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Multifunctionality : Towards an Analytical Framework. PDF

157 Pages·2001·1.64 MB·English
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« 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 u jointness on the supply side and by the characteristics of the output on the demand side, all l t i costs and benefits being taken into account. f u n c t i o n a l i t y T O W All OECD books and periodicals are now available on line A R D S www.SourceOECD.org A N A N A L Y T IC A L F R A M E W www.oecd.org O R K ISBN 92-64-18625-5 51 2001 04 1 P -:HSTCQE=V][WZZ: © OECD, 2001. © Software: 1987-1996, Acrobat is a trademark of ADOBE. All rights reserved. OECD grants you the right to use one copy of this Program for your personal use only. Unauthorised reproduction, lending, hiring, transmission or distribution of any data or software is prohibited. You must treat the Program and associated materials and any elements thereof like any other copyrighted material. All requests should be made to: Head of Publications Service, OECD Publications Service, 2, rue André-Pascal, 75775 Paris Cedex 16, France. 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 Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre français d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, tel. (33-1) 44 07 47 70, fax (33-1) 46 34 67 19, for every country except the United States. In the United States permission should be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400, 222Rosewood Drive, Danvers, MA 01923 USA, or CCC Online: www.copyright.com. All other applications for permission to reproduce or translate all or part of this book should be made to OECD Publications, 2,rueAndré-Pascal, 75775 Paris Cedex 16, France. 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. 3 © 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 8 © 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

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