=Paper=
{{Paper
|id=Vol-1152/paper58
|storemode=property
|title=Valuation of Environmental and Social Functions of the Multifunctional Cypriot Agriculture
|pdfUrl=https://ceur-ws.org/Vol-1152/paper58.pdf
|volume=Vol-1152
|dblpUrl=https://dblp.org/rec/conf/haicta/RagkosT11
}}
==Valuation of Environmental and Social Functions of the Multifunctional Cypriot Agriculture==
https://ceur-ws.org/Vol-1152/paper58.pdf
Valuation of Environmental and Social Functions of
the Multifunctional Cypriot Agriculture
Athanasios Ragkos1, Alexandros Theodoridis2
1
Department of Rural Development and Agribusiness Management, Alexander Technology
Educational Institute of Thessaloniki, Greece, e-mail: tragos@agro.auth.gr
2
School of Veterinary Medicine, Aristotle University of Thessaloniki, e-mail:
theoagrecon@mail.com
Abstract. The multifunctional farm sector in Cyprus poses threats on the
island’s water resources, but also highly contributes to preserving the cultural
identity, incomes and employment in rural areas. This paper presents an
application of the Choice Experiment method, in order to evaluate these
features of Cypriot agriculture, which are externalities, as farmers are not
remunerated in markets for such services. The results of the empirical analysis
demonstrate that the Cypriot public is in favor of a less intensive pattern of
agriculture. Furthermore, Cypriots are willing to pay in order to mitigate
adverse environmental effects of agriculture, to improve cultural heritage and
to safeguard the continuation of farming trade on the island. The estimated
benefits often exceed income losses from changes in the cropping pattern,
which verifies that EU rural development policies are regarded as beneficial by
the public.
Keywords: Multifunctionality, Choice Experiment, Rural development,
Cyprus
1 Introduction
The agricultural sector is multifunctional, given its complex interactions
with the environment and rural amenities. Agriculture’s multifunctionality has been a
central issue during trade liberalization negotiations in WTO and is steadily gaining
attention in the agricultural policy agenda. Proponents of multifunctionality claim
that the maintenance of rural landscapes, the viability of rural areas and food security
are some of the non-traded outputs of agriculture, which are endowed with public
good characteristics or are externalities (OECD, 2001). As such, these non-traded
outputs provide additional arguments in favor of intervention in the farming sector.
The debate over agriculture’s multifunctionality has been mainly based on
societal perceptions of values that stem from agricultural activity. Farmers continue
to provide society with landscapes and keep rural economies viable but they are not
rewarded by markets. A positive approach of multifunctionality recognizes multiple
functions of agriculture, but favors policy measures to arrange their provision as long
as they are perceived and valued by society (Vermersch, 2001, Allaire and Dupeuble,
2002, OECD, 2003). If society is not affected by non-traded outputs of agriculture,
there is no room for public intervention. Therefore, central to the use of
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675
multifunctionality in the agricultural policy reform agenda is to provide estimates of
the values of non-traded outputs, which sum up to the total economic value of
agriculture (Hediger and Lehmann, 2003).
The multifunctional character of agriculture is an emerging issue in academic
circles. Many authors have examined the effects of price policies on the production
of non-traded outputs (Randall, 2002, Peterson et al., 2002, Romstad, 2004a, b), the
implications of joint production of traded and non-traded outputs (Paarlberg et al.,
2002, Havlik et al., 2005) and the possibilities of valuing agriculture’s externalities
(Boody et al., 2005). The valuation of multifunctional aspects of agriculture, on
continent scale, has been highlighted by Randall (2002). Stated preference
techniques, such as Contingent Valuation (CV) and Choice Experiments (CE), have
been employed in order to attach monetary values to non-traded outputs of
agriculture (Yrjola and Kola, 2004, Kallas et al., 2007).
The purpose of this paper is to provide estimates of the value that society
places on certain features of multifunctional agriculture. The CE method is employed
in order to examine the factors that affect individual preferences about functions of
multifunctional agriculture and then estimate monetary values for these functions.
The experimental design considers four attributes. The first two functions concern
the adverse environmental effects of agriculture; that is pollution of water resources
by pesticide and fertilizer use and pressures on water reserves from irrigation. The
third function is related to the preservation of cultural heritage and rural landscapes,
which formulate the identity of rural regions on the island. The fourth function is the
maintenance of the farming trade, which is multifunctional; it is expected that the
public is positively predisposed towards farmers.
The CE data are analyzed by estimating a Conditional Logit Model (CE)
and Random Parameters Logit Models (RPL), which are based on Random Utility
Models (RUM). The estimated coefficients reveal public preferences towards the
valued function of agriculture and focus on the effects of particular characteristics on
the acceptance of changes in the provision of agriculture’s externalities. Furthermore,
these coefficients are used in the estimation of the Marginal Willingness to Pay
(MWTP) for the valued functions. As a final step, income losses from changes in the
cropping pattern are compared to benefits from non-traded outputs of the Cypriot
agriculture; the results reveal a net social surplus from the adoption of an extensive
cropping pattern, due to the provision of externalities at the level that society desires.
2 Agriculture’s Multifunctionality in the Policy Agenda
Agriculture’s multifunctionality reflects the fact that the agricultural sector
jointly produces non-traded outputs, food and fiber. The former, referred to as “non-
trade concerns” in the WTO agenda, are often externalities or are endowed with
public good characteristics. Although controversial, the concept of agriculture’s
multifunctionality has been central among countries’ claims of widening the “green
box” measures in order to protect unique farming systems that produce some of these
externalitites. It is worth to notice that the negative externalities of agriculture, such
as pressures on water resources and air quality, have been long recognized in
literature (see Pretty et al., 2000); however, the concept of multifunctionality in
agricultural policy reform has focused on positive externalities on employment,
income, cultural heritage and rural development.
676
The EU farm sector has been long recognized as multifunctional, as is expressed
by small family farms that prevail in the Continent (de Vries, 2000). This “European
Model of Agriculture” plays a significant role in maintaining vivid rural areas and
protecting the environment and cultural heritage (Casini et al., 2004). EU policies
favor protectionism in the farm sector, as market competition could abolish this
model of agriculture. The Common Agricultural Policy (CAP) provides economic
incentives, many of which have influenced non-traded farm outputs. However, these
measures did not achieve environmental and rural development goals. Regulations
(ΕC) 1782/2003, (EC) 73/2009 and (ΕC) 864/2004 and (EC) 1698/2005 recognize
that farming should always safeguard soil quality and protect the environment.
The relationships between agriculture and the environment are predominantly
complex. The extent to which farming affects the environment, either positively or
negatively, depends on input use and on the cropping pattern. Conventional farming
systems in the EU produce negative environmental externalities which affect soil, air
quality and surface and ground water resources. The main pressures of agriculture on
water resources and aquatic ecosystems are due to poor management of irrigation and
non-point sources of pollution, mainly residuals of agrochemicals (Hitchens et al.,
1978, Thampapillai and Sinden, 1979, Burton και Martin, 1987, Pretty et al., 2000).
Lately, agroenvironmental policy measures have emerged in order to minimize
adverse environmental effects of agriculture (Dobbs and Pretty, 2004). The recent
CAP reform introduced payments to farmers who adopt integrated or organic farming
and incentives to expand fallow lands and forests (Axis ΙΙ, Reg. (EU) 1698/2005).
Another category of agriculture’s externalities is the formulation of agricultural
landscapes (Lindland, 1998, Peterson et al., 2002, Casini et al., 2004). These
landscapes include both natural and man-made elements which reflect structural
changes in the sector as well as social, cultural and political changes that occurred
during centuries. It is argued that rural landscapes characterize and differentiate the
countryside and they constitute development resources for these areas.
Agriculture’s role in rural development is undeniably significant. Functions
such as safeguarding rural populations, protecting cultural heritage and maintaining
the farming trade are some of its non-traded outputs that affect rural amenities. Farm
policies are considered necessary in maintaining them; however, it is ambiguous that
market interventions are the ideal measures to induce rural development. Most
countries agree that the diversification of rural economies is prerequisite for lively
rural areas. This trend is reflected in the constant emergence of pluriactive farms in
the Union (Potter, 2004). It is argued, however, that in regions where the rural
economy is poorly diversified, such as EU’s LFAs, agriculture performs cultural and
environmental functions, except for its predominant role in local economy and
employment. The introduction of EU Reg. 1698/2005 depicts the incorporation of
such issues in the CAP, and acknowledges that basic infrastructure is necessary to
retain acceptable population levels, rather than a heavily subsidized primary sector.
Cultural heritage and the mere identity of rural regions have been shaped,
throughout the years, by the predominance of agriculture. The countryside is
endowed with a wide range of cultural features, such as traditions, music, dances and
architecture. These elements differ among regions and constitute resources that
support rural development, based on existing advantages (Lowe et al., 2002, Jervell
and Jolly, 2003). The public perceives farmers as the keepers of this “agricultural
677
cultural heritage” (Abler, 2003), thus recognizing concrete links between farming
and culture. Nevertheless, markets often fail to remunerate farmers for these services.
Farming has traditionally been viewed by society as a particular trade, as life in
the countryside and constant interactions with nature are unique to the profession.
The multifunctional character of agriculture impels farmers to redefine their scopes
in order to integrate them in a modern framework which embraces economic,
environmental and social aspirations (Deverre, 2002). Cayre et al. (2004) recognize
social and ethical motivations in engaging with farming. Non-economic motivations
are reflected in the maintenance of small family farms with poor economic
performance, as well as in pluriactive farmers, who take over other activities in order
to subsidize the continuation of farming (Streeter, 1988, Sumner, 1991).
According to Harvey (2003) the positive way in which society regards
farming stems from the development process during the industrial revolution, of
which farmers are the “losers”, who did not have the opportunity to move from the
countryside and seek new forms of employment and a modern way of life in urban
areas. The “winners” of this process, civilians, retain a “romantic” view for farmers.
Within this context, the CAP recognized farmers as a disadvantaged trade even from
its origins (Potter and Burney, 2002).
3 The Farming Sector in Cyprus
The main environmental problem in Cyprus is water management. Low
annual rainfalls threaten surface and ground water reserves on the island. Given that
the farming sector accounts for 70% of the total water consumption in Cyprus,
irrigation policies are of vital importance not only for the farming sector, but also for
the economy as a whole.
Water reserves are also threatened by agrochemical use. The expansion of
irrigated crops (potatoes, citrus, olives and grapes) has resulted in a considerable
increase in the use of fertilizers and pesticides, whose residuals pollute the otherwise
limited water resources on the island. Especially nitrogen pollution is severe and is
the main cause of eutrophication.
During the last 25 years, the Cypriot government has prioritized the
implementation of integrated irrigation water management policies. An estimated
80% of total funding of the Ministry of Agriculture, Natural Resources and the
Environment has been directed to irrigation projects. Nowadays, 23% of total
farmland is irrigated. The amelioration of irrigation networks has permitted the
extensive introduction of Improved Irrigation Systems, which nowadays cover
approximately 95% of the irrigated farmland and have brought about water savings
of up to 70 mil. m3/year. Nevertheless, continuous droughts in the past few years have
deteriorated salinization and have intensified pressures on water reserves, with
considerable adverse effects on ecosystems and biodiversity.
The Cypriot farming sector contributed by 3,1% to the GDP and by 6,7 to
employment in 2008. However, its contribution is vital in incomes and employment
in highland rural areas, where tourism and manufacturing activities are limited.
Features of agricultural cultural heritage are widespread in rural areas of the island,
including monuments, festivals, museums and buildings (windmills, bridges, oil
mills etc). The importance of these cultural resources has been recognized and
considerable efforts are in force in order to incorporate them into rural development
678
strategies. The Rural Development Program, in force since 2007, endorses
investments and actions to protect cultural features through measure 3.2, in order to
prevent depopulation of rural areas.
4 Methodological Framework
The effects of agriculture’s externalities are difficult to value, as they are not
captured by the production functions. Stated preference valuation techniques have
been applied by numerous authors during the past few years, in order to attach
monetary values to non-marketed goods and services (Lusk et al., 2003, Birol et al.,
2006, Travisi and Nijkamp, 2008, Christensen et al., 2011). Among stated preference
techniques, this paper adopts the Choice Experiment (CE) approach to value
agricultural externalities.
The CE method is based on Lancaster’s (1966) theory of consumer
preference, according to which goods and services can be described in terms of their
characteristics. The design of a choice experiment requires the choice of attributes
that describe the good of service as well as the determination of levels for each
attribute. The researcher adds a monetary attribute that corresponds to an amount that
a member of a hypothetical market would be willing to pay in order to achieve the
attribute levels they desire. The possible combinations of attributes and levels yield
the alternatives, which are then organized in pairs in order to formulate the choice
sets. Each respondent is presented with 4-16 choice sets (Louviere et al., 2000) and
for each one they are asked to mark the alternative they prefer.
The econometric analysis of CE data is based on Random Utility Models
where utility is distinguished in an observed (Vij) and an unobserved (εij) part.
U ij = Vij + e ij (1)
Based on RUM, several econometric models have been proposed for the
analysis of choice data, among which Conditional Logit (CL) models (McFadden,
1973) have been widely applied. In CL models, the indirect utility function is linear
and the stochastic component of the utility is Gumbel extreme Type-B independently
and identically distributed. The probability distribution function is formulated as
follows, where the probability (denoted Pij) of respondent i choosing alternative j
over all other k alternatives in choice set B equals the utility from this alternative
over the utility from all other alternatives.
mV
e ij
Pij = J "j , k Î B (2)
mVik
åe
k =1
The basic CL model is subject to two limitations. The first is the
Independence of Irrelevant Alternatives (ΙΙΑ) property, which states that the choice
probability between two alternatives is not influenced by the inclusion or exclusion
of other alternatives in a choice set. If IIA does not hold, the model might be biased
(Christiardi and Cushing, 2007). Second, this CL model does not account for
preference heterogeneity. This can be arranged in two ways. Observed (systematic)
heterogeneity can be captured in respondents’ social and economic characteristics,
679
which enter the model as interaction terms. Unobserved heterogeneity is captured in
the random part of the RUM.
Random Parameters Logit models (RPL) (Revelt and Train, 1998) are
similar to CL in that they are based on the same distributional and behavioural
grounds. However, in RPL models a separate linear utility function is introduced for
each respondent and standard deviations for random coefficients account for
unobserved heterogeneity; hence, utility from choosing an alternative in a choice set
is itself a random variable. The probability distribution function is formulated as
follows, where ηi is the random factor in the utility function.
Z ( b +h )
e ij i
Pij = J "j , k Î B (3)
Zik ( b +hi )
åek =1
Formula (3) can be solved by simulation, using the simulated maximum
likelihood estimation (Train, 2003). For the estimation, Halton draws are preferred,
in order to minimize variance (Bhat, 1999, 2000). The choice of random coefficients
and distributional forms depends on the researcher. Hensher et al. (2005) argue in
favor of a normal distribution, while Revelt and Train (1998), Lusk et al. (2003) and
Morey and Rossman (2003) assumed normal distributions in their analyses.
Following the results of the estimation of logit models, welfare measures can be
estimated for each attribute. The monetary value of the good or service under
consideration is reflected in the compensating surplus (CS) (Hicks, 1939, Hanemann,
1984), using formula (4) (Hanemann, 1989).
I I
ln å eVi1 - ln å eVi 0
i =1 i =1
CS = (4)
b payment
where Vi0 και Vi1 are utilities of individual i before (status quo situation) and after the
implementation of the proposed management scenario and βpayment is the coefficient of
the monetary attribute, which stands for the marginal value of income.
The most commonly used welfare measure in non-market valuation is
Willingness to Pay (WTP). In choice experiments, the experimental design allows for
the estimation of the Marginal Willingness to Pay (MWTP), for marginal changes in
the level of each attribute, as the trade-off between income and a marginal change in
the level of the attribute. For CL models, as well as for attributes with fixed
coefficients in RPL models, trade-offs are estimated by means of formula (5)
b attribute + b1S1 + ... + b n Sn
MWTP = - (5)
b payment
where β1…βn are the coefficients of interaction terms S1…Sn. It is obvious that
formula (5) takes into account the observed part of preference heterogeneity.
MWTP for random coefficients in RPL models is estimated using the formula
(5); however, in order to take into account the standard deviations, Hensher et al.
(2005) describe a technique that uses the population minutes, in order to simulate the
unknown distribution of MWTP. By simulating the distribution, it is possible to
680
estimate means, medians and standard deviations, depending on the distributional
assumptions about the random coefficients (Abou-Ali and Carlsson, 2004).
Confidence intervals for MWTP are estimated using bootstrapping techniques, in
order to simulate unknown and complex distributions. Krinsky and Robb (1986)
proposed a method which uses random draws from a multivariate normal
distribution, using the vector of estimated coefficients and the estimated variance-
covariance matrix. For random coefficients, the procedure uses population minutes.
In both cases, MWTP is estimated for each draw and the resulting welfare measures
create the unknown distribution.
5 Survey Design and Administration
The CE questionnaire includes three parts, following common
recommendations in literature (Mitchell and Carson, 1989, Arrow et al., 1993, Boxall
et al., 1996). In the first part, respondents are asked about their attitudes towards
multifunctionality, using Likert-scale questions; in the third part respondents’ social,
economic and behavioral characteristics are recorded.
The second part of the questionnaire starts with a brief explanation of
externatilies that affect the environment and society, as well as relevant problems. As
a solution, a change in the cropping pattern is proposed. The introduction of an agro-
environmental, non-government trust-fund is proposed, which will be in charge of
actions and synergies necessary to carry out changes in the cropping pattern.
Individuals who are interested in this management scenario are invited to volunteer
by paying an amount to the trust-fund. This payment vehicle is considered
compatible to the nature of the proposed trust-fund, as such bodies could perform
better in organizing efforts, by taking into account particularities at the local level
(Blandford and Boisvert, 2002). Dwyer and Hodge (1996) are also in favor,
following the example of carts operating in the UK.
The payment scenario is based on the results of a mathematical
programming analysis (details are available in Ragkos et al., 2010). Using published
technical and economic indicators of the main crops in Cyprus, a parametric
programming model yielded 15 alternative cropping patterns for the country, each
subsequent of which represents reduced requirements in input use. The basic
characteristic of this change is the predominance of wheat, which gradually
substitutes tree crops and vegetables, thus reducing the use of agrochemical inputs
and irrigation water. Nevertheless, this shift to wheat brings about a loss in farm jobs,
due to its low requirements in human labor, and a raise in incomes per farmer, as the
loss in total revenue would be counterbalanced by the reduction of the number of
farmers. The main results of the 15 cropping patterns are presented in Table 5.
The design of the CE survey was based on the results of the parametric
programming model. The five attributes included in the experimental design are (see
also Table 1):
1. “Reduction in agrochemical use”. This attribute captures respondents’
preferences about environmental externalities of agriculture, considering the adverse
effects of detrimental inputs on the environment.
2. “Reduction in water consumption”. The consideration of public preferences
towards irrigation water could inform water management policies.
681
3. “Rural development and cultural heritage”. This attribute involves retraining
farmers who will leave farming, as a result of changes in the cropping pattern, in
order to engage in other sectors of the rural economy. It reflects the values of rural
cultural heritage and rural landscapes.
4. “Increase in incomes from agriculture”. An increase in farm incomes
induces farmers to remain in the trade. Preferences towards this attribute reflect
public interest in safekeeping the farming sector and imply the degree of consent for
maintaining protectionism in the sector.
5. “Payment” is the amount of money that a respondent would pay by
choosing an alternative.
Table 1. Attributes and levels in the CE design
Attributes Levels Description
Reduction in 11%, 34% Reduction in the value of pesticides and fertilizers
agrochemical use 46% used as a result of changes in the cropping pattern
Reduction in water 16%, 41% Reduction in irrigation water consumption as a result
consumption 60% of changes in the cropping pattern
Rural development 18.571 farmers Number of farmers who leave farming, as a result of
and cultural heritage 24.910 farmers changes in the cropping pattern, and will be retrained
27.852 farmers in other sectors of the rural economy (development
of rural landscapes and rural cultural heritage)
Increase in incomes 18%, 25%, Increase in incomes per farmer as a result from
from agriculture 37%, 45% changes in the cropping pattern, which entail less
employment in the sector
Payment 30€, 80€, 150€, Amount of money paid for each alternative
350€, 500€
The full-factorial yielded 540 alternatives, which were reduced to 25, using
the orthogonal design command in the statistic package SPSS 17.0. The 25 remaining
alternatives were organized in 25 choice sets, which were then divided into four
groups, three of six alternatives and one of seven. This process yielded four different
versions of the questionnaire. Each respondent was presented with one version,
therefore making six or seven choices.
The sampled population consisted of the total adult population in the
Republic of Cyprus. The stratified random sampling method yielded a sample of 407
respondents. Enumerators approached all respondents and the response rate was very
high (81%), which finally produced a total of 330 valid questionnaires. After
removing protest votes (see a discussion in Arrow et al. (1993)), a total of 1558
choices was used for the analysis.
6 Empirical Results
Responses to the Likert-scale questions in 1st part of the questionnaire were
analyzed and five multiple-item indexes were formulated, which represent
respondents’ attitudes towards specific aspects of multifunctionality of agriculture in
Cyprus. These indexes are explained in Table 2, along with other variables in the
analysis.
682
The results of the maximum likelihood estimation of the CL model are reported
in the first column of Table 3. All coefficients are significant at the 1% level, which
indicates that all attributes are important explanatory factors of preferences towards
multifunctionality. The positive signs of “Agrochemicals”, “Water”, Retrain” and
“Farm_Income” reveal that the probability that a respondent chooses an alternative is
increased by an increase in their levels, while, as expected, the opposite holds for an
increase in “Amount”.
The CL model was tested for the IIA using the Hausman – McFadden
(1984) test. The null-hypothesis that IIA does not hold cannot be rejected when
Alternatives B or C are removed. This entails that the results of the estimation are
biased, therefore RPL models are estimated.
Table 2. Variables used in the empirical analysis
Variables Description
Agrochemicals Attribute "Reduction in agrochemical use"
Water Attribute "Reduction in water consumption"
Retrain Attribute "Rural development and cultural heritage"
Farm_Income Attribute "Increase in incomes from agriculture"
Payment Attribute "Payment"
Gender Male/Female
Age Numeric variable
Income Ordinal variable
Education Numeric variable (Years of schooling)
Resident Lives/Does not live in a rural area
Farm_Family Comes/Does not come from a farm family
Rural_Family Has grown/Has not grown up in a rural area
Env_Group Membership in an environmental club
Knowledge Latent variable - Knowledge about multifunctionality
Water_Management Latent variable - Attitude towards water use
Environment Latent variable - Environmental consciousness
Cult_Her Latent variable - Attitudes towards agricultural culrutal heritage
Farming Latent variable - Attitudes towards the farming trade
The RPL model is reported in the second column of Table 3. “Water” and
“Payment” are normally distributed random coefficients. All coefficients are
significant at the 1% level and of the expected sign; hence, an increase in the level of
non-monetary attributes affects utility positively, whereas larger payments reduce the
level of utility. The latter finding was expected, due to income constraints.
683
Table 3. Conditional Logit and Random Parameters Logit models
Random
Random
Conditional logit Parameters Logit
Variables Parameters Logit
(CL) with interactions
(RPL)
(RPL-INT)
Intercept -2,48927*** -2,11162*** -2,48527***
(0,35727) (0,47357) (0,47647)
Agrochemicals 0,01883*** 0,02879***
(0,00363) (0,00641)
Water 0,02674*** 0,03165*** -0,10711***
(0,00264) (0,00438)a (0,03842)a
Retrain 0,5177*10^-4*** 0,5567*10^-4***
(0,1394*10^-4) (0,1999*10^-4)
Farm_Income 0,01645*** 0,03277***
(0,00450) (0,00782)
Payment -0,00756*** -0,02331*** -0,06303***
(0,00040) (0,00369)a (0,01152)a
Water*Gender 0,01333**
(0,00626)
Payment*Gender -0,00488**
(0,00196)
Agrochemicals*Age 0,00041*
(0,00022)
Water*Age 0,00106***
(0,00028)
Payment*Income 0,00389***
(0,00093)
Water*Education 0,00589***
(0,00119)
Retrain*Resident -0,2618*10^-4***
(0,0102*10^-4)
Agrochemicals*Farm_Family 0,01632
(0,01019)
Farm_income*Farm_Family -0,03678***
(0,00977)
Agrochemicals*Rural_Family -0,03701***
(0,01245)
Retrain*Rural_Family 0,5901*10^-4***
(0,1608*10^-4)
Water*Env_Group -0,03032***
(0,01038)
Farm_income*Knowledge 0,00225***
(0,00065)
Payment*Knowledge 0,00089***
(0,00022)
Water*Water_Management 0,00311***
(0,00091)
Agrochemicals*Environment 0,00271***
(0,00083)
Farm_income*Cult_Her -0,00240*
(0,00134)
Retrain*Cult_Her 0,1618*10^-5
(0,1404*10^-5)
Farm_Income*Farming 0,00473***
(0,00126)
Standard Deviations
684
Water 0,03379*** 0,03697***
(0,01068) (0,01088)
Payment 0,01411*** 0,01397***
(0,00266) (0,00246)
Log-Likelihood function -1282,955 -1251,210 -1079,931
McFadden R 2 0,25045 0,26900 0,36959
Draws 500 Halton 1000 Halton
Likelihood Ratio Test 857,366*** 920,856*** 1265,213***
Observations 1558 1558 1558
* significant at the 10% level, ** significant at the 5% level, *** significant at the 1% level
Note: a denotes random parameters
Unobserved preference heterogeneity is incorporated in the standard
deviations of the random coefficients, which are significant at the 1% level. The
reported standard deviations indicate that changes in “Water” and “Amount” have a
positive impact on utility, although its extent varies among individuals.
In order to account for both observed and unobserved preference
heterogeneity, a RPL model with interaction terms (RPL-INT) was also estimated
(Table 3). The random coefficients of “Water” and “Amount” are normally
distributed and the estimated standard deviations are significant at the 1% level. The
McFadden R2 (0,36959) is significantly improved compared to the models without
interaction terms, indicating the effects of observed preference heterogeneity. The
internal validity of the model is verified by the positive sign of the interaction term
“Payment*Income”, which verifies that individuals of low incomes are less inclined
to pay higher amounts than individuals of higher incomes. The signs of the other
coefficients of the interaction terms provide indications as to the preferences of
particular segments of the population.
The coefficients of the three models are used in the estimation of the marginal
Willingness to Pay (MWTP) for each attribute. The estimations are based on formula
(5). For random coefficients, standard deviations were taken into account.
The estimated MWTP for the non-monetary attributes are presented in Table 4.
The results produced by the RPL-INT model are considered more reliable, as they
incorporate all sources of preference heterogeneity. Following these, the Cypriot
public are willing to pay:
1. 1,75 €/person for a 1% reduction in the use of agrochemicals, in order to
decrease pressures on ecosystems
2. 2,16 €/person for a 1% reduction in the use of irrigation water
3. 1,65 €/person to achieve a 1% raise in the average farm incomes, which
would induce farmers to remain in the trade
4. 0,0031 €/person in order to retrain a farmer who would leave the trade
The MWTP estimates indicate that the Cypriot public is willing to pay for the
reduction of adverse environmental effects of agriculture, but also for benefits that
affect society and rural development.
685
Table 4. Marginal Willingness to Pay for attributes of multifunctional agriculture
Marginal Willingness to Pay (€/person)
Attributes Confidence Intervals (95%) (€/person)
CL RPL RPL-INT
Reduction in agrochemical use 2,49*** (0,48)1 2,02 2 1,75 2
(1,57)-(3,42) 3 (-5,45)-(8,18) 4 (0,61)-(8,63) 4
1
Reduction in water consumption 3,54*** (0,39) 3,74 2 2,16 2
(2,81)-(4,35) 3 (-18,94)-(22,48) 4 (-0,97)-(21,04) 4
Increase in incomes from agriculture 2,17*** (0,60) 1 2,30 2 1,65 2
3 4
(0,99)-(3,38) (-6,20)-(9,32) (0,57)-(8,13) 4
Rural development and cultural heritage 0,0068*** (0,0019) 1 0,0039 2 0,0031 2
3 4
(0,0033)-(0,0106) (-0,010)-(0,016) (0,0011)-(0,0152) 4
1
MWTP estimated using the WALD procedure in LIMDEP 8.0 NLOGIT 3.0. Numbers in
parentheses are standard errors
2
MWTP estimated using population minutes
3
Numbers in parentheses denote the lower and upper confidence intervals, at the 95% level,
estimated using the bootstrapping procedure by Krinsky and Robb (1986).
4
Numbers in parentheses denote the lower and upper confidence intervals, at the 95% level,
estimated using population minutes
The estimated monetary values can be used for the quantification of benefits
derived from the alternative cropping patterns. Each one of these scenarios
corresponds to different levels of the four non-monetary attributes and, consequently,
to various levels of monetary benefits from their implementation. The monetary
values derived from each scenario are the compensating surpluses (CS) between the
status-quo situation and the levels of these attributes in each scenario. The CS in each
case is estimated using the coefficients of the RPL-INT model, which accounts for all
sources of preference heterogeneity, by simulating the population minutes.
CS estimations for the 15 alternative cropping patterns are presented in Table 5.
CS per person is minimized in scenario 2 (-51,28 €/person), it increases between
scenarios 3-7 and then between scenarios 9-11 and reaches a maximum at scenario
11 (309,49 €/person). It is, therefore, evident that society attaches monetary values to
the implementation of such extensive scenarios, which would entail reduced
agrochemical and water use, more human resources to safeguard cultural heritage
and increased farm incomes to assure the continuation of farming in Cyprus.
Losses in gross margin, due to the substitution of tree crops and vegetables by
wheat, vary between 4,7% και 64,2%. However, these considerable losses are
counterbalanced by the total benefits, aggregated to the Cypriot population, in
scenarios 3-12. The comparison between total benefits and income losses reveal a net
social surplus, which varies between 19,7 mil.€ και 91,7 mil.€ for scenarios 12 and 5
respectively. Hence, the inclusion of the value of agriculture’s externalities in the
decision-making process, for example considering the introduction of an
environmental-friendly policy, heavily influences the results, whether only traded
outputs of agriculture are taken into account. The social and environmental impact of
farming represents an important part of the total economic value of agriculture and
need to be included in the decision-making process, alongside with economic criteria.
686
Table 5. Compensating surplus and gross margin of the 15 alternative cropping pattern scenarios
Cropping patterns
Attributes Benefits
Benefits
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Reduction in agrochemical use (%) 0 11 28 34 37 42 44 46 47 48 49 50 51 51 51
Reduction in water consumption (%) 0 16 41 48 53 57 60 66 69 71 73 73 78 80 80
Retrained farmers 0 4 46 59 62 63 60 45 44 43 42 37 25 18 13
Increase in incomes from agriculture (%) 0 198 18751 22121 23352 24910 25311 24328 25474 26594 27607 27582 29877 30229 30936
687
Compensating surplus (€/person) 0 -51,28 172,51 233,71 260,38 285,92 292,89 281,8 292,8 301,32 309,49 302,58 303,03 296,84 290,46
1
Total benefits (mil.€) 0 -35,4 119,0 161,2 179,5 197,2 202,0 194,3 201,9 207,8 213,4 208,6 209,0 204,7 200,3
Gross margin (mil.€) 406,8 387,5 348,1 331,5 318,9 298,5 286,2 271,8 255,2 240,4 224,4 217,8 173,0 159,2 145,4
2
Reduction in gross margin (mil.€) 0 19,2 58,6 75,2 87,9 108,2 120,6 135,0 151,5 166,4 182,3 188,9 233,8 247,6 261,3
Reduction if gross margin2 (%) 0 - -
-4,73 -14,42 -18,49 -21,61 -26,61 -29,64 -40,91 -44,83 -46,44 -57,48 -60,86 -64,24
33,18 37,25
1
Total benefits are calculated by aggregating the compensating surplus to the entire population
2
The reduction in gross margin is calculated by extracting the gross margin of cropping pattern (1) from the gross margin in each cropping pattern
7 Conclusions
The choice experiment approach in valuing some outputs of the multifunctional
farm sector in Cyprus verifies public awareness concerning agriculture’s
externalities. Cypriots are willing to pay for environmental benefits, through the
reduction in pesticide and irrigation water use, for the protection of agricultural
cultural heritage and for the continuation of farming on the island. This positive WTP
reflects public consent to a shift towards less input-intensive crops which will limit
environmental pressures, reduce jobs in the farming sector and improve farm
incomes. Farmers who will leave the farming sector, because of this extensification,
could be employed in other sectors of the rural economy, which will develop local
characteristics formulated by the predominance of agriculture, such as rural
landscapes and agricultural cultural heritage. Then, the implementation of such a
program could bring about considerable benefits, in terms of non-market goods and
services, which overlap income losses from marketed goods.
The results of the analysis can be of use in policy design. The estimated welfare
measures verify that agriculture is a multifunctional sector, endowed with
environmental and social functions. Therefore, decisions about the cropping pattern,
rural development and price policies should always incorporate the values of non-
marketed services provided by the agricultural sector. Special attention needs to be
directed to the values of the farm trade, as the continuation of farming on the island is
valued by the public, which provides an argument for interventions in the sector.
The results of the analysis verify that the public is in favor of policies that aim at
the diversification of the rural economy (Axis ΙΙΙ, Reg. (EC) 1698/2005). The
analysis has shown that agriculture’s externalities provide a wide range of resources
that could be developed in this context. The use of existing cultural, environmental
and social resources in development programs could produce better results as it
reclaims local know-how. In this pattern, agriculture’s externalities are resources for
sustainable development, as environmental pressures would be mitigated and
infrastructure for rural population would be created. The contribution of farming in
local economies would be reduced, without however ceasing to perform its
environmental and social functions.
Comparisons between the estimated benefits and income losses are not the only
criteria for the choice of the proper agricultural system. Other significant factors in
the decision making-process are transaction costs, constraints set by EU and local
legislation, infrastructures for the rural population and other externalities of
agriculture, which have not been included in the experimental design. An integrated
approach of multifunctional agriculture could provide estimates of the total economic
value of Cypriot agriculture. Furthermore, the formulation of a common valuation
framework in other EU countries could provide policy-makers with valuable
information in planning the future of the CAP.
Acknowledgements
The authors acknowledge the financial support of the Cyprus Research
Promotion Foundation
688
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