Agriculture and the Environment

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 (CO2, CH4, N20)

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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Agriculture and the Environment