By Tito Sasaki
The market value of farm land is based on the profitability of the produce it can yield. Land suitable for higher profit crops like wine grapes thus commands a higher price than the same acre of land suitable only for grazing. However, all agricultural lands provide environmental services such as retention and filtration of rainwater, carbon sequestration, wildfire control, wildlife habitat, and open space. The full value of such environmental benefits is not reflected on the land price. Worse, it often turns into a cost factor when some environmental functions are mandated by regulations.
The reason for the above price distortion is the beneficiary difference. While the profit from the produce of the land benefits the landowner, the environmental benefits are shared by those who are outside the land ownership. Market economy does not integrate public benefit values into the pricing mechanism, nor does traditional economics offer convincing solutions for it.
David Batker of Earth Economics, Takoma, WA, is one of the new breed of economists trying to integrate the environmental value of agricultural land to overall economics. This is a new frontier of agricultural economics that deserves our full attention.
Batker consults the coalition of Sonoma County Agricultural Preservation and Open Space District (APOSD), Santa Clara County Open Space Authority, and Santa Cruz County RCD, which has embarked upon a joint study titled “Healthy Land & Healthy Economies.”
This study, as explained at the APOSD’s workshop on May 17, will identify the environmental services that agricultural land provides, their values, beneficiaries, cost effectiveness and return-on-investment, as well as financing mechanisms for desired environmental investments.
The study should enable the APOSD and other agencies to compensate us for the environmental services we provide, rather than forcing us to do it at our cost. If they do that, it would be a welcome start. But it will create a second, parallel economic system besides the spontaneous market system.
The problems of an artificial economic system directed by government are its narrow focus and inability to correct itself. It may give us an impetus to do the right things but may not provide us with needed supporting services, materials, and infrastructure. Other times, it may create unintended consequences or become outmoded, and everyone would then be pouring money into a wrong end.
In contrast, free market economy has proven to be the most dependable system for optimizing resources allocation. Despite some shortcomings, it gives us the right incentives to use our time, money, and land for the maximum benefit of consumers.
We should have similar incentives for maximizing the environmental functions of our land. But at present we have only disincentives, fear of regulations or, at best, humiliating government handouts. To correct the situation at its root will require breaking new ground at the frontier of economics that Batker and a few others are exploring.