The Economists’ Viewpoint On Conservation Incentives
The market provides many incentives for soil
conservation. Conservation measures can
add to a farmer’s bottom line by improving soil quality and hence productivity,
by protecting productivity over the long run, by conserving water, or reducing
costs and more. Nevertheless, additional
incentives are used by the state in virtually all soil conservation programs
around the world. Presumably, these
incentives are offered to overcome insufficient market incentives for land
users to adopt enough conservation measures on their own. Incentives are inducements for soil
conservation that are designed and implemented by an external body (governments
or non government) to influence the conservation behaviour of land users
towards a predetermined conservation goal. They are aimed at making
conservation more economically preferable than non-conservation. Incentives for soil conservation compete with
incentives for land degradation. In the
later case, land users may find it more profitable to degrade land than
conserve it due to production externalities or other market failures like the
inability to borrow capital. When
private and social objectives don’t match, society often offers incentives to
internalize the externality costs.
Incentives for soil conservation are not always required,
but are sometimes needed under any of the following three circumstances: (1)
conservation investment is socially profitable, but not privately so, (2)
private land users are unable to invest in profitable conservation practices,
due to various institutional and technical constraints, and (3) failures of
policies and markets distort the economic desirability of soil conservation. In the first case, the costs of soil
conservation are not fully recouped because some of the benefits accrue off the
farm, due to externalities. In the
second case, the competition axiom of economic theory is violated, leading to
market failures that disable a producer from making optimal management decisions. A producer may not, for example, be able to
get a loan for conservation even though it is a profitable thing to do. In the third case, goods and services are not
priced correctly, which leads people to over or under invest. The price of soil conservation is under
priced and the value of products is relatively over priced. If conservation practices are privately
profitable, and land users are able to make the optimal investment, there is
little need for the public to intervene.
Incentives can be direct or indirect[1].
Direct incentives are targeted at specific objectives and encourage land users
to conserve soil by providing rewards for change in conservation behavior.
Direct incentives can take the form of cash payments (eg. grants, loans,
subsidies) or in kind payment (eg. supply of implements, tree seedlings).
Indirect incentives on the other hand encourage land users to conserve soil by
improving the economic environment under which they operate. Indirect
incentives can take the form of fiscal and legislative measures (eg. taxes,
input and output price policies, land tenure arrangements, exchange or interest
rates), or services (eg. extension, technical assistance, marketing,
information and education). As we show in each of the three case studies, indirect
incentives are generally believed to be more effective in achieving long-term
change in conservation behavior of land users, although direct incentives can
be quite important in the short- and medium-terms. Economic incentives may also take the form of
internal as well as external, depending on the source. Internal incentives are
those that the farmer considers for making a farm profitable, such as planting perennial
trees. External incentives are not needed if the trees
are profitable. External incentives come from outside the farmer’s
production decisions. They could be from
the government in the form of direct or indirect incentives as discussed above.
This paper examines private land users’ incentives to adopt
soil conservation measures. Understanding
how private land managers see soil conservation incentives is critical to the
success of any program to promote conservation measures, and ultimately to
optimal social management of soils. Incentives can be effective only to the
extent they address conservation problems as perceived by farmers. In this paper, we explain how economists view
private incentives in the context of social incentives with the hope that it
will improve the efficiency of public programs aimed at managing soils. Three case studies from
The Market and Public Incentives
The first question that needs to be addressed is who wants
conservation and why? If it is
producers, then they will adopt conservation without the need of outside
incentives. However, if society desires even
more conservation, for environmental benefits for example, then it will have a
direct interest in providing the right kind of incentives. We know from experience that incentives sometimes fail (Reed,
1999; Enters, 1999, Sanders and Cahill, 1999; Pagiola, 1999). For example, in our paper about the
For
example, as we show in the
Of course,
if incentives are to be successful, they will need to account for sociological
and psychological factors that effect human behaviour (Sanders et al., 1999;
USDA, 1987). Nevertheless, some sort of
financial incentive is probably going to be required to get a majority of
producers to the level of conservation that most citizens desire (Sanders and
Cahill, 1999; Hoag, 2004). That is, the
foundation for adopting conservation is profit (Miranowski and Cochran,
1993). Turkelboom et al. (1993) found
that many farmers will have to be compensated to adopt conservation measures
because they would be foregoing revenue for the benefit of the environment and
society.
Another important question regarding public and private
support is who should pay. The primary
economic benefit of conservation to farmers is saved productivity. Studies show that erosion reduces yields from
about 0 .15 percent per year (Napier, 1990) to 0.05 percent per year (Crosson,
1984). On the other hand, off-site
damages seem to dwarf on-site losses. For
example, siltation can cost 4.5 percent of gross returns (Smith, 1992) or more
than 90 times more than the highest estimate of on-site productivity costs.
Another example is wind erosion, which has off-site costs 40 times greater than
on-site costs (Huszar and Piper, 1986).
The question of who should pay is difficult to address. However, two things seem obvious:
Observation 1:
From an economic standpoint, society has much more interest in curbing
erosion than private land owners, possibly having nearly 100-1 times the
benefits that producers have.
Observation 2:
The public will have to provide incentives, whether stick or carrot, to
encourage land users to adopt optimal levels of conservation.
These two observations can be addressed through a simple utility
model as presented below.
A Simple Model
Conceptually,
a definition of utility can include just about every conceivable cost or
benefit from conservation, whether it is financial or otherwise, although it
would be impossible to include them all in practice. Keeping the definition simple is useful for
expository purposes and does not alter any of the points that we wish to make
here. Let the utility of society (s) for
conservation be:
(1)
Society
gets utility from conservation because it produces desired objectives, Oi,
subject to a complex web of constraints, C.
Social, or community, objectives include: productive capacity of the
land, flexibility of land for a range of purposes for the community, landscape
values, and habitat (Sander and Cahill,1999). Specifically, conservation may enhance
wildlife populations for hunting, viewing or preservation, reduce damages to
public waters that inhibit fishing and recreation, or curb air pollution that
affects public health. Of course, there
are also considerable constraints on adoption.
Constraints,
C, are not the main focus of this paper, but their importance bears
mentioning. Constraints can be grouped
into three categories: physical, economic, and socio-political. In some cases physical limits could be
overwhelming. There may not be enough
trained conservationists, revegetation material, equipment, fuel, natural
fertilizers, or infrastructure to get the task done. In the
Maximum
utility from conservation is a function of the objectives and the weights put
on each objective. Weights for society
are usually not stated, and they are complicated since they are the culmination
of political wrangling by disparate social interests. Nevertheless, weights do exist and they can
be imputed once a policy is chosen. For
example, Reichelderfer and Bogges (1988) estimated the weights Congress used
when constructing the rules of the Conservation Reserve Program (CRP) in the
We are
interested in the role of economic incentives on the adoption of soil
conservation measures. So far, we have
shown that the public will derive utility from conservation where benefits (the
sum of objectives times weights) exceed the costs and constraints, C. It is important to recognize that the private
land user’s incentive structure is embedded in equation 1. Which leads us into the next observation:
Observation 3: Land users care about the same
things that society does, but they weight them differently.
For
example, a producer cares a lot more than society about whether a production benefit
or cost occurs on the land, and would usually weight something like lake
siltation less than reduced productivity.
On the other hand, the public cares about farmers making money, but might
weight siltation greater than farm profitability. We can exploit this relationship to examine
economic incentives from the public and private perspectives by isolating
private land user’s incentives. In
practice, there is an overlap between private and social incentives. However, isolating private incentives reveals
the minimum residual that the public has to consider for their own cost-benefit
evaluations. That is, the public needs
to know how much more incentive is required for adoption.
A private
individual’s incentives can be represented by dividing objectives, O, into two
groups, profit, O∏ and
everything else, Oi ≠ ∏. By profit, we mean net financial returns:
(2) O∏
=
Y P(Y) – x Px(x) – FC
- CC
or
Profit =
Gross Returns [Y P(Y)] -Variable Costs [x Px(x)] - Fixed
Costs [FC] - Conservation Costs [CC]
where Y is
yield or output, and is function of variable inputs, f(x); output price, P, is
a function of yield; input price, Px, is a function of x; and fixed
costs are represented by FC.
Conservation costs, CC, can be variable or fixed but are aggregated for
our presentation. By everything else,
we mean on- and off-site costs and benefits that are not valued by the
market. On-site benefits of conservation
that producers care a relatively lot about include preserving family history,
personal stewardship values, wildlife, and water. Off-site values that they would probably
weight less, or even zero, include these same things, but when they occur off
the farm. For example, there could be a
lake on farm that is polluted, but off the farm we are concerned with siltation
shortening the lives of reservoirs and making navigation difficult, or harming
wildlife that live off-site. The public
values off-site, non-market impacts more than an individual.
Profits and Non-market Benefits
So far, we have stated that
incentives are a function of market (individual profit) and non-market (on and
off-site) incentives. Pagiola (1999)
developed a simple illustration about how a land user compares profits from a
conventional, degrading system to a conservation system (Figure 1). A conservation system starts out less
profitable than the degrading system, but improves over time. A degrading system decays continually. The returns to both systems decay in the long
run because future dollars are discounted (discussed later). At first, there are losses to the
conservation system, as indicated by the difference between the solid curve
(conventional) and dashed curve (conservation).
However, the conservation system catches up in time (breakeven is about
year 8 in this example) and then provides a stream of long run benefits. A system (e.g. conservation) is profitable if
the discounted long-term benefits exceed short-term losses when compared to
another system (no or less conservation); that is, the area between the dashed
and sold line is greater on the right of breakeven than on the left. The dotted line represents benefits to
conservation when net non-market (off-site and on-site) benefits are included. From the public’s viewpoint, short-term
losses are lower, as shown by the smaller difference between the dotted and
solid lines, and long-term benefits are higher.
Of course, in practice the streams could be very different from the
example shown in figure 1; sometimes conservation would be profitable and other
times it would be unprofitable. A
private solution will approach the social optimum for landowners that place
more value on non-market benefits. Nevertheless, there will be a difference
between optimal social and private conservation levels because a producer’s
private interest is included in the social total. Finally, private individuals and the public
both value non-market goods and services, but a producer probably places
relatively more weight on on-site, non-market attributes.
A producer’s
economic incentives will depend on a comparison of the discounted flow of
profits for each system. Discounting is an important topic that is often
ignored in the non-financial world.
Simply put, comparing a dollar today with a dollar in the future is like
comparing apples to oranges. For
example, if one dollar is put into a bank today at 10 percent interest, it
would be worth a $1.10 next year. If it
were left there another year, it would be worth 1.1x1.1 = $1.21; and in another
year the money would grow to $1.33. Future
value = present value *(1+interest rate)number
of periods (n). Or, FV = PV*(1+i)n. Likewise, a $1.10 next year is only worth
$1.00 to me this year; or, PV = FV/(1+i)n. This is important because many of the
benefits of conservation occur in the future at a discounted rate, especially
to the land user. For example, a yield
savings worth $100 in 20 years from now is only worth only about $15 today at
10 percent interest. Therefore, the costs of conservation usually occur in
the present at full value, while the benefits occur in the future at a
discounted value.
Observation 4:
Conservation systems are disadvantaged because many of the benefits
occur off-site and because conservation investments in today’s dollars are
weighed against discounted future benefits.
Elemental Incentives
Related to Profit
In Table 1,
we put equation one into tabular form with columns for gross returns, variable
costs (short run), fixed costs (long run), and conservation costs. We then looked at three conditions that could
effect profits, and likewise conservation, by having an impact on one of these
profit components. First, macroeconomic
forces, the economic world away from local forces, can influence conservation values
(Miranowski, J. and M. Cochran, 1993).
Second, the personal physical and business environment can effect when
conservation is profitable. For
example, some farms have good soil that is easy to conserve while others have
poor soils that are difficult to conserve.
And third, local, regional and national policies will affect
conservation. We proceed with a
discussion about how these conditions may affect each of the elements of profit
and, ultimately, the adoption of conservation measures.
Gross Returns
Gross
returns equal price multiplied by yield.
The more the return, ceterus paribus, the greater the
profit. When gross returns are high,
producers will push land harder for yields, whether it is more land or more
inputs per unit of land. Generally, this
makes conservation less attractive.
However, for some people, higher yields or prices make conservation more
likely, because it provides them with the cash to afford conservation
measures. It is difficult to tell which
force outweighs the other. Studies in
the
At the
macro level, the world economy can profoundly influence conservation by the
amount and constitution of the products the world demands and by the prices it
offers. Countries set exchange rates
that make prices more or less favourable.
Products can be in excess demand one year and excess supply the
next. The world economy and exchange
rates are, therefore, two important determinants of incentives. The discount rate is also a macroeconomic
phenomenon. It is important for
conservation because it determines how much future benefits will be
discounted. A high discount rate reduces
the value of higher future gross returns from conservation.
From a
personal physical and business environment standpoint, we identified four
important factors. First, the
biophysical environment will influence gross returns because it determines
yield, and how yields will respond to conservation measures. Every farm responds differently to
conservation. Second, the impact of
erosion on productivity will be a factor.
Some soil can mitigate damages to yields from erosion while others
cannot. Third, the value of production
will depend on the local agribusiness community. Not everyone has an opportunity to sell
organic produce for example. Many
regions produce what they have the infrastructure to process. Fourth and finally, the impact will depend on
technology. Consider Figure 2. Soil depth can be thought of as an input of
production; hence, erosion moves a producer from right to left on the
production function. However, technology
is shifting the production function up at the same time, offsetting some or all
of the erosion losses. In the example
shown in Figure 2, soil depth starts at 18 inches. For this
Finally,
from a policy standpoint, commodity price and income support programs can have
profound impacts on gross returns, by improving returns, as described above, or
by influencing crop production.
Commodity programs in the
Many
macroeconomic factors will affect gross returns, and are too vast to discuss in
detail here. By way of example, exchange
rate policies can raise the price of outputs, or a rise in interest rates can
raise the price of inputs. Any policy that affects prices will have an impact
on gross returns. Government price risk
programs, such as crop insurance and futures markets, can also influence
conservation efforts. Unfortunately,
there are probably more circumstances where degrading practices will be pursued
when risk is curbed than circumstances where conservation practices are
pursued.
Finally,
education and technical assistance will make a difference. Educated producers can better take advantage
of conservation than uneducated producers.
Nevertheless, sometimes education is counterproductive to conservation,
as is the case in much of the
Variable or Short Run Costs
Variable
costs can also be either a help or hindrance to conservation. Higher costs make profits lower and, thus,
conservation less likely (unless the conservation itself increases revenues or
lowers costs). Infrastructure to deliver
inputs is very important at the macro level.
Producers that cannot get inputs can’t use certain products. For example, there was not enough native
grass seed for all the land put into the Conservation Reserve Program in the
For the
personal environment, the biophysical environment is just as important for
costs as it was for yields. Other
factors that are important are education and technical assistance, or the
ability to apply known technologies, and risk and uncertainty, since this will
influence the level of risk reducing inputs used. For example, nitrogen is usually over applied
when there is uncertainty about the weather, because it is cheaper to waste
nitrogen when there is too little water than to lose yields when water is
abundant.
Finally,
policy makers have a lot of ability to influence input use. Many locations face more than one constraint
due to local, regional, or national environmental compliance standards. It is often more expensive to farm when
conservation is required, but conservation is increased. Alternatively, the government can use a
carrot approach by offering cost sharing or tax breaks.
Fixed or Long-Run Costs
Fixed costs
include things, not very related to conservation, like buildings and land. We include a brief discussion here only for
completeness. For simplicity, we also
include capital goods like tractors, since they last more than one year. Most of these costs have little to do with
conservation, since the ones that do are listed below in conservation
costs. However, at the macro level, the
discount rate will be a factor. In
addition, these costs can be and often are influenced by policies such as
building codes or clean air standards for tractors that enforce environmental
compliance or subsidies that encourage using long-term capital, such as
renewable energy.
Conservation Costs
Most conservation
technologies cost something to apply.
Some conservation practices are paid for up front, like a no-tillage
drill or conservation terracing, and last more than one year. Other practices will incur an annual
cost. No-tillage, for example, will save
money on fuel, but could cost more for weed management. Both short and long run costs for
conservation will be greatly influenced by the land user’s personal physical
and business environment. These costs
will vary significantly for every land user, and attempts to make general
statements are futile. Regional
variations in weed, pest, soil and weather patterns make the costs significant
for one person and trivial for another.
Every situation should be evaluated independently. Fixed costs will be influenced at the macro
level by the discount rate. Higher rates
will typically discourage conservation, unless the conservation method is a way
to avoid costs. Of course, policy makers
develop many programs that either regulate or reward conservation activities.
Non-Market Considerations
The
discussion above focused on profits. A producer will also consider non-market
benefits, and society may wish to address the residual needs at a minimum. Non-market simply means that the market does
not price the good or service, not that it does not have value. The problem is that these values cannot be
observed. For example, a producer might
adopt a conservation practice for which s/he loses $10 per hectare. This implies that there is some other value,
not priced by the market, that is worth at least $10 to that individual. Perhaps improvement in wildlife habitat is
more valuable.
Non-market
values tend to fall into two categories, use and non-use. The recreational value of hunting a deer is
use, while the benefits received hunting deer with a camera is a non-use. A landowner cares about both of these values
and so does society. However, the public
might care more about the bequest value of a better environment, preserving the
option for future generations to see resources the way we see them now, or even
to know that a species exists.
Furthermore, when problems occur off-site, a producer is imposing a cost
on someone else, called an externality.
Externalities include things like increased costs on water recreation,
water storage, navigation, fishing, and water treatment. Smith (1992) estimated that these off-site
costs could be as high as 16 percent of gross returns, with a mean of 4.5
percent. That is, every dollar a farmer
earns imposes 4.5 cents of damage on someone else.
Concluding Remarks
Many of the
economic concepts presented here may be familiar to most people that read this
manuscript. Nevertheless, it has been a
valuable process for us to lay everything out in tight order. This has been an especially beneficial way to
summarize the literature about economic incentives. We showed that the public and private sectors
value the same things, they just value them differently. This means that incentives must be developed
to account for the different weights and that some incentives may have to be
carried on indefinitely if conservation is to be maintained. The point is that incentives differ. Furthermore, we showed that the public sector
has many times more benefit by providing incentives than the farmer does to
provide them on his or her own. What
this adds up to is that there is no fundamentally correct set of incentives
that will encourage adoption of socially desired levels of conservation that
does not have to be sustained. Getting incentives right matters and can save
taxpayer dollars, but supplementation will always be required because social
and private objectives do not perfectly overlap.
Finally, we
tied economic concepts to the literature where it was available. We showed that findings in many studies
support our propositions.