Negative Externalities of Agriculture Industry


The identification and measurement of public and private goods, presents challenges for government agencies and private suppliers to overcome the tragedy of the commons and discourage negative externalities. “The study analyses the contribution of relevant economic actors to the provision of private and public goods in agricultural landscapes.” (Villanueva, Targetti, Schaller, Arriaza, Kantelhardt, Rodriguez-Entrena & Viaggi, 2015) To analyse the extent of market failure and consider the costs of not accounting for the non-market private and social costs, to prevent poor investment and policy decisions. Covering the pitfalls associated with bureaucratic taxes, and the freedom associated with market competition. Conversely, societal pressures prevent the tragedy of the commons through moral injunction and choice of action is best left to the individual can prevent associated pitfalls.

“[British Economist] A.C. Pigou was instrumental in developing the theory of externalities.” (Callahan, 2005) Ones actions often impose costs on others (third parties), actors un-accounting as spill-over costs or negative externalities. A number of externalities can arise from a given situation. “Block points out that the flaw in such analysis is that almost any good might be viewed as providing some benefit [or cost] to third parties.” (Callahan, 2015) An actions less immediate impact on one group and its secondary impact on all other groups, ever expands the list of inter connected externalities. Never ending nature to the outcomes of action and there valuations. “The selected stakeholders represent the most relevant economic actors/sectors and public institutions, namely, agriculture, tourism, trade and services and environmental associations, local government bodies (municipalities) and other institutions of local relevance (e.g. natural parks or water regulation bodies) as well as scientists with specific knowledge of local issues.” (Villanueva et al., 2015) Everyone has their own basis from which they establish truth, beyond one’s valuations there are commonly excepted norms and traditions. Therefore, one can never judge others from their own value judgements as this excludes other possible reasons or explanations. Just as statistics can omit relevant facts for the promotion of their theories. In this respect, there is little means to predict ones effect on others.

At worst, however, it can be considered “bloody cheek,” in the British expression. For, armed with the idea, I can approach you with the following claim: “You, gentle reader, have never hired me as an economic consultant. You have not taken advantage of this [marvellous] opportunity open to you. However, whether you know it or not, whether you realize it or not, whether you appreciate it or not, you actually benefit from my economic analysis. You are thus a selfish, [chiselling] free-rider on these multifaceted benefits I have long provided for you, gratis. But now it is time to stop you from exploiting me regarding these spillover gains you have long enjoyed for free. It is time for you to pay your fair share! Accordingly, I am hereby presenting you with this bill for $100,000, a bargain at the price. If you refuse to pay, I will then initiate violence against you.” Not only is this “bloody cheek,” but you could reply in the same vein to me. All of us could bill each other for services rendered to any extent we wished. Once we have left the Rothbardian world of demonstrated preference, anyone can make whatever claim he wishes. We are at sea without a rudder. (Hoppe, 2003)

Negative externalities multiply rapidly in urban, industrialised societies. “The results show that Agriculture & forestry is judged to be the sector contributing the most to the production of private and public goods […]” (Villanueva et al., 2015). For instance, A buys product, B produces product, as an unintended consequence C is negatively impacted by factory pollution. “These include provisioning services (namely food, water, timber, and fibre); regulating services that affect climate, floods, disease, wastes, and water quality; cultural services that provide recreational, aesthetic and spiritual benefits; and supporting services such as soil formation, photosynthesis, and nutrient cycling.” (Villanueva et al., 2015) Neighbouring tourism-oriented regions invested in sustaining and developing their private environmental assets produce positive spill-over effects. (Villanueva et al., 2015) An instance where minimal adherence to sustainable, renewable and organic agricultural practises disturbed land surrounding a public Natural Park through public bads, erosion was one result of little adherence to soil conservation. (Villanueva et al., 2015) In contrast to when individuals protect and develop their land, whether to increase yields or land value, it can be argued of a less possibility of land erosion where humans don’t inhabit and therefore overuse the resource. Take for example, there may be less civilization and intervention within the mountain ranges due less incentive from high transport costs for trade far from near cities. Modest mountain slope agricultural and forest management offset against natural hazards, postponing the onset of an avalanche or mudslide caused by erosion, where valuable resource and scarce agriculture land erosion is proven to slow naturally protecting the alpine habitats of rare species. (Villanueva et al., 2015) Private value is denoted by a downward sloping demand curve. An upward supply curve denotes private cost. External costs imposed on society ads to the social cost curve maintaining it above the supply curve. Market inefficiency results when optimal quantity exceeds equilibrium quantity.

“With a weight of empirical evidence now showing that fertilizer subsidies [and taxes] are likely to be inefficient, costly, and fiscally unsustainable, […]” (Morris, 2007) Rules are an effort to put in place as low cost solutions to negative externalities, considering rules make it simpler to exchange rights and obligations. Government agencies can use command-and-control policies that regulate behaviour directly or market-based policies to provide private suppliers incentives to act. Market-based policies discourage polluters through taxes or tax breaks on undesired spill-over costs and systems for trading pollution rights are established. Though command-and-control policies pay far less attention to information and incentive problems facing pollution reduction policies. Governments often use a tax policy to decrease pollution. “Whenever fertilizer price subsidies [or taxes] have been used, the results have generally been disappointing: the [taxpayers or debt] cost of the subsidies has often been high, and the benefits generated by the incremental fertilizer use have usually been modest.” (Morris, 2007) When appropriating taxes an ideal corrective tax should equal the external cost and consider quantity and quality. “More recent studies suggest that public sector [monopolized agricultural] research may be crowding out private [agricultural research and development.” (Hu, Liang, Pray, Huang & Jin, 2011) Any agricultural development should be one where the producer or consumer progresses to become more aware of the environment. In economic theory, values are subjective and cannot be measureable; therefore the social cost is often compared to the opportunity cost, represented as consumers’ willingness to pay minus the actual payment. As free goods have no price signals distribution of resources results in the socialist calculation problem. “Since Pigou’s solution involves imposing taxes and subsidies by fiat, without voluntary exchange, the numbers it relies on are mere guesswork.” (Pigou in Callahan, 2015) Value is not a feature of the good itself, but a person’s subjective valuation of a marginal utility.

Government wanting to maintain high agriculture employment issues high agricultural goods prices, to reduce surplus production a subsidy check is used by government by paying farmers not to plant crops. Future use is considered for private property and less in public property. Greed incentives and maximum overuse of public property is not necessarily bound to externalities. Individuals respect private property to avoid associated costs, whereas using common land entail no capital depreciation costs. Cheaper to use common land than private land. “According to the Coase theorem, if private parties can bargain over the allocation of resources at no cost, then the private market will always solve the problem of externalities and allocate resources efficiently.” (Mankiw, 2015) “[This can be] best understood from the classical parable called the Tragedy of the Commons […] that illustrates why common resources are used more than is desirable from the standpoint of society as a whole.” (Mankiw, 2015) Private markets overuse the resource, while governments regulate behaviour and impose fees to combat overuse. Determining the goods’ external costs, can eliminate the tragedy of the commons. “However, economist Steven Cheung studied those markets and found that the parties involved had accounted for the externalities quite well, through contracting with each other to raise production to preferable levels.” (Callahan, 2015) “Hayek contends that those who value liberty should prefer social pressure directed against “deviant” behavior to outright bans [deviant behaviour] of which many people disapprove, but which does not violate anyone else’s right to life or property.)” (Callahan, 2015)

Private investment in research and development show privatisation growth, where private owned firms may with a state, foreign governments, or other non-private partners form a joint venture. (Hu et al., 2011) Once property remains private externalities from former commons cease. Externalities then on arising require law reform to discourage them from occurring. ““If the people downriver from the factory have a property right in the river, the factory will have to negotiate with them in order to legally discharge waste through their property.” (Callahan, 2015) Liability law for damage inflicted repeal private ownership barriers. “[Negotiating] between the parties affected allows them to use the “particular circumstances of time and place,” with which they alone are familiar, to arrive at a solution.” (Callahan, 2015) Negotiation is the standard procedure used by members of a society to secure the cooperation and consent of others without imposing unwelcome costs on one another. “[It] is hard for a factory creating air pollution that spreads over a wide area to negotiate with each person affected [or] to define property rights so that each person has a right to be free of airborne pollutants that exceed a certain level on his property.” (Callahan, 2015) Clearly defined property rights make negotiations easier by lowering transaction costs, and encourage entrepreneurial incentives to internalise the externality. “[Ronald] Coase demonstrated that as long as property rights are clearly defined and transaction costs are low, the individuals involved in a situation can always negotiate a solution that internalizes any externality.” (Coase in Callahan, 2015) Equally, through adjudication (preserving the continuity of people’s expectations) private suppliers would devote few resources with high transaction costs and unclear, absent or arbitrary changes in public policy. To increase profits private firms’ model as investments in response to great research product demand, barriers such as patents allow a firm to own most benefit from a new product or process, with a favourable monopoly permit for profitable innovations. (Hu et al., 2011) However, discourages creative seeking behaviour. It can be argued some producers provide free sustainable guarantees to its environment, without impairing the private cost of a product. [Within] a system of voluntary exchange, each party has demonstrated that it prefers the solution arrived at to the situation that existed before their negotiations.” (Callahan, 2015)

Government official’s actions un-account for external effects. “Although it is difficult to support the use of fertilizer subsidies [or taxes] on efficiency grounds, realistically it must be recognized that fertilizer subsidies [and taxes] are likely to be implemented in some African countries, if for no other reason than their political popularity.” (Morris, 2007) As corrective taxes require government coercion the majority with political clout expect to benefit. “Another common policy adopted has been to regulate the amount of the activity legally permitted,” (Callahan, 2005). No figure can show net intervention benefits, nor if positive or negative. Net benefits increase through voluntary actions of people and acts indicate preference over alternative choices. “There is no mode of action thinkable in which means and ends or costs and proceeds cannot be clearly distinguished and precisely separated.” (Mises, 1998) Externalities assert the third party inflicted the cost or benefit has not acted. Property damage states use without sanction. Conversely, in other contexts where the third party inflicted the cost or benefit are innocent bystanders. Economists theorised a separate category to explain non-acting third parties, and their utility effects in externality contexts. Actions demonstrate preference with expected maximization of marginal utility. Externalities – the effect of an action on another’s utility. Recent Austrian externality theory suggest inaccurate and insignificant scale calculation results. Impossible to interpersonally compare utility flawed traditional welfare economics. Quantitative scale measurement is possible for voltage not utility. Unable to calculate utility gained or lost, government intervention is not immune. “If we had not in our mind the schemes provided by praxeological reasoning, we should never be in a position to discern and to grasp any action.” (Mises, 1998) Action demonstrating preference, shows one prefers to forgo something for something else. “Action and reason are congeneric and homogeneous; they may even be called two different aspects of the same thing.” (Mises, 1998)

In that offering to buy a neighbour’s land is a preference demonstrated in action, where one prefers the land over the money offered. One may want to rid of the pesticide use as the neighbour sprays crops with bad chemicals, valuing organic farming more than money offered. Alternatively, one wanted the land for housing construction. Economists unable to differentiate acts motivated by either must treat them the same. Money or having the right price for damaged property will not replace something of value when it is lost as it does not account the value one places on psychic damage. The Coase Theorem (less damage to private land) ceases when owners of high sentimental and low market value property, are without persuasive means to cease factories polluting, leaving uncorrected externalities and liability only accounting market value of damaged property. In addition, to the negative externality already caused by damaged property, this counts for an extra negative value that of sentimental value. Unless, the owner prefers or shows no concern for the new state of damage, on the condition one not act in response nor enacted the damage themselves, as one demonstrated preference to act in some other way. Had one given a choice, would approve of the way property was used by another.

As a private good, producers are more willing to reduce pollution with more aware consumers within the factory pollution radius, internalising the costs provides private suppliers proper incentives. Privatising public research institutes that conducted applied research and liberalised input markets with specific laws provides incentives and allows public research. (Hu et al., 2011) Such private market incentives to pollution might be declining sales or fear of health law suits. “[Unsure of] what solution the participants might arrive at—the factory might shut down, the people downriver might be paid to move, the factory might install pollution control devices, or it might simply compensate those affected for suffering the pollution.” (Callahan, 2015) Without accurate measurements on factory pollution emissions, governments can tax industries with most political clout less rather than those that yield the lowest negative externalities. “Studies in India have shown that the private sector in developing countries can also play a key role in agricultural innovation and productivity growth, even though private research in developing countries is currently limited (Evenson, Pray, and Rosegrant, 1999; Ramaswami, Pray, and Kelly, 1979 in Hu et al., 2011). Comparing levels of utility among individuals is impossible as utility is not quantifiable. A policy had to make at least one person better off (in that person’s own estimation) and none worse off before economists could say it was unambiguously better. (Callahan, 2005) Consumers’ willing to pay in a free market fairly allocates resources to the most in need of a particular good. “[Lionel] Robbins pointed out that, since utility is not measurable, it is invalid to compare levels of utility between different people, as Pigou’s theory required [and] held that if we just assume people have an equal capacity for satisfaction, economists still can recommend certain state interventions.” (Callahan, 2005)

“[Murray] Rothbard showed [only] through preference demonstrated in action that we can gauge what actors really value, and that to try to deduce values from mathematical formulas, without the evidence of action, is a hopeless cause.” (Rothbard in Callahan, 2015) Exchange demonstrates preference as parties feel better off than not trading. “[Diversified] European rural economies [contribution] of agriculture [is] not usually visible when only traditional macroeconomic indicators are observed ([gross] domestic product or employment).” (Villanueva et al., 2015) The private cost from factory pollution cost grows with the level of pollution, can also be a variable. The federal tax structure reaps a rich harvest from the additional price of a product (internal costs) accruing to individuals, by adding GST tax generated by more pollution. This defeats the purpose of correcting the external cost and taxing both producer, consumers and society. GST tax consumers and then goes back to charitable donations, including oil mining subsidies, while subsidy resources must be taken coercively from tax payers to bear the cost and compensate society’s costs. Farmland can be unproductive and still receive government subsidies or tax breaks. “As highlighted by the stakeholders, farmers in the region are still perceived as society’s backbone; they are connected to strong social networks and often occupy important social positions and political offices.” (Villanueva et al., 2015) Corporate planner’s cost-benefit-analysis shows a level of ignorance and basis, with limited resources, special interests, and increasing competition, faced with allocating resources when there are goods without market prices. “Such logic, followed to its conclusion, would lead to a centrally planned economy, as the price and quantity supplied of all goods would be set based on the state’s cost-benefit analysis, not on consumer evaluation.” (Callahan, 2015) Where higher taxes are accused for price increases there is no direct correlation between taxing and improved environment and taxes are increasing the total cost of a product for the consumer overall. Little do consumers realise this side effect when weighting up the costs and benefits. To overcome this tax propaganda, there needs to be a balance between liberties with the competing governmental interests. The market could be left to compete on having the lowest price and better quality.

In conclusion, the identification and measurement of public and private goods in factory products, continues to prevent an ideal corrective tax that equal’s the external cost. Considering market failure for government agencies and private suppliers to overcome the tragedy of the commons and discourage negative externalities through government market-based policies. Arguing that the abolishment of taxes and the promotion of market based competition can lower the overall cost to the consumer and society taxes.


Reference List (American Psychological Association)

Callahan, G. 2005 (2002), Economics for Real People. 2nd ed. United States: Ludwig Von Mises. Retrieved [29/01/16] from <>.

Hoppe, H. (2003). The Myth of National Defence: Essays on the Theory and History of Security Production. Alabama. United States: Ludwig Von Mises Institute. Retrieved [29/01/16] from <,%20The%20Essays%20on%20the%20Theory%20and%20History%20of%20Security%20Production_3.pdf>.

Hu, R., Liang, Q., Pray, C., Huang, J., & Jin, Y. (2011). Privatization, public R&D policy, and private R&D investment in china’s agriculture. Journal of Agricultural and Resource Economics, 36(2), 416-432.

Mankiw, G. (2015). Principles of economics, 7th ed. United States: Cengage Learning.

Mises, M. 1949 (2010). Human Action, Scholar’s ed. United States: Yale University Press, Ludwig Von Mises Institute.

Morris, M. L. (2007). Fertilizer use in african agriculture: Lessons learned and good practice guidelines. Washington, DC: World Bank. doi:10.1596/978-0-8213-6880-0

Villanueva, A. J., Targetti, S., Schaller, L., Arriaza, M., Kantelhardt, J., Rodriguez-Entrena, M., & Viaggi, D. (2015). Assessing the role of economic actors in the production of private and public goods in three EU agricultural landscapes. Journal of Environmental Planning and Management, 58(12), 2113-2136. doi:10.1080/09640568.2014.1001022



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