plus social costs

Correcting for Externalities

• Internalize all costs so that the producer considers both direct (private) and social costs – Need to create a market for the externality • Not an easy action – There is an incentive for the producer to reduce the externality – The market determines the value/cost

Correcting for Externalities

• Impose a tax – Theoretically attractive • Set the tax equal to the marginal external (social) cost – Applied to a measurable output or input – What is the appropriate tax rate?

– There is limited incentive to reduce the externality because the tax is not directly tied to the externality

Correcting for Externalities

• Regulation – Limit the application or use of an input, or emissions of an output – Used with it is difficult to monitor the externality, uncertainty about the input-output relationship with the externality, high variability in externality production – Easy to implement and enforce – No incentive to reduce the externality

Property Rights

• Property rights impact resource use and externalities • Property rights need to be: – Well defined – Tradable – Secure – Enforceable

Property Rights

• In agriculture, these 4 conditions hold • For most land-based resources, these 4 conditions hold • Some natural resources do not have well defined property rights – They are non-excludable resources • Example – fish in the ocean, it is difficult to exclude fishermen from fishing • No incentive to conserve the resource

Property Rights

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

• For some goods, property rights can be defined to accomplish this – Patents on manufactured goods to exclude others from its production – Could fishing areas be assigned to exclude other fishermen?

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

Common Property

• The tragedy of the commons – common resources are typically over used • Four property regimes – State property – grazing leases – Private property – private land – Common property – group ownership – Open access property – first to use

Measuring Exernalities

• Externalities do not have a price • Two possible approaches to measure – Willingness to pay – how much would one pay not to have the externality – Willingness to accept – how much would one need to be compensated to accept the externality

Non-Market Goods

• What is the price of non-market goods?

– Use a substitute good for which there is a market – Travel Cost Method – used as a proxy for the willingness to pay – Contingent Valuation Method (CVM) – in a controlled setting, determine how much one would be willing to pay to obtain some environmental good or service

Ecological Goods and Services

• Agricultural land owners supply ecological goods and services, but no compensation • Producers compensated only for food and fiber produced and marketed • EG&S – private benefits related to maintaining land productivity • EG&S – social benefits related to those received by society

Ecological Goods and Services

• EG&S – argument is that there is a market failure, and the market does not compensate the producer for the EG&S • Can society expect agricultural producers to continue producing EG&S without compensation?

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

Ecological Goods and Services

• Valuation methods for non market goods: – Value of services that increase productivity – Damage cost avoidance, replacement cost – Travel Cost Method (recreation services) – Contingent Valuation Method (survey of willingness to pay for specific services) – Contingent Choice Methods (survey of trade off selections to determine value)

Ecological Goods and Services

• Can not include value in the market price of commodities, EG&S are non market goods • The approach is one of compensating producers for using specific practices – Example: Ducks Unlimited and practices that increase duck habitat • A tax approach might be possible, but not a part of the current EG&S work

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