Economic Research Report No. (ERR-64) 77 pp

September 2008

The Use of Markets To Increase Private Investment in Environmental Stewardship

U.S. farmers and ranchers produce a wide variety of commodities for food, fuel, and fiber in response to market signals. Farms also contain significant amounts of natural resources that can provide a host of environmental services, including cleaner air and water, flood control, and improved wildlife habitat. Environmental services are often valued by society, but because they are a public good-that is, people can obtain them without paying for them-farmers and ranchers may not benefit financially from producing them. As a result, farmers and ranchers underprovide these services. This report explores the use of market mechanisms, such as emissions trading and eco-labels, to increase private investment in environmental stewardship. Such investments could complement or even replace public investments in traditional conservation programs. The report also defines roles for government in the creation and function of markets for environmental services.

Keywords: agricultural economics, environmental stewardship, private investment, conservation, farmers, land, wetlands, wildlife, government, eco-labeling, environmental service, emissions trading, market, public good, supply and demand, transaction cost

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