Multifunctionality and optimal environmental policies for agriculture in an open economy

Introduction Though agriculture has long been recognized as a polluter, it has also more recently been noted as a provider of non-market benefits. Examples of these public goods that are by-products of agriculture include landscape amenities, a habitat for wildlife, and the preservation of agrarian cultural heritage (OECD 1997a; 1997b; Bohman et al., 1999). Though many of these benefits are difficult to define and measure, non-market valuation studies have found substantial non-market values for farmland in different regions around the world (Beasley, Workman, and Williams, 1986; Hackl and Pruckner, 1997; López, Shah and Altobello, 1994). The notion of agriculture providing a set of non-market goods and bads as joint products with market goods has given rise to the term “multifunctionality” (Lindland, 1998; Nersten and Prestegard, 1998; Runge, 1998). Conceptually, a “multifunctional” agriculture means that the agricultural production process is a multioutput technology, where some outputs are privately traded commodities and others are public goods. This case differs from standard environmental models where some activity in the economy generates a single externality. The realization that agriculture is multifunctional has important implications for policy-making at both the domestic and international levels. In the domestic sphere, policies aimed at the various externalities from agriculture are typically legislated and administered independently. Likewise, the economics literature almost always examines externalities in isolation, either implicitly or explicitly assuming that other (potentially related) externalities are fixed or unimportant.