Multifunctionality : Towards an Analytical Framework.

157 Pages·2001·1.64 MB·English

by  OECD

«
AGRICULTURE AND FOOD
Multifunctionality Multifunctionality
TOWARDS AN ANALYTICAL FRAMEWORK
TOWARDS AN ANALYTICAL
The term multifunctionality is increasingly used, but is prone to different interpretations
concerning its definition, its utility and its implications for policy at domestic and international FRAMEWORK
level. The OECD undertook this analysis to clarify the concept of multifunctionality and to try
to establish a common analytical framework and terminology.
Examining production, externality and public good aspects of multifunctionality, the analysis
contained in this report leads to a series of questions, the answers to which determine if
and when policy intervention is warranted and what the nature of that intervention should
be. The framework encompasses both negative and positive externalities of agriculture. The
first question relates to the degree of jointness in production between the multiple outputs.
The second question identifies the circumstances in which market failure arises. A third AGRICULTURE AND FOOD
question leads to an investigation of the public good characteristics of the outputs in
question and helps to define the optimal type of intervention. These may range from market
creation, to the imposition of user fees, the formation of clubs or public provision financed
at local, regional or national level. The most efficient policy option is defined by the nature of M
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jointness on the supply side and by the characteristics of the output on the demand side, all l
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costs and benefits being taken into account. f
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ISBN 92-64-18625-5
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Multifunctionality
TOWARDS AN ANALYTICAL
FRAMEWORK
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into
force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD)
shall promote policies designed:
– to achieve the highest sustainable economic growth and employment and a rising standard of
living in Member countries, while maintaining financial stability, and thus to contribute to the
development of the world economy;
– to contribute to sound economic expansion in Member as well as non-member countries in the
process of economic development; and
– to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in
accordance with international obligations.
The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France,
Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries
became Members subsequently through accession at the dates indicated hereafter: Japan
(28thApril1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973),
Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland
(22ndNovember 1996), Korea (12th December 1996) and the Slovak Republic (14th December 2000). The
Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD
Convention).
Publié en français sous le titre :
MULTIFONCTIONNALITÉ
Élaboration d’un cadre analytique
© OECD 2001
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FOREWORD
This is the final version of a study that was carried out under the1999-2000 Programme of Work of
the OECD’s Committee for Agriculture. It contains the results of the first phase of the work on
multifunctionality and aims to provide a conceptual basis for policy discussions. It focuses on
production, externality and public good aspects of multifunctionality.
The principal authors of this report are Leo Maier and MikitaroShobayashi. ProfessorBoisvert of
Cornell University is the author of Annex2 and part of Annex1. CatherineMoreddu and JenniferFellows
also contributed to the preparation of this report, as did other staff in the Directorate for Food,
Agriculture and Fisheries.
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© OECD 2001
TABLE OF CONTENTS
Part I. SUMMARY AND CONCLUSIONS................................................................................................................... 9
Background........................................................................................................................................................................... 9
Structure of the report......................................................................................................................................................... 11
A “working definition” of multifunctionality..................................................................................................................... 13
Policy context........................................................................................................................................................................ 14
Summary of production aspects........................................................................................................................................ 15
Key concepts and questions........................................................................................................................................... 15
The nature of jointness in agriculture............................................................................................................................. 16
The spatial, scale and time dimensions of non-commodity outputs.................................................................................... 17
Non-agricultural provision............................................................................................................................................ 18
Summary of externality and public good aspects........................................................................................................... 19
Public goods................................................................................................................................................................. 20
From an analytical framework to policy implications...................................................................................................... 22
Notes..................................................................................................................................................................................... 24
Bibliography......................................................................................................................................................................... 25
Part II. THE PRODUCTION RELATIONSHIPS UNDERLYINGMULTIFUNCTIONALITY.................................... 27
Introduction.......................................................................................................................................................................... 27
What are the key questions?.............................................................................................................................................. 27
Joint production and its application to multifunctionality............................................................................................. 30
The nature of jointness in agriculture............................................................................................................................... 38
Agricultural landscape and cultural heritage values........................................................................................................ 41
Environmental outputs................................................................................................................................................. 43
Rural viability and the contribution of agricultural employment...................................................................................... 45
Food security................................................................................................................................................................ 47
Animal welfare............................................................................................................................................................. 48
Spatial and scale issues...................................................................................................................................................... 49
Spatial differences in production relationships................................................................................................................. 49
The spatial extension of non-commodity outputs............................................................................................................. 51
Agricultural versus non-agricultural provision of non-commodity outputs.................................................................. 52
Notes..................................................................................................................................................................................... 55
Bibliography......................................................................................................................................................................... 56
Part III. EXTERNALITY AND PUBLIC GOOD ASPECTS OFMULTIFUNCTIONALITY......................................... 59
Introduction.......................................................................................................................................................................... 59
Background................................................................................................................................................................. 59
Approach..................................................................................................................................................................... 59
Organisation of this part............................................................................................................................................... 60
Externality aspects............................................................................................................................................................... 61
Definitions and classifications........................................................................................................................................ 61
Market failures associated with externalities: analytical basis........................................................................................... 66
Revising some assumptions........................................................................................................................................... 70
Taking negative externalities into account....................................................................................................................... 71
Review of major non-commodity outputs........................................................................................................................ 72 5
© OECD 2001
Multifunctionality: Towards an Analytical Framework
Public good aspects............................................................................................................................................................. 76
Definitions and classifications........................................................................................................................................ 76
Characteristics and optimal provision of each pure and impure public good....................................................................... 77
Categorising agricultural externalities under multifunctionality from a public good point of view........................................ 79
The importance of analysing consumption relationships.................................................................................................. 84
Other issues associated with multifunctionality: stability and equity................................................................................ 87
Availability of information and multiple non-commodity outputs...................................................................................... 95
Notes..................................................................................................................................................................................... 97
Bibliography......................................................................................................................................................................... 101
Annex 1. A NOTE ON THE CONCEPT OF JOINTNESS IN PRODUCTION............................................................... 105
Introduction.......................................................................................................................................................................... 105
Historical background......................................................................................................................................................... 105
Definitions and nature of joint production....................................................................................................................... 106
A formal definition........................................................................................................................................................ 106
The causes of joint production........................................................................................................................................ 106
The nature of joint costs................................................................................................................................................ 107
Jointness, dual indirect profit functions, price response, and output supply for many outputs.............................................. 107
A conventional illustration of joint production................................................................................................................ 109
The multifunctionality case................................................................................................................................................ 111
Simple models of joint production with two outputs – one being a non-market externality.................................................. 111
The significance of having no markets for some outputs................................................................................................... 111
General models of joint production for multiple (more than two) outputs.......................................................................... 113
A final word on allocable fixed inputs and joint production.......................................................................................... 118
Concluding remarks............................................................................................................................................................. 119
Notes..................................................................................................................................................................................... 120
Bibliography......................................................................................................................................................................... 122
Annex 2. JOINT PRODUCTION IN FOUR OUTPUTS: TWO AGRICULTURAL COMMODITIES
ANDPOSITIVE AND NEGATIVE EXTERNALITIES..................................................................................... 125
Introduction.......................................................................................................................................................................... 125
The farm production situation............................................................................................................................................ 125
The farm model.................................................................................................................................................................... 125
Several cases........................................................................................................................................................................ 126
Case 1. No external effects or allocated fixed factors...................................................................................................... 126
Case 2. An allocable fixed input: land......................................................................................................................... 127
Technical interdependence with non-commodity outputs.................................................................................................. 128
Case 3. An environmental residual............................................................................................................................. 129
Case 4. A landscape amenity..................................................................................................................................... 130
Case 5. Both a landscape and an environmental residual............................................................................................. 130
A final case of particular interest.................................................................................................................................... 131
Notes..................................................................................................................................................................................... 131
Bibliography......................................................................................................................................................................... 132
Annex 3. MULTIFUNCTIONALITY IN OTHER PARTS OF THE ECONOMY............................................................. 133
Forestry................................................................................................................................................................................. 133
Fisheries................................................................................................................................................................................ 135
Other examples involving natural resource management.............................................................................................. 136
Household production........................................................................................................................................................ 136
Banking.................................................................................................................................................................................. 137
Other applications............................................................................................................................................................... 138
Notes..................................................................................................................................................................................... 138
6 Bibliography......................................................................................................................................................................... 139
© OECD 2001
Table of Contents
Annex 4. ECONOMIC INEFFICIENCY CAUSED BY A DECREASE IN IMPORT PRICE........................................... 143
Annex 5. SUPPLEMENTAL NOTE ON CHARACTERISTICS AND OPTIMAL PROVISION OF PURE
ANDIMPURE PUBLIC GOODS...................................................................................................................... 145
Market and policy failures in providing pure public goods........................................................................................... 145
Non-inferiority in providing public goods........................................................................................................................ 146
Open access resources, common property resources and pure public goods............................................................ 146
Optimality of club goods..................................................................................................................................................... 146
Intergenerational club goods............................................................................................................................................. 147
Bibliography......................................................................................................................................................................... 148
Annex 6. SOME FACTORS SUPPORTING VOLUNTARY PROVISION OF PUBLIC GOODS.................................. 149
Annex 7. TRADE AND INTERNATIONAL INCOME DISTRIBUTION ISSUES IN THE PRESENCE
OFEXTERNALITIES........................................................................................................................................ 151
Benchmark case: no externalities...................................................................................................................................... 151
Externalities that are not internalised.............................................................................................................................. 152
Exportable good with a negative externality.................................................................................................................... 152
Exportable good with positive externality........................................................................................................................ 153
Import-competing good with a negative externality.......................................................................................................... 154
Import-competing good, positive externality.................................................................................................................... 154
Externalities that are internalised..................................................................................................................................... 154
Negative externality, exportable good............................................................................................................................. 154
Positive externality, exportable good............................................................................................................................... 155
Negative externality, import-competing good.................................................................................................................. 156
Positive externality, import-competing good.................................................................................................................... 156
Large country-case: terms-of-trade effects...................................................................................................................... 156
The effect of internalisation in only one of two countries.............................................................................................. 158
List of Boxes
I.1. A note on terminology............................................................................................................................................ 10
I.2. Multifunctionality and sustainability.................................................................................................................... 11
I.3. Multifunctionality: a specificity of agriculture?.................................................................................................... 12
I.4. Multifunctionality: a characteristic or an objective?........................................................................................... 14
I.5. The sources of joint production............................................................................................................................. 16
I.6. Illustrative categorisation of public goods........................................................................................................... 21
II.1. What is the appropriate unit of analysis?............................................................................................................. 32
II.2. Joint production – the example of forestry.......................................................................................................... 33
III.1. Basic terms and analytical tools for discussing externalities............................................................................ 62
III.2. Are externalities with opportunity costs externalities?...................................................................................... 64
III.3. Notes on some basic terms for discussing public goods................................................................................... 78
III.4. What is community supported agriculture (CSA)?.............................................................................................. 86
III.5. Conservation, amenity and recreation trusts (CARTs) in UK............................................................................. 87
List of Tables
II.1. Examples of production relationships for selected non-commodity outputs................................................ 40
III.1. Sketch of how likely markets are to fail................................................................................................................ 70
III.2. Illustrative consumption relationships between positive externalities and a negative externality............ 73
III.3. Sketch for major non-commodity outputs from externality points of view..................................................... 73
III.4. Classification of pure public goods, impure public goods and private goods................................................ 77
III.5. Classification of pure public goods, impure public goods and private goods (Sketch)................................ 80
III.6. Illustrative income elasticities of demand for various non-commodity outputs............................................ 89
III.7. Effects of trade on international income distribution when there are externalities...................................... 91
III.8. Effects of policies to internalise externalities on the international income distribution.............................. 92 7
© OECD 2001
Multifunctionality: Towards an Analytical Framework
List of Figures
II.1. A simplified model of supply and demand for joint products.......................................................................... 34
II.2. Optimal supply of a jointly produced non-commodity output......................................................................... 35
II.3. Joint production, relative prices and output composition................................................................................. 36
II.4. Some hypothetical production relationships...................................................................................................... 37
II.5. A schematic representation of economic activities on the farm....................................................................... 39
II.6. Commodity production and agricultural employment....................................................................................... 45
II.7. Implications of site-specific productivity and value differences for non-commodity supply....................... 50
III.1. Classification of positive externalities (marginal benefit – commodity output curve).................................. 63
III.2. Classification of positive externalities (social cost curves in commodity output-price graph).................... 63
III.3. Positive externalities where government intervention is unnecessary........................................................... 65
III.4. Economic inefficiency caused by positive externalities (without imports)..................................................... 67
III.5. No efficiency loss when demand is perfectly inelastic to price........................................................................ 68
III.6. Economic inefficiency caused by positive externalities (with imports)........................................................... 69
Annexes
A1.1. A simplified graphic model of markets for joint products................................................................................. 110
A1.2. A simplified graphic model of markets for joint products, where one of the goods is an externality........ 112
A1.3. Three joint products –effects of a change in the price of market goodC....................................................... 115
A1.4. Three joint products –effects of a change in the tax on the environmental residual.................................... 116
A1.5. Three joint products –effects of a change in the payment for landscape amenities.................................... 117
A4.1. Economic inefficiency caused by price decreases............................................................................................. 143
A5.1. Market and policy failures...................................................................................................................................... 145
A7.1. Exportable good with no externalities................................................................................................................. 151
A7.2. Import-competing good with no externalities..................................................................................................... 152
A7.3. Exportable good with negative externality.......................................................................................................... 153
A7.4. Exportable good with positive externality........................................................................................................... 153
A7.5. Import-competing good with positive externality.............................................................................................. 154
A7.6. Internalised negative externality: exportable good........................................................................................... 155
A7.7. Internalised positive externality: exportable good............................................................................................ 155
A7.8. Internalised negative externality: import-competing good............................................................................... 156
A7.9. Internalised positive externality: import-competing good............................................................................... 157
A7.10. Terms-of-trade effect –Importing country, increase in world price.................................................................. 157
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© OECD 2001
Part I
SUMMARY AND CONCLUSIONS
Background
The OECD has over a long period analysed the non-commodity outputs (BoxI.1) of agriculture,
including its environmental impacts and its contribution to rural employment, and has undertaken
substantive work in these areas. The introduction of the concept of multifunctionality by Agriculture
Ministers at their meeting of 5-6March1998 added a further perspective to this discussion. The
Ministerial Communiqué (OECD, 1998a) recognises that beyond its primary function of supplying food
and fibre, agricultural activity can also shape the landscape, provide environmental benefits such as
land conservation, the sustainable management of renewable natural resources and the preservation of
biodiversity, and contribute to the socio-economic viability of many rural areas.
The shared goals set out by Ministers take account of the multifunctional character of agriculture
but also aim for the sector to be responsive to market signals and further integrated into the
multilateral trading system. Agro-food policies should strengthen the intrinsic complementarities
between the shared goals and ensure that the growing concerns regarding food safety, food security,
environmental protection and the viability of rural areas are met in ways that maximise benefits, are
most cost-efficient and avoid distortion of production and trade.
The discussion of multifunctionality in the OECD and elsewhere has been beset by the problem
that the concept of multifunctionality is not well defined and prone to different interpretations. The
Secretariat therefore focussed in its initial work on elaborating a common terminology, identifying the
key policy issues and developing a framework for analysis that would be acceptable to all Member
countries and which would eventually clarify the meaning of the term “multifunctionality” and the way it
is used in Member countries. The reactions to this early work reinforced the impression that Member
countries have fundamentally different opinions and positions concerning the definition of
multifunctionality, its utility for the agricultural policy debate and its implications for policy reform.
Nevertheless, the discussions converged on three distinct but connected sets of issues, which
came to form the nucleus for the development of a work programme on multifunctionality. The first of
these concerns the production relationships underlying the multiple outputs of agriculture, and the
externality and public good aspects of these outputs. The second comprises methodological and
empirical issues related to the measurement of the demand for non-commodity outputs, criteria and
procedures for specifying domestic policy objectives, and mechanisms for evaluating progress. The
third set of issues concerns the policy aspects of multifunctionality, including its implications for policy
reform and trade liberalisation.
It was decided to begin with an analysis of the production, externality and public good aspects of
the various non-commodity outputs of agriculture. This work should shed light on the supply and
demand characteristics of the positive and negative outputs of agriculture and explore agricultural and
non-agricultural ways of supplying the non-commodity outputs demanded by society. The results
should provide the analytical basis for discussing, in a second step, the implications of
multifunctionality for agricultural policy reform and trade liberalisation. 9
© OECD 2001