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Managing increasing environmental risks through agrobiodiversity and agrienvironmental policies

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  • Stefan Baumgärtner
  • Martin F. Quaas

Abstract

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, CO2 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.

Suggested Citation

  • Stefan Baumgärtner & Martin F. Quaas, 2010. "Managing increasing environmental risks through agrobiodiversity and agrienvironmental policies," Agricultural Economics, International Association of Agricultural Economists, vol. 41(5), pages 483-496, September.
  • Handle: RePEc:bla:agecon:v:41:y:2010:i:5:p:483-496
    DOI: 10.1111/j.1574-0862.2010.00460.x
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    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

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