Identifying and Valuing NonMarket Outputs Provided by Multifunctional HouseholdFirms

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Identifying and Valuing Non-Market Outputs
Provided by Multifunctional Household-Firms

• David AblerPennsylvania State UniversityUSA

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Outline of Presentation

• The Concept of Multifunctionality
• The Complete Household-Firm and
  Multifunctionality
• Principal Research Questions Surrounding
  Multifunctionality
• Techniques for Valuing Non-Market Outputs
• Special Focus on Landscape and Open Space
  Amenities, with Emphasis on Data Collection Needs

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What Is Multifunctionality?

• An economic activity may have multiple outputs,
  some sold on markets and others not sold
• The market and non-market outputs are jointly
  produced (though not in fixed proportions)
• Some of the non-market outputs exhibit the
  characteristics of externalities or public goods
• Multifunctionality is not specific to agriculture

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Beneficial Non-Market Outputs in Agriculture

• Landscape and Open Space Amenities
• Cultural Heritage
• Rural Employment and Rural Economic Viability
• Enhanced Food Security
• Prevention of Natural Hazards (Floods,
  Landslides)
• Groundwater Resource Recharge
• Preservation of Biodiversity
• Sequestration of Greenhouse Gases

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Negative Externalities in Agriculture

• Loss of Biodiversity
• Water Pollution from Nutrients and Erosion
• Human Health Threats from Pesticides and Animal
  Wastes
• Animal Welfare
• Irrigation Overuse, Salinization
• Greenhouse Gas Emissions

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The Complete Household-Firm and Multifunctionality

• Farm households are producers and consumers of
  beneficial non-market outputs
• Farm households are affected as consumers by
  negative externalities
• A farm household can be affected by
• Its own non-market outputs and negative
  externalities
• Non-market outputs and negative externalities
  generated by other farm households
• Farm household preferences do not align with
  preferences of society at large

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The Complete Household-Firm and
Multifunctionality (Continued)

• Most beneficial non-market outputs are provided
  by small farms
• But most negative externalities are produced by
  large farms
• Farms closest to urban areas (and thus most of
  the social demand for non-market outputs) are
  small farms
• The behavior of small (and large) farms cannot be
  understood outside of the complete household-firm

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OECD Research Questions on Multifunctionality

• Is there a strong degree of jointness between
  agricultural commodity production and non-market
  outputs?
• If answer to 1 is yes is there a market
  failure associated with production of a
  non-market output?
• If answer to 2 is yes is government action
  required?
• What are the effects of agricultural policy
  reform and trade liberalization on non-market
  outputs?

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The Question of Jointness

• Is the degree of jointness with agricultural
  production strong or weak?
• Where there is strong jointness, is it national
  in scale, regional, or local?
• To what extent is jointness a function of the
  farming system rather than the intensity of
  production?
• Is it possible to de-link market and non-market
  outputs? At what effectiveness and cost?

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The Issue of Market Failure

• Is there a market failure or merely the absence
  of demand (and thus a market)?
• What valuation techniques are appropriate for
  estimating demand for non-market outputs in
  agriculture?
• Are demands national in scale, regional, or
  local?
• Can valuation studies produce sufficiently
  reliable estimates?
• Marginal effects
• Accounting for substitution effects

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The Issue of Government Action

• Which non-market outputs could be provided
  through market mechanisms?
• Which could be provided by community or
  environmental organizations?
• If government action is required, what is the
  appropriate level of government (local, regional,
  or national)?
• In trying to cure market failure, how can we
  avoid policy failure?

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Agricultural Policy Reform and Trade
Liberalization

• Will reforms intensify or extensify agricultural
  production?
• Will agricultural land be abandoned or converted
  to nonagricultural uses?
• What will happen to farm employment and labor
  devoted to non-market outputs?
• What will happen to farm size, structure, and in
  turn non-market outputs?
• What will happen to usage of environmentally
  harmful inputs?

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Research Findings to Date Negative Externalities

• Strong consensus here negative externalities
  joint with production to at least some extent
• Most options for partially de-linking negative
  externalities involve reducing the intensity of
  production
• Agricultural policy reforms would reduce negative
  externalities in most OECD countries

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Research Findings to Date Beneficial Non-Market
Outputs

• Jointness with agricultural production per se is
  generally weak
• What matters more are the existence of
  agriculture, land use practices, and agricultural
  structures
• Little research to date on options for partial
  de-linking and non-agricultural provision
• Research on valuation has been limited and
  results vary widely

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Valuation Techniques for Non-Market Outputs

• Methods Based on Individual Preferences
• Revealed preference techniques
• Stated preference techniques
• Methods Based on Opinions of Decision-Makers or
  Experts
• Methods Based on Public Policy Choices
• Revealed political preference analysis
• Simulated voting/town meeting techniques

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Revealed Preference Techniques

• Household Production Function (HPF) Approach
• Travel Cost Method
• Averting Costs / Replacement Costs
• Hedonic Price Analysis
• Simulated Markets

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Stated Preference Techniques

• Contingent Valuation Method (CVM)
• Open-ended format
• Discrete-choice format
• Choice Experiments
• Either/or format
• Contingent ranking format
• Conjoint Analysis

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Landscape Open Space Amenities What Do People
Value?

• Open Space
• The absence of development (congestion,
  pollution)
• Protection of wildlife habitat
• Landscapes
• Agricultural structures (barns, farmhouses, stone
  walls, hedges, canals, terraces, etc.)
• Topographical variation
• Colorful fields and meadows
• Variations in color and texture of vegetation
• Bodies of water (lakes, streams, rivers, etc.)
• Scenes of tranquility (e.g. cows in Swiss Alps)

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Implications for Data Collection

• Collect data on what people value
• Give priority to collecting data in areas where
  landscape and open space amenities are most
  important
• Ensure that landscape data can be integrated with
  socioeconomic data
• Matching data on a farm-by-farm basis
• Layering data within a GIS framework

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Current Data (USA) Primarily Land Cover and Use

• Satellite (Landsat) Imagery
• Multi-Resolution Land Characteristics (MLRC)
  Consortium
• Land Sample Surveys
• National Resources Inventory (NRI)
• Forest Inventory and Analysis (FIA)
• National Wetlands Inventory (NWI)
• Census and Census-Like Approaches
• Census of Agriculture
• Detailed local land use data (most urban areas,
  some other areas)

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Limitations of Current Satellite Imagery

• Land use categories are rough
• Land can be misclassified into the wrong category
• No data below a 30- or 15-meter resolution
• Virtually no data on agricultural structures

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Limitations of Current Land Sample Surveys

• A point of land does not a landscape make
• Sampling density is too low for reliable county
  or sub-county estimates in most cases
• Surveys are not done frequently enough to track
  rapid land use changes
• Virtually no data on agricultural structures

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Limitations of Existing Census Data

• Focus of the Census is on production, not
  non-market outputs
• Data on structures is not suitable from a
  landscape amenities perspective
• Land use and management practices are not broken
  down by farm field
• Census is every 5 years not frequent enough to
  track rapid land use changes

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Concluding Messages

• Understanding the complete household-firm is
  essential to understanding multifunctionality
• There are important unanswered research questions
• These questions cannot be answered without better
  data
• Even with better data, valuing non-market outputs
  will still be a major challenge

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For More Information

• OECD Multifunctionality Workshop
  (2001)http//www1.oecd.org/agr/mf/
• OECD, Environmental Indicators for Agriculture
  (3-volume series)