The Economic Approach to Environmental and Natural Resources, 3e

Further Topics Part IV

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Agriculture and Public Policy • Another difference between agriculture and other pollution activities is that agriculture is often a price-supported 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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.

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.

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.

The Economic Approach to Environmental and Natural Resources, 3e