Land, economic change, and agricultural economics

Agricultural and Resource Economics Review, Apr 2003 by Castle, Emery N

The maximization of net national benefits is the standard criterion used in benefit-cost analysis to judge resource and environmental policy actions within a nation. Can you imagine those with responsibility for state and local affairs using such a criterion to evaluate their options? I cannot-perhaps because I served for seven years as a member of the Environmental Quality Commission of Oregon. My knowledge of resource and environmental economics was useful in that service, but not because I applied welfare choice criteria or empirical findings from resource and environmental economics literature.

Perhaps an example will illustrate my concern. Assume the federal establishment provides financial aid to farmers who have had water deliveries curtailed because of application of (say) the Endangered Species Act. From the standpoint of the Nation, any such payment would create certain negatives or costs if the standard welfare criterion were used.2 Of course, the possible benefit of preserving a species would be "off the table" because, by decree, species preservation is of the highest priority, regardless of cost. Even so, there may be interest in knowing the amount of economic sacrifice associated with the water curtailment. From the standpoint of the local economy, however, government financial aid to farmers is not a negative, but rather a positive item. And, of course, the farmer receiving the aid will consider the payment positively.

Let us now consider outlays farmers might make for well drilling to obtain groundwater to compensate for the curtailment of surface waters. Such expenditures would be a cost in the calculus of farmers, but a benefit from the standpoint of the local economy. If the well drilling proved to be a productive investment, it would increase the net national product and be a positive influence in the national account. On the other hand, it would be a negative if this involved additional government spending. If the payments made to farmers were diverted from other government programs, there would be no cost to the Nation.

These straightforward and simple examples illustrate the complex and often conflicting objectives of decision units as movement is made from the micro to the macro level. The welfare maximization criterion, or "optimality" assumptions, so readily applied in resource and environmental economics, results in gross oversimplification if intermediate decision-bodies are ignored. If they are not ignored but considered individually, optimization of the welfare criterion will accomplish little except to highlight inconsistencies and conflicts. Recently I heard prize-winning research described as pertaining to the "optimal choice of unintended consequences." For some time, I have believed economists' preoccupation with optimality had gotten out of hand; that description did nothing to change my mind. Think about it!

With the help of Daniel Bromley, I now see that the neglect of intermediate decision-bodies in resource and environmental economics is but one manifestation of the second concern I have regarding contemporary resource and environmental economics (Bromley, 1990,1997; Vatn and Bromley, 1994). Economic optimality measures, or benefit-cost analysis, typically provide the yardstick by which a particular rule, policy, existing condition, or practice is judged in the natural resource or environmental economics literature. Existing entitlement, endowment, choice criteria, and income distribution, except for the item under examination, are assumed to be optimal or acceptable. The same is true of prices. Except for the price of the item under examination, prices are assumed as optimal, acceptable, or capable of being adjusted. The determination of "optimality" which results clearly is affected by such assumptions. The justification usually given is that the assumed conditions would have been changed by society if they were not acceptable.