Paper Number: 2010-04

Document Date: 04/2010

Author(s): R. David Simpson

Subject Area(s): Costs of Pollution Control; Land Use

JEL Classification: Renewable Resources and Conservation: Land; Environmental Economics: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling; Government Policy

Keywords: reactive nitrogen; diamonds and water paradox; ecosystem services; constrained optimization; land use regulation; corner solution

Abstract: There has been great interest in recent decades in “ecosystem services”. One of the services most often mentioned is the retention of nutrients. I construct a simple model of agricultural land use under a regulatory requirement that nutrient loading cannot exceed a fixed ceiling develop three propositions. First, when the regulatory constraint is relatively weak there will be a corner solution in which no land is set aside to provide the service of nutrient retention. Second, for any given regulatory constraint there is in general a minimum amount of land that would be set aside to provide ecosystem services, regardless of the efficiency with which preserved land provides the nutrient retention function. Third, there is sort of paradox of value: the more valuable it is to set some land aside for nutrient retention, the less land in total would optimally be preserved for this purpose. I illustrate the implications of this model with an application to the Chesapeake Bay watershed. Estimates reported in the literature suggest that land retained in natural cover could prove very effective in retaining reactive nitrogen and other nutrients. If so, there is a sort of “good news/bad news” scenario for conservation advocates touting the importance of ecosystem services. The good news is that the ecosystem service of nitrogen retention is, in fact, likely to be very valuable. The bad news is that “a little may go a long way”: setting aside small areas of land may be sufficient.

This paper is part of the Environmental Economics Working Paper Series.

• Allocating Land for an Ecosystem Service: A Simple Model of Nutrient Retention with an Application to the Chesapeake Bay Watershed (PDF)(26 pp, 228 K, 04/2010)