Natural Resources,the Environmentand Agriculture

Chapter 10

Topics of Discussion

Agriculture and the environmentEconomics of the environmentEconomics of resources in agricultureGovernment policies for agriculture,

natural resourcs, and the environment

Page 211Interactions with natural resources and the environment

Environmental and Natural Resources

Natural resources are part of the environmentEnvironment is a natural resourceEnvironmental Economics

Refers to the study of flows, such as pollution, that affect others

Natural Resource EconomicsThe study of natural assets that are valued for their

productive capacity

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Agriculture and the Environment

Water pollutionAir pollutionGlobal warmingOther environmental impacts

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Water pollutants are known to cause cancer. Agriculture is leading contributor to water pollution in US.

What are PCBs?

• Polychlorinated Biphenyl - a synthetic, organic chemical once widely used in electrical equipment, specialized hydraulic systems, heat transfer systems, and other industrial products. Highly toxic and a potent carcinogen

• PCBs were a common industrial discharge up around the 1980s and they are now a huge problem.

• Some companies paying billions of dollars to deal with these nasties

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The greenhouse effect is caused by an increase in atmospheric gases that trap solar radiation, gradually warming the earth’s surface.

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Temperature record over the past 150 years

The latest science

• National Academy of Sciences, “the warming trend in the global mean surface temperature observations during the past 20 years is undoubtedly real and is substantially greater than the average rate of warming in the 20th century.”

• August 17, 2000• “10 Arctic scientists have reviewed nearly 40

years of polar research… Their new survey paints a picture broadly consistent with climate-model forecasts.

• Mark Serreze, the survey's lead author: "Now, I'm definitely leaning very hard toward accepting the notion, although I haven't toppled yet."

Other Environmental Issues

• Odor– Can be a health hazard– Can depress nearby property values

• Endangering plant and animal species– Endangered Species Act (ESA)– Agriculture is one of many forces that can threaten

species by encroaching on or contaminating their habitat• Open spaces and traditional landscape

– Other people move to these areas and pay premium prices for lots surrounded by farms and/or open spaces

Economics of the Environment

• Does the environment has value?

• Demand and supply for environmental improvements

• WTP – willingness to pay to decrease or abate pollution

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Efficient level of abatement: as long as WTP is greater than MC, society’s net benefit can be increased by increasing abatement.

So will a market actually arise for environmental improvements leading to a socially optimal

outcome?

Unfortunately, the answer is no since the characteristics of efficient property rights usually are not satisfied for

environmental goods.

Property Rights – privileges and limitations that are associated with the

ownership of a resource.

Efficient Property RightsEnforceability: security of individual rights

Without this, no one would buy a good because it can taken away from them without permission.

Transferability: can be transferred from one individual to anotherWithout this, no market can arise because their sale is not

allowed.Exclusivity: all associated benefits and costs are received by only

the owner of the assetExternalities – consequences of the use or ownership of a

resource that befall someone other than the ownerE.g., farmers do not pay the cost that might be imposed on

downstream anglers due to declining water quality.

Page 218Efficiency and damage from externalities

Figure Explanation• Assume producing at Qm also causes pollution• Neither producers nor consumers of good take these into

account – external to the market• Social MC = MCs = MCm+E• additional cost at Qm= Qm x E = 2+3+5• Net social benefits = (2+3+4) – (2+3+5) = 4-5

• So net social benefits could be increased by supplying less of Q

• So with presence of externality - the free market will not achieve the socially efficient level of production

Cost Effective Environmental Policies• When negative externality exists, the free market will not lead to a

socially efficient outcome.

• The issue of free-riding (e.g., fishermen could be organized and pay E to convince farmers to reduce their production; farmers required to pay the fishermen for the right to pollute)

• As a result, government is frequently involved when externality problems arise.

• Due to difficulty of getting WTP and MC estimates, environmental govt standards are rarely set at socially efficient levels.

Cost Effective PoliciesCommand-and-Control policies

Regulations on technology or restrictions on practicesDoes not take into account heterogeneity of polluters

Taxes and subsidiesTax on pollution or subsidy for abatement

Transferable rightsRights to pollute can be bought and sold by polluters, moving the

permits to pollute to those firms for which abatement is most expensiveGovernment can control overall level of pollution and leave the

allocation up to the market

SummaryEconomists play a role in designing

policies that affect the environment and natural resources.

Incentives matter when designing policies to achieve desired objectives.

Agriculture impacts the environment through water pollution, air pollution, global warming among other ways.

Government plays an active role in guiding and regulating the use of resources and impact on environment.

Chapter 11 discusses other forms of governmental intervention, including price and income supports…