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Managing increasing environmental risks through agrobiodiversity and agrienvironmental policies
Author(s) -
Baumgärtner Stefan,
Quaas Martin F.
Publication year - 2010
Publication title -
agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.29
H-Index - 82
eISSN - 1574-0862
pISSN - 0169-5150
DOI - 10.1111/j.1574-0862.2010.00460.x
Subject(s) - agricultural biodiversity , externality , consumption (sociology) , natural resource economics , business , crop insurance , economics , ecosystem services , payment , price premium , public economics , agriculture , willingness to pay , microeconomics , finance , ecology , social science , ecosystem , sociology , biology
Agrobiodiversity can provide natural insurance to risk‐averse farmers by reducing the variance of crop yield, and to society at large by reducing the uncertainty in the provision of public‐good ecosystem services, for example, CO 2 storage. We analyze the choice of agrobiodiversity by risk‐averse farmers who have access to financial insurance, and study the implications for agrienvironmental policy design when on‐farm agrobiodiversity generates a positive risk externality. While increasing environmental risk leads private farmers to increase their level of on‐farm agrobiodiversity, the level of agrobiodiversity in the laissez‐faire equilibrium remains inefficiently low. We show how either one of the two agrienvironmental policy instruments can cure this risk‐related market failure: an ex ante Pigouvian subsidy on on‐farm agrobiodiversity and an ex post payment‐by‐result for the actual provision of public environmental benefits. In the absence of regulation, welfare may increase rather than decrease with increasing environmental risk, if the agroecosystem is characterized by a high natural insurance function, low costs, and large external benefits of agrobiodiversity.