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Managing increasing environmental risks through agrobiodiversity and agrienvironmental policies

  • Stefan Baumgärtner
  • Martin F. Quaas

Agrobiodiversity 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, for example, CO 2 storage. We analyze the choice of agrobiodiversity by risk-averse farmers who have access to financial insurance, and study the implications for agrienvironmental policy design when on-farm agrobiodiversity generates a positive risk externality. While increasing environmental risk leads private farmers to increase their level of on-farm agrobiodiversity, the level of agrobiodiversity in the laissez-faire equilibrium remains inefficiently low. We show how either one of the two agrienvironmental policy instruments can cure this risk-related market failure: an "ex ante" Pigouvian subsidy on on-farm agrobiodiversity and an "ex post" payment-by-result 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 agroecosystem is characterized by a high natural insurance function, low costs, and large external benefits of agrobiodiversity. Copyright (c) 2010 International Association of Agricultural Economists.

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Article provided by International Association of Agricultural Economists in its journal Agricultural Economics.

Volume (Year): 41 (2010)
Issue (Month): 5 (09)
Pages: 483-496

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Handle: RePEc:bla:agecon:v:41:y:2010:i:5:p:483-496
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  1. Quaas, Martin F. & Baumgärtner, Stefan, 2008. "Natural vs. financial insurance in the management of public-good ecosystems," Ecological Economics, Elsevier, vol. 65(2), pages 397-406, April.
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