Journal
AGRICULTURAL ECONOMICS
Volume 41, Issue 5, Pages 483-496Publisher
WILEY
DOI: 10.1111/j.1574-0862.2010.00460.x
Keywords
D62; H23; Q1; Q57; Agrobiodiversity; Ecosystem services; Agrienvironmental policy; Insurance; Risk-aversion; Uncertainty
Categories
Funding
- Volkswagen Foundation [II/79628, II/82883]
- German Federal Ministry of Education and Research [01UN0607]
- Kiel Cluster of Excellence Future Ocean
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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, CO2 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.
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