Directorate for Food, Agriculture and Fisheries Workshop on Multifunctionality

1. The second question suggested by the analytical framework is whether market failures will result from decreases in the prices of commodity outputs, in a context of agricultural policy reform. To answer this question, we need to know: (1) how price decreases will affect the level of production of both commodity and non-commodity outputs, and (2) what is the value of the resulting reduction in the supply of the non-commodity outputs. This paper outlines the main issues associated with the second question while the first question is covered in the previous sub-session. 2. More specifically, to assess the occurrence of market failure following a commodity price decrease it is necessary to compare the loss of positive externalities and the gains due to trade (increased consumer surplus, elimination of high-cost production and decreased negative externalities). The former can only be obtained from marginal values of all of the non-commodity outputs (i.e. the value of the changes in the non-commodity outputs resulting from an one-unit change in commodity production). Similarly, marginal values of (reductions in) negative externalities need to be estimated. Furthermore, there may be substitution relationships among the non-commodity outputs, which affect the combined demand for several non-commodity outputs. If this is the case, the total value of the change could be different from the sum of individual values for each non-commodity output. Major findings from the reports prepared in the empirical studies 3. There have been many studies trying to measure the demand for individual non-commodity outputs in most countries (see Annex 1 for a summary drawn from the empirical studies undertaken for the Workshop by 18 consultants). Attempts have been made to measure demand for landscape in almost all countries. Demand for flood protection and water recharge has also been estimated in all countries in which those functions are considered important. There are also some studies on measuring demand for preserving natural habitat, cultural heritage and biodiversity associated with agricultural production. 4. There have been, however, almost no studies measuring demand for other non-commodity outputs although these non-commodity outputs are claimed to be important in some countries. Only one study has been found measuring demand for food security. There has been no study measuring demand for the positive effects of agricultural employment. 5. Regarding negative externalities, there has been a large number of studies estimating the costs to society of negative externalities. Some countries even have databases on these …