Opportunity Costs of Providing Crop Diversity in Organic and Conventional Farming: Would Targeted Environmental Policies Make Economic Sense?

Targeted environmental policies for farmlands may improve the cost-efficiency of conservation programs if one can identify the farms that produce public goods, or environmental outputs, with the least cost. We derive shadow values of producing crop diversity on conventional and organic crop farms to examine their opportunity costs of conservation. Non-parametric distance functions are estimated by applying data envelopment analysis to a sample of Finnish crop farms for the period 1994 – 2002. Our results show that there is variation in the shadow values between farms and the technologies adopted. The extent of cost heterogeneity and farms’ potential for specialization in the production of environmental outputs determine whether voluntary programs such as auctions for conservation payments are economically reasonable.