1

Natural

Resources,

the Environment

and Agriculture

Topics

• Agriculture and the environment

– Land use in the U.S. and Texas

– Chemical use

• Property rights

– Externalities

– Public goods

• Pollution

• Ecosystem services

• Potential solutions

Source USDA/ERS Major Land Uses Data - 2012

Land Use in the U.S. - Acres

2

Land Use in the U.S. - %

Source USDA/ERS Major Land Uses Data 2012

Land Use By State - %

https://www.ers.usda.gov/publications/pub-details/?pubid=84879

Shifts in Land Use – U.S.

3

• Figure 1. Texas'

Population density

as reflected in

nighttime

illumination (Data

Source: National

Geophysical Data

Center, 2003).

Population Density - Texas

Source IRNR http://irnr.tamu.edu/Default.aspx

Population Growth – Texas

Source https://nri.tamu.edu/news/2017/september/texas-land-trends-report-shows-changes-in-rural-working-lands-operators/

Growth 1997-2012 and projected growth to 2050

Shifts in Land Use – Texas

Source https://nri.tamu.edu/publications/research-reports/2019/changes-in-texas-working-lands-5-year-summary-report/

4

Brazos County: Roads and city boundaries

College Station: Original city boundary at incorporation in 1938

1938 - 2010

5

U.S. 2012Notice the Bakken and Eagle Ford Oil Fields – did not show up in 2010 Picture

Eagle Ford

Water Pollutants

Agriculture Related

6

Source USDA/ERS

Nitrogen Use and Price Index

Nitrogen 1960 -2015 Prices 1960 - 2018

Source USGS https://www.usgs.gov/mission-areas/water-resources/science/trends-water-use

Water Use in the U.S.

Source USGS

https://pubs.er.usgs.gov/publication/fs20183035

Summary of Water Use in the U.S. 2015

7

Source USGS https://www.usgs.gov/special-topic/water-science-school/science/total-water-use-united-states?qt-

science_center_objects=0#qt-science_center_objects

Source and Use of Water in the U.S.

Source USGShttps://www.usgs.gov/mission-areas/water-resources/science/trends-water-use

Water Use in the U.S.

Source USGS

https://www.usgs.gov/special-topic/water-science-school/science/total-water-use-united-states?qt-science_center_objects=0#qt-science_center_objects

Water Use by State

8

Agriculture and the Environment

• Agriculture (crop + grasslands) / Forests

– 84% of land use in the lower 48 states

• Use varies by region / state

• Losing agricultural land to urban / other uses

– Problem is not necessarily the amount of land but

type / location of the land

• Agriculture major contributor to pollution

• Agriculture major water user

• BUT – we can not live without agriculture

Environmental Issues

• Multitude of issues

– Range from individual (land degradation) to regional

(water pollution) to global issues (global warming)

– AGEC 350 Environmental and Natural Resource

Economics

– AGEC 422 Land Economics

• Discuss two issues

– Pollution – externalities

– Ecosystem services – public goods

Optimal Level of Pollution

Q*

$

Marg

inal cost

MC of Damages

MC of Control

Quantity pollution emitted

MC*

Key – optimal level does not

equal zeroQ* depends on the shape of the curves

Technology, pollutant, human impacts,

location etc.

Set MC Damages =

MC Control

Why?

9

Quantity pollution emitted

0 Q* Qm

$

Marg

inal cost

MC

DamagesMC Control

MC*

Optimal Control Level

Total cost

of Control

Total Costs

Of Damages

Quantity pollution emitted

0 Q1 Q* Qm

$

Marg

inal cost

MC

DamagesMC Control

MC*

Controlling Too Much

Total cost

of Damages

Total Costs

of Controla

b

MC Control

Is greater than

MC Damage

Quantity pollution emitted

0 Q* Q2 Qm

$

Marg

inal cost

MC

DamagesMC Control

MC*

Controlling Too Little

Total cost

of Damages

Total Costs

Of Control

cMC*

MC Control

Is less than

MC Damage

10

MC of Damages Decreases

Q*

$

Marg

inal cost

MC of Damages

MC of Control

Quantity pollution emitted

MC*

Decrease in MC of Damages

MC of Damages Increases

Q*

$

Marg

inal cost

MC of Damages

MC of Control

Quantity pollution emitted

MC*

MC of Damages Increase

MC of Control Changes

Q*

$

Marg

inal cost

MC of Damages

MC of Control

Quantity pollution emitted

MC*

MC of control increases

MC of control decrease

11

• Definition

– A bundle of entitlements defining the owner’s rights,

privileges, and limitations for use of a resource

– Instrument of society

– Help people form expectations

• Transactions

– Two bundles of property rights are exchanged

– Value of these bundles of rights determines the value of

the exchange

– Example - buying a car

Property Rights

• Universality

– All resources are privately-owned and all entitlements are

completely specified

• Exclusivity

– All benefits and costs accrued as a result of owning and using

the resource accrue to the owner and only the owner

• Transferability

– All rights can be transferred in voluntary trades

• Enforceability

– Property rights should be secure from involuntary seizure from

others

Property Rights - Characteristics

• Well-defined Rights Promote Efficiency

– Owners of have a powerful incentive to use the resource

efficiently because “misuse” results in a decline in the resource

value

• Primary Function

– Guide incentives to achieve a greater internalization of costs

and benefits

• Emergence of Property Rights

– Emerge with new or reevaluation of harmful effects or changes

in tastes and preferences

– Dynamic system

Property Rights - Efficiency

12

Video to Introduce Externalities

• http://www.youtube.com/watch?v=1FQyKMxv4mA

• Exclusivity violated

– Cost or benefit not being internalized

• Market will not be at society’s efficient point

– Govt. intervention maybe necessary

• Positive Externalities

– Gardens, landscapes

• Negative Externalities

– Pollution – water, air, noise, etc.

Externalities

1

1.5

2

2.5

3

3.5

4

4.5

0 5 10 15 20 25 30

Quantity

Pri

ce `

Externality – Efficient Point

MC society = MC private +

externality

MC private

Society’s efficient point given by

MC society = Demand

P* = 3 and Q* = 7.75

Demand

13

1

1.5

2

2.5

3

3.5

4

4.5

0 5 10 15 20 25 30

Quantity

Pri

ce `

Externality – Market Equilibrium

MC society = MC private +

externality

MC private

Market equilibrium given by

MC private = Demand

Pm = 2.50 and Qm = 10.75

Demand

• Market vs. society optimum

– Price in market is to low

– Too much quantity is produced

– Too much of externality is produced

• Government intervention

– Tax

– Coase Theorem

– Command and control

– Transferable rights

Externalities - Summary

1

1.5

2

2.5

3

3.5

4

4.5

0 5 10 15 20 25 30

Quantity

Pri

ce `

Externality – Tax

MC society = MC private +

externality

MC private

Market equilibrium given by

MC private = tax =

MC society = Demand

Pm = 3 and Qm = 7.75

Demand

14

Hoggie the farmer’s MC

No control = $0

Low control = $20

High control = $150

Joe Nose the neighbor’s MC

No control = $100 health problems

Low Control = $20 no health problems

High Control =$0 no health problems

Farm Odor Example

Society’s Optimal

Hoggies cost of control

Joe Nose cost of damages

Hoggies wants no control

Joe Nose wants high control

Society’s total minimized at low

• Command and Control

– Engineering approach

– Set a level of control use and everyone must use that control

• Can set at zero, low, or high levels of control

• Coase Theorem

– Economic inventive based approach

– Give rights to the air to either Joe Nose or Hoggie

– Does not matter who gets the rights we will reach society’s

efficient point as long as rights are well defined and

transactions costs are low

Solution

15

• Coase Theorem

– Economic inventive based approach

– Give rights to the air to either Joe Nose or Hoggie

– Does not matter who gets the rights we will reach society’s

efficient point as long as rights are well defined and

transactions costs are low

• Ronald C. Coase

– British Economist

– Wheat vs. cows

– University of Chicago

– Nobel Prize Winner

Solution

• Rights to Hoggie

– Start with no control

– End up with low control

• Rights to Joe Nose

– Starts with high control

– End up with low control

– Difference who pays -- wealth impact

Rights Defined

Hoggie the farmer’s MC

No control = $0

Low control = $20

High control = $150

Joe Nose the neighbor’s MC

No control = $100 health problems

Low Control = $20 no health problems

High Control =$0 no health problems

• No matter who received the rights

– Ended at the same point

– Negotiations between the parties

– Difference who pays

• Conditions

– Low transaction costs

– Wealth effective small

• Recall rights give you wealth

Rights Defined

16

• Another economic incentive approach

• Permits set equal to the level of pollution desired

– To be able to pollute you must have a permit

– Permits can be bought or sold

• Firms make the following decision

– Control pollution

– Buy a permit

• Idea

– Low control cost firms will control and sell permits

– High control cost firms will pollute but buy permits

– Society’s overall cost will decline

Transferable Rights

• Optimal level of pollution is not zero

• Damages / technology helps determines optimal level

• Problem property rights are not well defined

– Exclusivity violated

– Externalities

• Engineering and economic incentive approaches

– KEY – all have different weaknesses and strengths

– Solution will depend on a mix of these approaches

– Politics along with science will be involved

Summary Pollution

• A good whose consumption is indivisible

– One person’s consumption of a good does not diminish

the amount available to others

• Key – non-rival & non-excludable in consumption

– Examples

• Warning systems (tornado sirens), landscapes, genetic diversity,

defense

– Example - ecosystem services

• Efficiency is not achieved

– Free rider

– Absence of excludability

Public Goods

17

• The benefits people obtain from ecosystems

• Necessary to support and maintain life and support

economic processes

• Many of these services lack adequate substitutes,

thereby requiring careful stewardship of the

ecosystems providing them

• Classification

– Provisioning (food and water)

– Regulating (flood, gas and disease control)

– Cultural (spiritual, recreation, and cultural benefits)

– Supporting (nutrient cycling) services

Ecosystem Goods / Services

Ecosystem Value Examples

Study Value

O’Rear Henry (1998) Nonmarket value for rice production and hunting

$132/acre

Turner (1991) Consumers' surplus for boating in Lake

Livingstone $35.21

Bowker and Stoll

(1988)

Whooping crane annual WTP per person $21-149

Kreuter et al. (2001) $5.58/ha/yr ($6.24 million) decline in ecosystem

services value for 1976-1991 from rangeland to

urbanized use in San Antonio area

Costanza et al.

(1997)

Ecosystems provide estimated $33 trillion in

services annually

Rosenberger and

Loomis (1999)

Ranch open space value to tourist $1,132/ group

trip

Market Goods - Review

consumer 1

0

2

4

6

8

10

12

14

16

18

20

0 5 10 15 20 25 30Quantity

Do

lla

rs

consumer 2

0

2

4

6

8

10

12

14

16

18

20

0 5 10 15 20 25 30Quantity

Do

lla

rs

0

2

4

6

8

10

12

14

16

18

20

0 5 10 15 20 25 30Quantity

Do

lla

rs

+ =

Market

KEY Horizontal summation of individual consumers’ demand

curve to get market demand curve

Only consumer 1

in the market

Both consumers

in the market

18

Market Goods - Review

0

2

4

6

8

10

12

14

16

18

20

0 5 10 15 20 25 30Quantity

Do

llars

6 11 17

Demand

Supply

Market Equilibrium

P* = 7 Q*=17

Consumer 1

Q=6 at price 7

Consumer 2

Q=11 at price 7

7

0

5

10

15

20

25

30

35

0 5 10 15 20Quantity

Do

llars

Public Goods – Ecosystem

3 8

Demand

Vertical Summation of

consumer demand curves

Why - Non-rival in consumption

Only consumer 2

Red demand curve

Both consumers

0

5

10

15

20

25

30

35

0 5 10 15 20Quantity

Do

lla

rs

Public Goods

3 8

Demand

Supply

Society’s Efficient Point

S = D

Market

P*=10, Q*=8

Problem – non-rival

19

• At price =$10

– Consumer 1 -- 3 units of ecosystem services

– Consumer 2 -- 8 units of ecosystem services

• Let consumer 1 purchase first

– Consumer 1 buys 3 units

– Consumer 2 free rides and buys only 5 units but

consumes 8 units (3 units from consumer 1)

• Let consumer 2 purchase first

– Consumer 2 buys 8 units

– Consumer 1 free rides and buys no but consumes 3 units

(3 units from consumer 2)

Public Goods – Free Rider

• Public goods are NOT goods supply by the public

• Goods that are

– Non-rival

– Non-excludable

• Market will undersupply public goods

– Free rider problem

– Vertical vs. horizontal summation

Public Goods- Summary

• Economists play a role in designing policies that affect the environment and natural resources

• Incentives matter when designing policies at achieve desired objectives

• Agriculture impacts the environment through water pollution, air pollution, and emissions of greenhouse gases among other ways

• Agriculture also plays a major role in benefits such as ecosystem services and food production

• Government plays an active role in guiding and regulating the use of resources and impact on environment

Summary