Agriculture Reference
In-Depth Information
while any imputed interest on equity capital is a part of the return to equity capi-
tal. By contrast, Gittinger sees economic analysis as concerned with net economic
returns to the whole society, frequently based on shadow prices to adjust for market
or administered price imperfections. In economic analysis, taxes and subsidies are
treated as transfer payments, that is, taxes are part of the total benefit of a project to
society and subsidies are a societal cost. For purposes of this chapter, financial and
economic analysis will refer to private and social concepts of economic efficiency
analysis, respectively.
This financial versus economic distinction is important, but the complementar-
ity of these analytical approaches is equally relevant. Financial analysis provides
information on the profitability of a given soil erosion reduction practice (e.g., cover
crops or terraces) to individual entrepreneurs or investors and thus gives an indica-
tion of the incentive structure and potential adoption rate. Economic or social cost-
benefit analysis attempts to determine profitability from a societal standpoint, taking
into consideration externalities or environmental costs, pricing of underemployed
or unemployed factors, currency evaluation, etc. The appropriateness of these ana-
lytical alternatives depends on the question one is asking. Generally speaking, it is
relatively straightforward to assign values to the cost and benefit streams in financial
analysis; market prices suffice. However, this is substantially more difficult in full
social analysis.
Social costs and benefits or gains and losses from an economic perspective refer
to the aggregation of individual producer and consumer measures of full willingness
to accept or pay compensation. Individual preferences count in the determination
of social benefits and cost and are weighted by income or more narrowly by market
power. Since most policy changes involve economic gainers and losers, economists
have developed the concept of potential Pareto improvement (PPI) to add up gains
and losses to get net benefits. Simply stated, the concept holds that any policy change
is a PPI or an increase in economic efficiency if at least one individual is better off
after all losers are compensated to their original or before the policy change income
positions. The compensation need not actually occur but must be possible (Dasgupta
and Pearce 1979).
These measures of social costs and benefits are often not fully reflected in current
market prices (or in government-regulated prices) as in the case of crop production in
an area with high rates of soil erosion. This divergence results from several factors.
First, government subsidies of inputs and/or outputs can lead to levels of input use
and outputs in agriculture that are not economically efficient or environmentally sus-
tainable, particularly in the case of fertilizer, irrigation, and agricultural sediments.
Second, because there are consumers willing to pay more and producers willing to
sell for less than prevailing market or regulated prices, they receive what economists
call consumer and producer surpluses. Third, technological externalities in agricul-
tural production exist to the extent that, external to the production and consumption
of the resulting output, individuals, households, or firms experience uncompensated
real economic losses (or gains) from soil erosion, agricultural chemicals, or other
residuals. Finally, there may be willingness to pay to keep future economic options
such as hydroelectric generation open (see Veloz et al. 1984 and the related case
study later in this chapter) or willingness to pay for existence value of plant or animal
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