FAO Criteria for S ARD

1. FAO Criteria for SARD • Meeting the basic nutritional requirements of present and future generations, qualitatively and quantitatively while providing a number of other agricultural products • Providing durable employment, sufficient income, and decent living and working conditions for all those engaged in agricultural production • Maintaining and, where possible, enhancing the productive capacity of the natural resource base as a whole, and the regenerative capacity of renewable resources, without disrupting the functioning of basic ecological cycles and natural balances, destroying the socio-cultural attributes of rural communities, or causing contamination of the environment • Reducing the vulnerability of the agricultural sector to adverse natural and socio-economic factors and other risks, and strengthening self-reliance

2. Table 6.1. Macro-environmental linkages Macroeconomic policies and objectives Likely environmental impacts Conditions and policy interventions to facilitate positive environmental impacts Monetary Policy: · Stabilization of inflation and interest rate alignment + More sustainable use of NR due to lower inflation and reduced in-vestments - Pressure on NR as a result ofincreased export competitiveness ·Proper regulation of property rights, royalties, well structured concessions, command and control regulation, zoning Macro Policies and the Environment

3. Table 6.1. Macro-environmental linkages Macroeconomic policies and objectives Likely environmental impacts Conditions and policy interventions to facilitate positive environmental impacts Fiscal Policy: Public expenditure reduction; increased transparency/tax reform Price reforms and subsidy red-uction on agro-inputs, energy, and water • + Pressure for higher cost recovery in services, improved collection of rents • - Reduction of expenditures onenvironmental infrastructure, NR protection, and enforcement • + More efficient use of NR,pollu-tion reduction • - Increased pollution due to substi-tution of dirty fuels ·Regulatory and institutional conditions and the proper application of user charges, fees, and rents Protection of critical social and environmental expenditures Full subsidy removal and introduction of prices reflecting economic costs Protection of the poor Macro Policies and the Environment

4. Table 6.1. Macro-environmental linkages Macroeconomic policies and objectives Likely environmental impacts Conditions and policy interventions to facilitate positive environmental impacts Exchange Rate Policy: Trade balance improvement • + Increased price of imported inputs (fertilizers, pesticides, etc.) • - Pressure on NR as a result of increased export competitiveness ·Proper regulation of property rights, royalties, well structured concessions, command and control regulation, zoning Macro Policies and the Environment

5. Table 6.1. Macro-environmental linkages Macroeconomic policies and objectives Likely environmental impacts Conditions and policy interventions to facilitate positive environmental impacts Trade Policy: Elimination of export taxes, import quotas, and other trade barrier • + Improved efficiency, application of cleaner technologies, and better environ-mental management • - Increased depletion of NR ·Appropriate regulation and implementation of property rights, rents, concessions Macro Policies and the Environment

6. Table 6.1. Macro-environmental linkages Macroeconomic policies and objectives Likely environmental impacts Conditions and policy interventions to facilitate positive environmental impacts Institutional Reform: Privatization, liberalization, restructuring, and deregulation + Improved efficiency, management, and response to incentives, increased investments in cleaner technologies and processes ·Effective environmental regulation and enforcement Macro Policies and the Environment

7. Macro Policies and the Environment Common Roots of Economic and Environmental Problems • Policy failures • growth without safeguards • lack of proper sector policies • Market failures • monopolies • imperfect information • externalities • Governance failures • lack of monitoring and control • weak management • lack of transparency • collusion • Financial sector problems • excessive exposure to risk • weak portfolio • unsustainable business practices • Environmental problems • excessive pollution • excessive NR depletion • unsustainable industrial, agricultural, and NR management practices

8. Macro Policies and the Environment Conclusions: • if one traces the impacts of a macroeconomic policy change, one can find effects across many sectors, not always self-evident • the environmental impacts of economic policies will depend critically on the economic institutions that are in place and that govern the use of the resource base and the environmental sinks of the economy • where there are market imperfections of one kind or another, and where these cannot be resolved at source, it is desirable to use economic instrumentsspecifically to address the environmental issues

9. Some Introductory Concepts • What is economicsabout? • scarcity,allocation, andtrade-offs • values: total economic value: • - market vs. non-market • - use vs. non-use • positive vs. normativeeconomics • environmentalvs. natural resource economics • neoclassicalvs. ecological economics

10. World with income X NR Economics Natural assets Technology Capital Labor Human Utility and Consumption Pollution Some Introductory Concepts

11. World with income 10X Natural assets Technology Capital Labor Human Utility and Consumption Pollution Environmental Economics Some Introductory Concepts

12. Neoclassical Economics • sustainable growth • natural resource can be substituted for capital • technical progresswill relax the limits to growth • maximum sustainable yield • recycling • sustainability of economic development • golden rule: resource growth potential  discount rate - rate of exogenous technical progress • irreversibilities

13. Ecological Economics • sustainable growth • the substitution of capital for natural resources is limited • technical progresswill relax the limits to growth • functions of the environment are essentially intertwinedadditional restriction on economic growth • full recycling of energy is not possible • sustainability of economic development • continuous co-evolutionary feedback between economy and environment • the economy has to adapt itself • economy + natural environment + culture + technology + political system + population = ecological complex

14. Price (P) P1 P2 P* 1 2 3 4 5 6 7 Q* Quantity (Q) Recalling Some Basics • Demand: • downward sloping • willingness to pay (WTP) • reservation price: max WTP • marginal benefits

15. P P0 CS A P* Q* Q Recalling Some Basics • Consumer Surplus: • gross total benefits • total purchasing costs • net total benefits

16. TC TC(10) TC(9) TC(8) TC(7) TC(6) TC(5) TC(4) TC(3) TC(2) Q 1 2 3 4 5 6 7 10 9 8 TC(1) Recalling Some Basics • Marginal Costs: • costs of each additionalQ • MC are rising • why? • MC and supply curve

17. MC Lost profits if producing 9 units Missed profits if producing only 7 units P*= MC(8) Q 7 9 8 Recalling Some Basics • Firm equilibrium: • max p MC = MR • competitive market  • MR = P* • why? • willingness to accept (WTA)

18. P MC1 MC2 MCT= MC1+MC2 P* Q1 Q2 QT Q Recalling Some Basics • Market supply: • horizontal sum of all firm supply curves

19. P Supply = MC P* PS Cost of goods sold Q Q*= 8 Recalling Some Basics • Producer Surplus: • gross total benefits (revenue) • total production costs: cost of the goods sold • net total benefits

20. P S P* D Q Q* Recalling Some Basics • Market equilibrium: • market vs. individual curves • price that clears the market • why? • equilibrium price • equilibrium quantity • decentralizedmechanism

21. P S Consumer surplus P* Producer surplus Cost of goods sold D Q Q* Recalling Some Basics • Welfare: • why to exchange? • benefits of exchanging • costs of exchanging • net social benefits • NSB = CS + PS • optimality • economic efficiency • at the equilibrium: • - P = MC • - WTP = MC • - MB = MC

22. P S = MC Consumer surplus A P* Producer surplus D = MB Cost of goods sold Q Q* Q*+1 Recalling Some Basics • Max NSB: • max CS + PS • a competitive equilibrium is a social optimum • Pareto optimality • FTWE: “under a set of speci-fic assumptions, any compe-titive equilibrium is Pareto optimal”

23. Recalling Some Basics • Market failures: • market power: e.g. monopoly • externalities:uncompensated effect on a third party, e.g. pollution, protection from floods • ill-defined property rights:e.g. pollution, open access • public goods: non excludability + non rivalry, e.g. landscape, knowledge • imperfect information: incompleteness or asymmetries, e.g. decisions under uncertainty, contract design (moral hazard, adverse selection)

24. Recalling Some Basics • Government failures : • Government intervenes to: • - correct for market failures • - achieve non-efficiency objectives • trade-off between efficiency and equity:e.g. price ceiling intervention • two kinds of policy failure: • - underpricing natural resources: e.g., timber or water subsidies • - rent-seeking or directly unproductive profit-seeking (DUP) • activities

25. P S Distribution effect Deaweight loss (efficiency) a P* b c P1 D Q Q1 Q* Recalling Some Basics Efficiency vs. equity: price ceiling policy PS CS Tot -c-b -a+b -a-b

26. P TSMC Demand PMC C PS D P* SMC E B A Q* QS Q Environmental Economics • Pollution: • negative externality • social marginal costs (SMC) • private marginal costs (PMC) • total social marginal costs: TSMC = SMC + PMC • total vs. marginal costs • internalizing a -ve externality • social vs. private optimum • - no 0 pollution • - balancing market and non- • market goals • what if a +veexternality? • NSB = C +D + E

27. WTP A WTP* Marginal benefits B E* Quantity of environmental improvement Environmental Economics • Env. Improvements: • marginal benefit curve • marginal benefits of envir. improvement vs. marginal costs of pollution • demand curve for envir. quality improvement • WTP for environmental quality improvement • trade-off between environm. improvement and other things we could do with income • total benefits to the society • total benefits vs. CS

28. WTP Marginal costs WTP* C E* Quantity of environmental improvement Environmental Economics • Env. Improvements: • marginal cost curve • environmetal improvement does not come for free

29. WTP Marginal costs A WTP* Marginal benefits B C E* Quantity of environmental improvement Environmental Economics • Optimum level of pollution/environm. improvement: • max NSB from environmental improvement: NSB = TB – TC MB = MC • socially efficient quantity of pollution • who should enjoy the benefits and who should bear the costs?

30. MB MC MD MC MC(A) MD(Q) WTP* MB(A) MC(Q) A* A Amax Q* Q Qmax Environmental Economics • Abatement vs. pollution damages: • Two ways to look at the same problem: • - max NSB  MB(A) = MC(A) • - min TSC  MD(Q) = MC(Q) • socially efficient quantity of pollution • who should enjoy the benefits and who should bear the costs?

31. Stock (X) XMAX B A XMIN C X0 Time Natural Resource Economics • Biological Model: • population growth curve: X=f(t) • logistics curve • carrying capacity: XMAX • minimum viable population: XMIN

32. dX/dt MSY X0 XMAX X XMSY Natural Resource Economics • Biological Model: • population growth rate:dX/dt =f(X) • identify A, B and XMAX • maximum sustainable yield • MSY  highest possible harvest

33. dX/dt H E4 E3 MSY E2 H3 H4 H2 E1 H1 X0 X4 X3 X2 X1 X XMAX XMSY Natural Resource Economics • Economic Model: • effort • if E   X  and viceversa • doubling effort does not mean doubling harvest

34. H H3 H4 H2 H1 E0 E2 E3 E4 E1 E EMAX X0 XMAX Natural Resource Economics • Economic Model: • harvest • H=f(E) • what about X?

35. TR TC HPROF TR TC HOA EPROF E0 EOA E EMAX Natural Resource Economics • Economic Model: • total revenue: TR=PH • total costs: TC=WE • single ownerequilibrium: (HPROF, EPROF) • - max p vs. MSY • - conservation • open access(i.e. no owner) equilibrium: (HOA, EOA) • - OA vs. max p vs. MSY • - conservation

36. TR TC HPROF TR TC HOA EPROF E0 EOA E EMAX Natural Resource Economics • Economic Model: • total revenue: TR=PH • total costs: TC=WE • single ownerequilibrium: (HPROF, EPROF) • - max p vs. MSY • - conservation • open access(i.e. no owner) equilibrium: (HOA, EOA) • - OA vs. max p vs. MSY • - conservation • The “Tragedy of the commons” (Hardin 1968)

37. harvest wait indifference year 1 year 0 Natural Resource Economics Introducing time: discounting Marginal product + Rate of capital appreciation = Discount rate V1 X1 P1 X0 P0 V0   = =

38. I H MEC A B MNPB C G E J O Q* F Qmax D Property Rights • Coase Theorem: • what is a property right? • Pareto improvement • sufferer’s property right • polluter’s property right • problems: • - transaction costs • - open access • - information gathering costs • - distributive impacts

39. Resource Management Regimes • private: • - individuals have a duty to observe the rules of use determined by the • controlling agency • - the agency has the right to determine those rules • state: • - individuals have the right to undertake socially acceptable uses and a • duty to refrain from unacceptable uses • - others have a duty to respect individual rights • common: • - amanagement group has the right to exclude non-members • -non-members have a duty to abide that exclusion • - co-owners comprise the management group and have rights and duties • related to the use of resources • open access (no property): • - no users or owners are defined • - individuals have the privilege but not the right to use resources

40. Renewable Resources and Games • prisoners’ dilemmagame: • - non-cooperative game • - isolation • - no binding agreement • - the resource must be privatized or be subject to some form of state • regulation and control • assurancegame: • - cooperative game • - interdependence • - binding agrrement • - overexploitation of renewable resources in open access and common • property situations can be solved by cooperative agreement • extensions: • - incentives/institutions • -repeated over time • - no single regime is universally best suited to the wise NR management

41. Costs Benefits MEC MNPB (MNPB – t*) t* O Q Q* Economic Instruments for Envir. Policy • Pigovian tax: • optimal tax • need to know: • - MNPB • - MEC • informationaymmetries?

42. Costs Tax A MAC2 MAC3 MAC1 t* B Y X C O Abatement S1 S3 S2 Economic Instruments for Envir. Policy • Pigovian tax: • low-costsolution to standard setting • standard at S2: TACst = OAS2 + OBS2 + OCS2 • tax t*: TACtax = OXS1 + OBS2 + OYS3 • TACst - TACtax= S1XAS2 - S2CYS3 • S1XAS2> S2CYS3TACst > TACtax

43. Why to Prefer Environmental Taxes? • directlyinto the pricesof the goods, services or activitiespolluter-pays-principle • create incentives for producers and consumers • more cost-effectivepollution control than regulations • spur to innovation • raise revenues which can be used directly to improve the environment Why Are Envir. Taxes Not Widespread? • uncertaintyabout thejusticeof Pigovian taxes • lack of knowledge of the damage function

44. Costs Benefits MEC S P* P MNPB O Qmax QB Q* Qst Economic Instruments for Envir. Policy • Envir. Standards: • command-and-control • need to have: • - monitoring agency • - penalties • only by accidentoptimal • for being optimal: • - standard at Q* • - penalty equal toP* • - certaintyof penalty

45. Taxes vs. Standards • taxes as least-cost solutions • taxes are dynamically efficient • administrative costs? • outright prohibition

46. Permit price, Costs S* MAC MEC P* P1 O Q* Q1 Q2 Economic Instruments for Envir. Policy • Marketable Permits: • Q*: optimal number of permits • P*: optimal price of permits • S*isthe supply curve • MAC curve = demand curve

47. Permit price, Costs S* MACT MAC2 P* MAC1 O Q* Q1 Q2 Pollution permits Economic Instruments for Envir. Policy • Marketable Permits: • cost minimization • low-cost polluters sell permits and high-cost polluters buy them

48. Permit price, Costs S* Reduced Gov’t supply, environmental reserve groups purchase Increased Gov’t supply of permits P** P* D D’ O Q* Pollution permits Economic Instruments for Envir. Policy • Marketable Permits: • new entrants • opportunities for non-polluters • inflation and adjustment costs • technological ‘lock-in’ • spatialissues • types of permit systems: • - ambientpermit system (APS) • - emissionspermit system (EPS) • - pollution offset(PO) system

49. Agricultural Pollution • Non-Point Source Pollution: • spatial diffusion • high variability: in space and time • - polluter’s responsibility (who?) • - pollution level at the source (how much?) • - ecological and economic damage caused (how?) •  traditional instruments cannot be used

50. Agricultural Pollution • Input-based instruments: • input taxes and subsidies • - the regulatory agency should know the private production function, but • - information asymmetries • input proxiesandempirical models • - information asymmetries • - other uncertainties