Recipient Organization
MICHIGAN STATE UNIV
(N/A)
EAST LANSING,MI 48824
Performing Department
AFRE
Non Technical Summary
Agricultural nonpoint source pollution, as with many other agri-environmental interactions, is heavily influenced by random events such as weather. Prior economic work has emphasized the importance of designing policy instruments to address uncertainty due to this randomness, and this uncertainty has also been a significant issue in practice. Although the same random events also influence farm productivity and hence farm income, prior work has devoted little attention to this issue, which is likely to become more important due to climate change. Our proposed analysis will focus on understanding the importance of jointly determined environmental and farm production risk in the design of environmental policies, and how policies can be designed to better address these joint risks to (1) maximize economic values associated with agri-environmental service provision, and (2) support farm income through the provision of these services. A particular focus will be on risk linkages in the context of water quality management, especially in the face of climate change, using compensation programs such as government subsidies and point-nonpoint source trading programs in which point sources pay nonpoint sources for abatement. We will examine these policy design issues in theory, and numerically using simulations for the Chesapeake Bay watershed--an important water resource that has been harmed by nutrient pollution. We will also examine what opportunities or challenges correlated environmental and farm production risk poses for designing environmental policies that can improve risk management in ways that benefit both the environment and farmers.
Animal Health Component
35%
Research Effort Categories
Basic
60%
Applied
35%
Developmental
5%
Goals / Objectives
Our long-term objective is to understand the importance of jointly determined environmental and farm production risk for managing environmental problems, and how policy instruments can be designed to better address these joint risks to (1) maximize economic values associated with agri-environmental service provision, (2) support farm income through provisioning these services, and (3) work in concert with other agricultural programs addressing private farm risks. Specific research activities (RAs) and questions that will be undertaken in support of this objective, and the activities to answer these questions, are:1. Conceptual design of agri-environmental policy instruments. How can instruments be designed to promote economic efficiency in the presence of joint environmental and farm risks, as well as asymmetric information between farmers and regulators? We will examine how instruments such as pollution-reduction incentives and pollution markets are optimally modified or augmented to account for correlated environmental and farm production risk, and also asymmetric information. We will also examine the potential role of new instruments that can manage these risks more directly.2. Numerical assessment of alternative risk-augmented policy instruments. How do well do alternative policy instruments improve economic performance, including both environmental impacts and farm income, when instrument design accounts for both environmental and farm production risk? Our numerical analysis will compare the environmental and economic performance of various risk-augmented instruments, while also providing comparisons to traditional designs based on a subset of risks. Special attention is given to the effects of increased climate change risks.3. Improved risk management. How well do risk-augmented instruments improve risk management to benefit farmers and the environment, and how can these instruments be made to better coordinate with other public or private farm programs (e.g., insurance) that address private risks? This component will involve conceptual and numerical/simulation analyses. Our primary focus will be on risks related to water quality management, especially in the face of climate change. However, at least some of our analysis we will be extended to consider the joint management nutrients and greenhouse gas emissions (N2O); these are jointly produced by agriculture and so there are gains from managing both simultaneously.
Project Methods
Results will be derived using a combination of theoretical and numerical methods. Theory will focus on designing environmental policy instruments that promote economic efficiency, given the economic and environmental tradeoffs facing agricultural producers and the broader society when there is uncertainty about outcomes. The theory will yield many general insights, but some results will be ambiguous. Numerical analysis, combined with theoretical insights, is required to decipher these ambiguities. The numerical analyses will be performed using math programming simulation modeling. Sensitivity analyses will further facilitate understanding and produce more generalizable results.