Policy Choices about Agricultural Externalities and Sustainability: Diverse Approaches, Options and Issues

This paper reviews agricultural externalities as a source of market failure and as a reason for a lack of sustainability of agricultural incomes and production. It concentrates mainly on environmental externalities (which include biodiversity loss) but consideration is also given to externalities involving adverse selection. Types of agricultural externalities are classified and their nature is explored. Depending on their type and nature, different policy implications often follow. For example, no intervention may be required, or it may be reasonable for a farmer to have to pay to create an unfavourable externality or be paid to moderate or eliminate it. Adverse selection is also an externality phenomenon and some of its implications for agricultural policy are explored. Traditionally, environmental economics has focused on economic efficiency in formulating policies for environmental regulation but equity is also important in relation to public policy. The implications of various equity principles for designing policies to address the occurrence of agricultural externalities are outlined. Attention is subsequently centered on the economic practicality of agricultural environmental policies when account is taken of transaction costs and knowledge limitations, as well as the political and social acceptability of such policies. These factors can alter the choice of ideal policies. Biodiversity change (conservation and loss) involving agriculture is considered as a particular case. By showing the relevance for agricultural policy of diverse foci, this study accords with the polycentric approach of Konrad Hagedorn. His approach should make us wary of cut-and-dried specific but narrow policy solutions that characterise traditional environmental economics. The "exactitude" of these solutions appears in many cases to be obtained at the expense of relevance.