5. Why Intervene?

Administrators often justify government intervention on grounds of it being in "the public interest", a term which is subject to various interpretations by those exercising powers of intervention. Economics has a more tightly defined rationale for public intervention, reflecting its concern with the utilisation of finite and scarce resources in satisfaction of potentially unlimited human needs, and its focus on economic efficiency – enhancing economic well-being by maximising outputs from a given set of inputs, or minimising inputs for a given set of outputs. For a fuller understanding of efficiency criteria used in economics and how it is applied to environmental questions see Appendix A.

5.1 The case for government intervention

Government intervention is only clearly defensible in situations where private initiatives are likely to fail. Governments can act in these situations because of their authority vested through the political process and their ability to raise funds by taxing the community, which benefits. Local governments can perform similar functions where the issue only impact on local constituents.

The role of government from the economic perspective includes:

Setting the rules of the economic game by controlling the institutions within which economic activity takes place;
Providing public goods which a private supplier is unlikely to supply because of the impossibility of recovering full costs of supply, either because it is infeasible to charge for them and exclude non-payers from also receiving the benefits, or because charging would deter use which could be accommodated at zero additional costs;
Correcting externalities, which are effects arising from others’ actions borne by third parties without compensation;
Controlling market imperfections which distort competitive conditions, such as monopoly power;
Redistributing income, goods or services according to politically-set notions of equity and social justice. This relates to ‘fairness,’ or perhaps more practically, what society deems as fair. This will probably be include in the wider objectives (outputs) demanded by the government. While the definition under this item is decidedly fuzzy it does alter outcomes in the short term – long term however, justification for sustaining funding through what amounts to political patronage is uncertain at best.
Furthering other politically mandated objectives that are unlikely to emerge in the absence of intervention. These may include explicit social, environmental or economic goals.

One thrust of modern economics, influenced by the so-called Coase theorem, has been the re-examination of the role of property rights and entitlements in resource issues as a means of appropriating what were previously regarded as open access "free" resources (e.g. fish, soil conservation, and air pollution). Redefining entitlements to environmental resources opens the possibility of problems being resolved through private negotiation, rather than through public intervention. In this instance, government intervenes to provide a structure through which market-like allocation processes can operate, rather than providing a mechanism with which to direct allocation itself.

In short this means, that in certain circumstances, there is a rationale for government to fund the means to persuade farmers to undertake environmentally sustainable practices rather than direct on farm funding of environmental sustainable activity, provided that it meets the criteria set out above.

By way of example, the role of government in agricultural production and environmental policy in the post war to 1984 period could be described as the "interventionist period." Under this approach, substantial government subsidies were available to encourage farmers to boost production and undertake measures thought to reduce environmental degradation, such as planting trees or retiring erosion-prone land from grazing. In effect, the government paid landholders with subsidies to achieve on-site benefits such as reduced sediment discharges. Uptake by farmers was voluntary and not all susceptible areas received appropriate treatment, and benefits received by the community were not necessarily proportionate to subsidies paid. This system was ended in 1987, largely due to central government’s perception that its benefits were locally and privately appropriable and did not warrant national subsidies (see Table 1 and Part II for further discussion).

For major expenditures, land’s eligibility for subsidy was assessed through formal cost benefit appraisals, but the past analysis procedures were preoccupied with quantifying on-farm effects rather than off-farm benefits which were the real justification for public subsidy. Such appraisals commonly revealed a presumption that expenditure on environmental degradation was a good thing irrespective of any demonstrable effects; a lack of questioning of the premise of government support; and a lack of reference point with which to compare returns from environmental benefits with other government expenditures. The off-farm benefits were in some cases assumed large enough to overturn a poor result from the quantitative analysis.

Providing that environmental policy is justified (i.e. given that it fits the criteria described above), Coase provides a sound platform for interventions which seek to associated persuading farmers to act in environmentally sustainable way.

This indirect environmental assistance would have to be specifically targeted at improving the environmental off-farm benefits so that the benefits are captured by the community either regionally or nationally. Care must be taken in any policy design so that farmers or other land users must not be able to "pick the eyes" out of a particular programme capturing any private benefits available and ignoring the public benefits which the policy was designed for (see section two on policy objectives).

Table 1: Classification of environmental policy activities

Activity	Benefits captured:
Production	Privately
Direct environmental assistance	More privately than publicly
Indirect environmental assistance	Mostly publicly
Source: NZIER

5.2 Private vs public goods

Whether a good can be classified as public or private depends upon what good is being considered and how well the market works to provide the goods that are being demanded. One way of thinking about various goods within an economy is to ask:

is the good excludable? That is, can people be prevented from using the good? and
is the good rival? Does one person’s use of the good diminish another person’s enjoyment of it?

Using the classifications above we can examine the nature of goods in a continuum to illustrate how the various categories can blur into each other, see Figure 3.

Private goods are both excludable and rival. These include the every day products such as hardware, clothes, and ice cream. These goods are excludable because it is possible to prevent someone else using them. It is also rival because if one person consumes the product others can not use it at the same time. Production extension activities in the post 1984-87 era are private goods.
The ability to exclude and be non rival puts the good into the natural monopoly category. For example an uncongested toll road excludes those that do not want to pay the toll. However, it is non rival since one person’s use of the road does not preclude others from using it.
Use of common resources are rival but not excludable. These include products such as fish in the ocean, the environment, and congested non-toll roads. If, for example, you were able to measure a stock of environment and a farmer "used" (or degrade) part of the environmental stock i.e. because it is non excludable. Once the environment stock had been degraded, the impact of the degradation can effect "use" by others or the ability "sustain" the environment stock over the long run (because it has rival characteristics).
Public goods are neither excludable nor rival. People can not be prevented from using a public good, and one person’s enjoyment of a public good can not be reduced by another person’s use. For example the national defence force, where one person’s can gain the benefit of the defence force product and not exclude others from the same benefit.

Figure 3: Public / private good continuum

Source: NZIER

Figure 3: Public / private good continuum

Any number of different reasons can switch goods between different categories depending on the characteristics of the product. An interesting example is that of lighthouses. Lighthouses have long been seen as a public good, yet in the 19^th Century some British lighthouses along the English Channel were privately owned. They could not charge the ships as the past but could charge the neighbouring port. If the port did not pay the lighthouse, the light was turned off and fewer ships were prepared to use the port. The linkage between port business and lighthouse use made those lighthouses a private good.

Governments can also influence the way a product is viewed. Federated Farmers (in numerous articles in Straight Furrow) have expressed the view (rightly or wrongly) that the Resource Management Act (RMA) is eroding property rights of farmers by turning elements of on-farm management into public goods and developing policy on that basis. Since environmental extension activities, in the farmers’ eyes at least, are related to RMA activities, farmers could potentially see government initiatives on environmental extension as another action to curtail their property rights. They may, therefore, be reluctant to get involved in an environmental extension process because of farmers’ experience with the RMA.

5.3 Risk and uncertainty

Economic appraisals handle risk and uncertainty typically by estimating expected values, given by the product of consequential damage costs times the probability of the occurrence. Expected values also influence the effectiveness of property entitlements protected by liability rules determined through the courts, since the expected value of damages payable after court action will influence a landholder’s expenditure to prevent the damage which gives rise to court action in the first place.

What are the implications for government in achieving the desired goals set out in Figure 1? Absent an explicit specific government regime, the option of a tort action in the courts is available. The extent to which farmers can be held liable for the off-site damage resulting from their land use, as a practical matter seems limited: if cows crossing a stream pollute it how can downstream users identify individual farmers as culpable and prove that the pollution would have not otherwise occurred? Even if the victims could, what recompense could they expect to collect from such farmers, whose net asset limits their ability to pay damages?

In other countries, legislation has had to be changed to enact such litigation-based solutions, but these have high costs due to the demands they place on the legal system. In some situations public intervention, which spreads reparation across a wide range of individual taxpayers could have advantages from both efficiency and equity perspectives.

One traditional market-based response to handling risk is to take out insurance, whereby a wide number of contributors fund a pool which provides recompense for the few who suffer loss. However, the necessary conditions for an insurance market work are not present for many categories of environmental risk, and environmental insurance is costly to arrange. ¹⁰

5.4 Valuation issues

The treatment of "non-market values", principally for off-site effects on environmental quality is an important issue, particularly since any government interventions should be squarely targeted on off-site environmental improvements. These represent the loss of community well-being which would result from degradation of environmental resources which are not provided through a market mechanism. They include: current use values such as those from informal recreation in clear waterways, pleasant landscapes etc.

Various techniques of non-market valuation are available to impute values either by observing "revealed preferences"¹¹ in actual behaviour (such as travel cost analysis for recreational demand, "hedonic pricing" for amenity in housing values) or by inquiring into "stated preferences" expressed in surveys designed to mimic hypothetical market-like processes (such as "contingent valuation" of wildlife resources and safety improvements). All these techniques are relatively data-intensive and have not been widely applied in New Zealand. Furthermore, the approaches have well documented limitations and as yet unresolved problems in application, and a major drawback for applying to sustainability issues in that they do not yield values that can be extrapolated beyond the specific study areas.

5.5 Sustainability

The economic interpretation of sustainability has its roots in natural resource accounting, which attempts to explicitly deal with reductions in natural capital stocks, whether the resources are able to be easily sold (such as minerals, fish, or forestry) or whether they support the production process (such as land and water). Attempts to quantify sustainability criteria have focused on monitoring and maintaining a constant capital stock from one generation to the next.

The aim of sustainable management is not to retain or return land in its natural state but to achieve some modified state which allows the combined return form all available resources to be maximised over time. Conservation measures aimed at restoring "natural" quality may waste resources by diverting them from other, higher valued activities; and it may be more efficient to accept a degree of "degradation" and incur higher input costs than to attempt to eradicate degradation altogether. For example, inputs such as fertiliser act as substitutes for natural fertility, and where such inputs are abundant and cheap it is rational to allow a greater degree of natural modification than where those substitutes are scarce and relatively costly.

Does an economic analysis allow policy makers to make definite statements about environmental degradation? Around the world work has been done on devising indexes which estimate the opportunity cost of environmental damage. However, the procedures used appear to be data intensive (in an area where data is scarce and in some cases questionable) raising doubts about the validity of the approaches and results.

Critical of economic prescriptions, Bradsen (1992) regards high or increasing agricultural productivity as no reason for assuming degradation is absent: the question to be addressed in assessing sustainability is whether long-term capacity is being exceeded. He questions with some justification the methodological grounding of economic analysis, but is less clear on what exactly to put in its place. The strength of an economic approach (in this case cost benefit analysis – see Appendix A) is not that it provides an answer – which may be elusive any way given limited information – but rather that it helps clarify the effects which are implicit in all decisions. Economic appraisal can still be valuable if used as an informative, rather than prescriptive tool, since it provides a consistent approach to harnessing available information and ordering priorities.

^{10 Conditions for an insurance market to work
include: actuarially predictable risk categories, a wide pool of potential policy-holders,
and the ability to limit the "moral hazard" of fraudulent claims.}

11 Revealed preference examines consumers’ behaviour and develops policy on that basis, rather than analysing or developing policy on the expressed opinions of consumers.

Contact for Enquiries

Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND

Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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