Agriculture Reference
In-Depth Information
10.2 MEASURING COSTS AND BENEFITS
What passes for “economic” analysis of various soil degradation and restoration
scenarios/management strategies varies widely and can be placed within an
“accounting stance” continuum regarding both space and time. One end includes pri-
vate individual or firm-oriented, engineering-type financial analysis utilizing current
market or administered prices of inputs and outputs. At the other end are societal
and intergenerational efficiency concerns and income distribution analysis, includ-
ing consideration of both weighted and unweighted income distribution impacts. In
between lie a series of adjustments or shadow pricing methods to account for full
opportunity cost, willingness to pay, elasticity of supply and demand, unemployed
factors, externalities, economic surplus, and overvalued currency considerations.
Margolis (1969) suggests why private market prices may not reflect full social
benefits or costs with the following:
… there are many cases where exchange occurs without money passing hands; where
exchanges occur but they are not freely entered into; where exchanges are so con-
strained by institutional rules that it would be dubious to infer that the terms were
satisfactory; and where imperfections in the conditions of exchange would lead us to
conclude that the price ratios do not reflect appropriate social judgments about values.
Each of these cases gives rise to deficiencies in the use of existing price data as the
basis for evaluation of inputs or outputs.
Costs generated from engineering data and future revenues based on current mar-
ket prices can be misleading, particularly if one is concerned with societal costs and
benefits. These “costs” generally do not represent full opportunity costs or highest
use value of all factors of production such as the value of the farmer's time in imple-
menting soil erosion and related sediment control during the busy spring planting
season. Alternatively, the opportunity cost of labor is less than the wage rate in those
situations involving underemployed or unemployed labor. Costs based only on engi-
neering data may also omit major technological externalities from soil erosion such
as flood damage, water pollution and ditch, harbor, and reservoir sedimentation.
“Revenues” may also be overstated, particularly in those cases where local cur-
rency is overvalued (which is the case in many developing countries) or where a
relatively inelastic demand exists for the end product(s). The inelastic demand situ-
ation refers to those cases where an increase in supply results in a disproportionate
decrease in price. Ward (1976a,b) discusses the use of shadow exchange rates to
adjust for overvaluation of local currencies and the Bruno Criterion to evaluate the
foreign exchange saved or earned by alternative erosion control strategies. This is
particularly relevant in evaluating erosion control strategies in developing countries.
Frequently, these countries are dependent on hydroelectric power as a major domes-
tic energy source. Sedimentation of reservoirs reduces power output and may lead to
increased importation of oil.
Gittinger (1982) argues for distinguishing between financial and economic analy-
sis, where financial analysis refers to net returns to private equity capital based
on market or administered prices. Financial analysis also treats taxes as a cost and
subsidies as a return; interest paid to outside suppliers of money or capital is a cost,
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