1Department of Agricultural and Resource Economics ARE 298/School of Public Policy PP 290University of California at Berkeley David ZilbermanFall, 2001ENVIRONMENTAL SERVICESTopicsCategories of Environmental ServicesTargeting and Policy DesignThe Role of CorrelationScale EffectsMarket Effects and SlippageOrganizational Structure and Environmental ServicesMulti-ObjectivesPolitical Economic ConsiderationsInformation ConsiderationsInhabitants’ RightsCategories of Environmental ServicesThere are several categories of environmental services. Some usefultypologies and partition of environmental services include:Pollution Prevention, Conservation, and Amenity Creation Activities.Producers, in particular farmers, have established de facto rights toconduct certain activities that have negative environmental effect. Theseinclude application of chemicals that may harm water quality, fish and wildlife, tillage practices that lead to soil erosion and build up of silt, andexcessive irrigation that lead to water logging. Farmers may be paid tomodify their activities and engage in sustainable practices.Many environmental services scheme are established to conserveresources, life styles, ecosystems etc. These include payment forpreservation of forest resources and wetland, purchasing of “development2rights” near cities to slow urban sprawl, payment to peasants to continue andplant and or raise traditional varieties and species, etc.A third category of policies aims at natural resources restoration andbuilt up. They include payment for clean up activities, planting of forests,restoration of wetlands etc.Purchase of Resources (or Resource Services) Vs. Payment for ActivitiesSome environmental services purchase resources or resource services.For example, producers may be paid for their water that will be used insteadfor, say, improving wetland or fishery conditions. Farmers may be paid fornot farming their land and instead will be planted with cover crops or trees.Forest communities will be paid for not harvesting their forests etc. Anotherset of policies will pay producers for modifying their production activities.These are “working lands” programs that may pay farmers for desirabletillage practices, for instance not using certain chemicals, etc.Targeting and Policy DesignA key issue in the design of an environmental service purchasing land isthe determination of what to buy and how much to pay. Severalconsiderations affect the “targeting” decisions.(1) Heterogeneity. There are differences in both environmental qualityand cost of resources in different locations. For example, consider thecase where we want to stop farming in a region so that native plantscan be restored. The lands may vary, both in terms of agriculturalproductivity and in value of environmental products. These variationsare reflected in the amount of purchasing funds willing to offer land atvarious locations.Suppose these are landowners in a region and let n = 1...N be anindicator of an owner. Assume constant benefit and profit per acre ofeach unit, but benefits may vary across units. Let bn be benefit per3acre of unit in that it has An acres. Let !nbe profit per acre of the n-thunit. Let this unit be order according to their !nbn ratio. So that unitwith n = 1has the lowest cost of providing benefits. We can nowconstruct the supply curve for benefits depicted below in Figure 1 onthe next page.a bdcA !µb4Pb!3b3 !2b2!1b1 A1b1 A1b1+ A2b2 A1b1+ A2b2+ A3b3 D B( )Figure 14Assume that society has a utility of environmental benefit V B( ). Themarginal benefit curve V B( )!V!B= D B( ) in a demand for benefits. Socialoptimism occurs at a point like A in Figure 1 when the demand intersectssupply. That will yield PB- social cost for environmental benefits.Under the optimal solution we will have a price PB, so that all units with PBbn<!n will be purchased for conservation. All the units with PBb <!nwillcontinue production, and that may be a marginal unit nx when PBbn!<"n!that will be partially conserved.The optimal policy can be carried out in two ways:(1) Offer farmers PBbnfor conservation. This solution equivalent tothe competitive market solution and units will accrue rent. InFigure 1 unit 1 will gain the area abcd under this arrangement.(2) The regulation should behave as discriminating monopsony andoffer the farmer units he wants to purchase !nper acre. In thiscase, the government (or buying agency) captures all the surplus ofthe transaction.In a case when an agency has a limited budget and knows both bn and !n, itwill maximize benefit by ranking lands according to their bn!nratio,paying these ongoing rents and capturing the entire surplus. Such anapproach may anger farmers because price per unit of benefits vary and theydon’t capture rent of environmental amenity.The Role of CorrelationSuppose the bn and !nare correlated. In the case of negativecorrelation, b = b1( ) is associated with low so that !b1is much smaller than !nb1and supply of benefit is rather steep.5 Pb !1b1b S2 S1Figure 26In the case with positive correlation, the !nbnratio may not varymuch S = S2( ). Even when the price of the amenities is the same-thedifference is distributional. Outcomes between market and discriminatorymonopsony solutions are substantial. Landowners will loose much morefrom the discriminatory solution when correlation is negative. If thecorrelation is negative and the purchasing fund is discriminatory, it willreach the optimal solution by targeting the deepest land. In this case, thebenefit maximizing solution also maximizes land purchased.If there is a positive correlation, in some cases it may be optimal totarget the highest quality land (that will be the most expensive). But if therelative difference is profits between high and low utility, lands is muchhigher than difference in benefits. Again the optimal solution is to target thelower quality land. If the lands are A1A2A3A4 (Figure 3) it is worth targetingthe highest quality reports A4. But if they are B1B2B3B4benefit maximizationsuggest targeting the lowest quality plots B1.Scale EffectsFrequently the design of a reserve requires minimum space to enablemovement of wildlife and diversity of conditions and opportunity.Therefore, the value of reserves and targeting opportunities depend on agreater confirmation.
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