1. Agriculture and the Environment
Econ 4300
2008

2. 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)

3. 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

4. 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,

5. 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

6. 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

7. 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

8. 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)

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. Property Rights Property rights impact resource use and externalities
Property rights need to be:
Well defined
Tradable
Secure
Enforceable

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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)

27. 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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