Ecological Economics 30 1999 29 – 46
ANALYSIS
Alleviating soil erosionpollution stock externalities: alternative roles for government
Edna T. Loehman , Timothy O. Randhir
Department of Agricultural Economics, Purdue Uni6ersity, West Lafayette, IN
47907
, USA Received 1 March 1994; received in revised form 15 June 1998; accepted 18 June 1998
Abstract
This paper addresses two temporal externalities due to agriculture: soil erosion and related pollution. The possibility of decentralization of decisions, the appropriate role of a resource manager, and the efficiency of
alternative policies are examined using traditional welfare economics concepts for a two-sector model of rural – urban linkage. Three alternative types of policies can be socially efficient, but imply different involvement by government,
and have different knowledge requirements. A Pigouvian policy requires full information. A bargaining solution involves government only in setting an entitlement, but it may require too much knowledge by rural households in
terms of understanding dynamic environmental relationships. A third way is that government and rural households be co-producers of environmental goods. This concept assigns government the responsibility for maintaining
knowledge about environmental relationships, and government is a participant in a market system that determines prices for environmental-related goods. © 1999 Elsevier Science B.V. All rights reserved.
Keywords
:
Soil erosion; Pollution; Stock externalities; Policies; Incentives; Tax; Subsidy; Bargaining entitlements; Decentralization
1. Introduction
Soil degradation is a common occurrence in Third World countries as growing populations try
to satisfy subsistence requirements with limited resources. If current trends continue, agricultural
output will not be sustainable in the long run in many areas. For example, from an interview with
a scientist at the Chinese Academy of Sciences in 1988: ‘Unless urgent measures are undertaken,
desertification will erode an additional 29000 square miles by the year 2000, more than twice
the area of Taiwan’ Postel, 1991. This is an example of the ‘tragedy of the commons,’ consid-
ering soil quality to be a common property resource.
Corresponding author. Fax: + 1 765 4949176; e-mail: Loehmanagecon.purdue.edu
0921-800999 - see front matter © 1999 Elsevier Science B.V. All rights reserved. PII: S 0 9 2 1 - 8 0 0 9 9 8 0 0067-6
For problems of the commons, a solution often put forth has been privatization or assignment of
ownership rights see, for example, Anderson, 1991. With privatization, an individual will sup-
posedly act in hisher own best interests to pre- serve the resource. The argument is that an
individual who owns land for the purpose of food production should be interested in sustainable
production, unless the personal discount rate is so high that the future is ignored.
However, in spite of the best intentions, as pointed out by Larson and Bromley 1990, soil
depletion can still occur under privatization. Lar- son and Bromley developed a dynamic household
model of agricultural production that included the relation between soil quality on food production,
the effects of food production on soil, and activi- ties that improve soil quality such as allowing
land. They showed that degradation can come about — even when property rights to land have
been assigned — as a response to economic incen- tives. Furthermore, Perrings 1989 showed that
the struggle to meet food consumption needs un- der conditions of poverty or other limited re-
sources can result in degradation. Therefore, the assignment of property rights may be no panacea.
That soil erosion is a stock externality is an- other reason why privatization is not a sufficient
social solution. Soil erosion is also associated with another type of stock externality: persistent water
pollution related to fertilizers and pesticides car- ried by soil particles to water bodies. A stock
externality is a case in which decisions made at one time period have cumulative effects over time
Nordhaus, 1982; Brito and Intriligator, 1987; Ko et al., 1992. In such situations, as in the static
externality case, private decisions may not be socially efficient.
Many dynamic resource studies have focussed on existence and stability of steady-state solutions
assuming that production would be carried out by profit-maximizing institutions see, for example,
Fisher, 1981; Conrad and Clarke, 1987. In con- trast, here we are concerned with identifying the
types of policies and social organization that could satisfy social efficiency for the soil erosion
pollution stock externality. To examine alternative policies, we first define
social efficiency in a society with urban and rural sectors that engage in manufacturing and agricul-
tural production. The urban sector is assumed to be more wealthy than the rural. The types of
taxsubsidy policies examined range from central- ization with government determining taxessubsi-
dies
to complete
decentralization with
government determination of an initial entitle- ment followed by market decisions about pollu-
tion reduction. To traditional Pigouvian and bargaining solutions extended to a dynamic set-
ting, a third alternative is government as a co-pro- ducer of environmental goods.
2. Policy alternatives
