Managing increasing environmental risks through agro-biodiversity and agri-environmental policies

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Managing increasing environmental risks through agro-biodiversity and agri-environmental policies

Author Info

Stefan Baumgärtner () (Centre for Sustainability, Leuphana University of Lüneburg)
Martin F. Quaas () (Department of Ecological Modelling, UFZ-Centre for Environmental Research Leipzig-Halle)

Abstract

Agro-biodiversity can provide natural insurance to risk-averse farmers by reducing the variance of crop yield, and to society at large by reducing the uncertainty in the provision of public-good ecosystem services such as e.g. CO2 storage. We analyze the choice of agro-biodiversity by risk-averse farmers who have access to financial insurance, and study the implications for agri-environmental policy design when on-farm agro-biodiversity generates a positive risk externality. While increasing environmental risk leads private farmers to increase their level of on-farm agro-biodiversity, the level of agro-biodiversity in the laissez-faire equilibrium remains ineciently low. We show how either one of two agri-environmental policy instruments can cure this risk-related market failure: an ex-ante Pigouvian subsidy on on-farm agro-biodiversity and an ex-post compensation payment for the actual provision of public environmental benefits. In the absence of regulation, welfare may increase rather than decrease with increasing environmental risk, if the agroecosystems is characterized by a high natural insurance function, low costs and large external benefits of agro-biodiversity.

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Paper provided by University of Lüneburg, Institute of Economics in its series Working Paper Series in Economics with number 80.

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Length: 36 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:lue:wpaper:80

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Find related papers by JEL classification:
Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
D62 - Microeconomics - - Welfare Economics - - - Externalities

This paper has been announced in the following NEP Reports:

NEP-AGR-2008-03-15 (Agricultural Economics)
NEP-ALL-2008-03-15 (All new papers)
NEP-ENV-2008-03-15 (Environmental Economics)
NEP-IAS-2008-03-15 (Insurance Economics)

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Salvatore Di Falco & Charles Perrings, 2003. "Crop Genetic Diversity, Productivity and Stability of Agroecosystems. A Theoretical and Empirical Investigation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(2), pages 207-216, 05. [Downloadable!] (restricted)
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