Cost–Benefit Analysis of Soil Degradation and Restoration - Principles of Sustainable Soil Management in Agroecosystems - page 232

species threatened by water pollution, which are not reflected in the market or gov-
ernment-regulated prices of agricultural inputs and/or outputs.
Figure 10.1 illustrates both the concepts of economic surplus and technological
externality. For example, at market price P , consumer surplus is equal to area PEC
and producer surplus is equal to area PEA. One might think of P as the market
price at equilibrium point E where marginal private cost (MPC) of the farmer is
equal to demand or marginal willingness to pay. Farm output at Q also includes the
joint production of soil erosion and/or surplus chemicals that impose social costs on
downstream watershed residents represented by P * and E *. One might also think
of this as producing residuals (sediment and chemicals) that exceed environmental
assimilative capacity. These external social costs are fully internalized at P ′ E ′ Q ′.
The shaded area BE ′ EA represents the net loss in producer and consumer surpluses
from the presence of the soil and chemical externalities or alternatively the net gains
from internalizing these external effects.
Once all quantifiable cost and benefit streams have been given prices or shadow
values, one must decide on an appropriate rate of discount or time value and a
criterion for evaluating and ranking the economic efficiency of alternative soil-
conserving strategies or programs. A long-standing controversy on the appropriate
discount rate centers primarily on those who support various private opportunity
cost versus social time preference measures. Baumol (1968) has written a classic
article dealing with the discount rate controversy.

S ´ MSC

P
C

S MPC

E*

P *
P ´

E´

B

E

A

D

Q ´ Q Q

Te chnological externality defined (Dasgupta and Pearce 1978)
1. Necessary condition
Phycical interdependence of production
and/or utility functions
2. Su€cient condition
Not fully priced or compensated
S = marginal private (e.g., upstream farmer) cost function
S ´ = marginal social (e.g., watershed) cost function
D = demand or marginal benefit function
Q = output quantity
P = price unity of output

FIGURE 10.1 Soil erosion as an externality.