The Economics of Soil Erosion: A Model of Farm Decision-Making

Soil erosion is widely considered to be a serious threat to the long-term viability of agriculture in many parts of the world. The problem is particularly serious in certain developing countries. This paper examines key factors affecting smallholder farmers, decisions about soil depletion and conservation. The analysis focuses exclusively on the on-site productivity losses due to soil erosion in an attempt to understand farmer behaviour, thus ignoring any externality effects or off-site costs. The physical processes of soil erosion are described and its economic effects are reviewed, drawing on theoretical and empirical studies to date. Contrary to arguments that farmers are not aware of the extent and effects of erosion, an economic rationale for them to deplete their soil may be found in relatively simple conceptual models. While much of the research focuses on the North American context, this paper emphasises the relevance of economic models for analysing the situation in developing countries. A simulation model is presented and used to describe the economic consequences of soil erosion for smallholder agriculture in Malawi. Simulation analysis indicates that few conservation measures will be attractive to smallholder farmers due primarily to the low productivity of this sector. The results highlight how incentives to invest in alternative cropping systems are influenced by a number of factors, including the initial and ongoing costs, the sensitivity of yields to erosion and the farmer's discount rate. The study also compares alternative measures of the benefit of different cropping systems to the farmer and explores the implications of the results for agricultural pricing policy.