Public benefits, private benefits, and the choice of policy tool for land-use change

David J Pannell

School of Agricultural and Resource Economics, University of Western Australia

Cooperative Research Centre for Plant-Based Management of Dryland Salinity

Abstract

Many government programs around the world have been created to attempt to encourage changes in land management on privately owned lands, in order to enhance environmental conservation or natural resource management. These programs use a range of mechanisms to encourage change, including education, awareness raising, technology transfer, research and development, regulation, subsidies and other economic instruments. In practice, the choice among these possible policy mechanisms is often not very sophisticated. Programs tend to rely primarily on a small number of mechanisms, sometimes as few as one.

In this paper I present a simple framework to guide the choice between policy mechanisms, based on the levels of public and private net benefits that are likely to result from the land-use change.

I am defining these terms in very specific ways.  ‘Private net benefits’ refer to benefits minus costs accruing to the private land manager as a result of the proposed changes in land management. ‘Public net benefits’ means benefits minus costs accruing to everyone other than the private land manager. Defining them in these ways is helpful because the private net benefit dimension provides insight into the behaviour of the landholder, while the public net benefit dimension relates to the effects on everyone else that flow from the landholder's behaviour. Economists call these latter effects 'externalities' and argue that their existence can be an important potential justification for governments taking action to try to influence behaviour (Randall, 1987).

The private net benefits of a project (i.e. a specific set of land-use changes) would depend on:

• the financial returns from the new land uses;

• the financial returns from the land uses that are replaced (the "opportunity costs");

• any change in risks faced as a result of the change;

• indirect impacts on other aspects of the farm system or on the farmer's lifestyle;

• the farmer's own interest in the environmental outcomes.

The public net benefits would depend on:

• the value or importance of the environmental assets that are affected by the changes;

• the degree of degradation that the assets were facing or had already suffered;

• the extent to which that degradation can be prevented or alleviated by the changes;

• any lags in the response of the biological or physical system to the land-use changes.

Note that public benefits, as defined here, are not synonymous with public goods as defined by economists (e.g. Randall, 1987), although it is true that the public benefits would often have public-good characteristics.

In the framework that follows, the net benefits relate to the benefits and the costs of the proposed land-use changes, assuming that those changes do occur. They exclude any costs borne by the environmental manager in the process of intervening to encourage the change in land management. This is to allow us to compare the benefits of an intervention with its costs, which we will do later. 

3. Categories of Policy Mechanisms

Policy mechanisms are selected from five broad categories, as shown in Table 1. Note that financial or regulatory instruments include polluter-pays mechanisms (command and control, pollution tax, tradable permits, offsets) and beneficiary-pays mechanisms (subsidies, conservation auctions and tenders). Either approach can be used to create either positive incentives (to encourage change) or negative incentives (to discourage change). For example, to create an incentive for land-use change, we could offer landholders a payment out of public funds (beneficiary-pays in the sense that the public benefits from the environmental improvements), or we could charge them a tax for the pollution that they generate as a result of not changing land use (polluter-pays). The choice depends on who is considered to have the property rights. Do farmers have the rights to farm as they wish, irrespective of any off-site costs they generate, or does the public have the right to be free of those off-site costs? The choice is essentially political (Pannell, 2004), and the politics can work in either direction. In Australia, programs like the Natural Heritage Trust and the National Action Plan for Salinity and Water Quality use beneficiary pays to influence farmers, but there are also state regulations on things like land clearing that apply polluter pays. In practice, if often seems to be the case that beneficiary pays is used to encourage landholders to change their current land management in environmentally beneficial ways, while polluter pays is used to discourage landholders from changing their current land management in environmentally damaging ways. (That is the rule of thumb we use in SIF3: Ridley and Pannell, 2005).

Table 1. Alternative policy mechanisms for seeking changes in management of private lands.

The starting point for the framework is the recognition that environmental managers can invest in a range of projects involving changes in land management or land use on private land, and that the available options vary widely in the levels of public and private net benefits they generate, potentially including negative net benefits.

Figure 1 illustrates a hypothetical sample of possible projects with various levels of public and private net benefits. The top half of the graph is for projects with positive public net benefits, while the right half is for projects with positive private net benefits. The figure illustrates that any combination of positive or negative public or private net benefits is possible.

Figure 1. Each point represents a potential project, involving specific changes in land management in specific locations.

Figure 2 shows the sets of potential projects that would generate positive net benefits overall: areas A, B, and C. In area A, public net benefits outweigh private net costs. In C, private net benefits outweigh public net costs. In B, there are positive net benefits for both.  

Figure 2. Areas for which different policy mechanisms may be preferred. The units on each of the axes are dollars, and the line passing diagonally through the figure is at exactly 45 degrees to the axes.

The aim is to identify which policy mechanisms are likely to be suitable for each of the six labelled areas in Figure 2. To start with, we use the simple assumption that landholders will adopt all land-management practices with positive private net benefits (projects in areas B, C, D), provided that they are able to learn about those practices. More sophisticated assumptions about adoption are introduced later.

To select policy mechanisms, the following set of rules is proposed.

1. Do not use positive incentives for land-use change unless public net benefits of change are positive: no positive incentives for C, D, E.

2. Do not use positive incentives if landholders would adopt land-use changes without those incentives: no positive incentives for B.

3. Do not use positive incentives if private net costs outweigh public net benefits: no positive incentives for F.

Rules 1, 2, and 3 narrow the use of positive incentives down to area A.

4. Do not use extension unless the change being advocated would generate positive private net benefits. In other words, the practice should be sufficiently attractive to landholders for it to be ‘adoptable’ once the extension program ceases.  

5. Do not use extension where a change would generate negative net public benefits.

These rules narrow extension down to area B. This is referring to cases where extension is used as the main tool to achieve land-use change. Extension could also be used to support any of the other policy mechanisms, playing a supporting role, rather than being the main tool.

6. If private net costs outweigh public net benefits (area F), consider technology development to create improved (environmentally beneficial) land management options that can be made adoptable (with or without positive incentives).

7. If private net benefits outweigh public net costs (area C), the land-use changes should be accepted if they occur, implying no action.

8. If public net costs outweigh private net benefits (area D), use negative incentives.

9. If public net benefits and private net benefits are both negative, no action is necessary. Adverse practices are unlikely to be adopted.

10. In all cases, the suggested action needs to be weighed up against a strategy of no action.

These rules lead to Figure 3.

Figure 3. Recommended efficient policy mechanisms based on a simple set of rules.

"Positive incentives" means that landholders are encouraged to change their land management in particular ways (e.g. planting perennial vegetation to control the watertable or provide habitat) using tools such as subsidies, conservation auctions, or, potentially, polluter-pays mechanisms such as a pollution tax (as a penalty for not changing).

The reasons for recommending positive incentives for this area of the graph are that (a) public benefits are positive (so it might be worth somebody bearing some cost to generate them), (b) private benefits are negative (so adoption of changed practices won't occur without some additional incentive), and (c) public benefits are large enough to outweigh the private costs (so, as a society, we can afford to pay incentives that are large enough to prompt adoption without spending more than the resulting public benefits).

How large would the created incentives have to be? They would need to be large enough to at least offset the private net cost. Let's assume that they would exactly offset the private net costs. Given our simple assumption that the landholder would rapidly adopt change if private net benefits were positive, this seems a reasonable rule for setting the incentive. For example, if the incentive was created by paying a subsidy, to pay more than the private net cost would just provide a windfall gain to the landholder without further altering his or her behaviour, eating into the funds available for investment in environmental protection elsewhere. Our funding rule means that, for a set of projects with the same positive level of public net benefit, as we move to the right, the require incentive falls. It reaches zero where the private net benefit is zero.

The required incentive is a cost that is incurred by either the environmental manager, if beneficiary-pays instruments are used, or the landholder, if polluter-pays instruments are used. In either case, we can divide that cost into the public net benefit for every point in the triangle, and come up with a map showing all projects that generate a particular benefit:cost ratio (BCR) (Figure 4).  

Figure 4. Benefit:cost ratios for projects in the "positive incentives" area.

The figure shows that benefits are greater as we move from bottom to top of the diagram (obviously!), but also as we move from left to right for a given level of public net benefit. As we approach the vertical axis, the required incentive (the cost) approaches zero, so the BCR gets bigger and bigger. The best projects in the triangle are those where private net benefits are very slightly negative (and, of course, those where the public net benefits are large). In other words, the best projects are those where the net cost of the change in land-use is lowest. It makes intuitive sense. This highlights the need for environmental managers to pay close attention to the farm-level economics of the practices they would like to see adopted.   

For projects that lie on the diagonal line that bounds the region, the costs of land-use change exactly offset the gain in public benefits, so the BCR is 1.0. There is nothing to be gained by pursuing these projects, while projects further to the left have a BCR below 1.0 and a Net Present Value below zero.

In reality, the incentive required to achieve change might be greater than we have allowed for above, to get landholders over the learning hump. Also, the simple assumption about rapid adoption of all projects with positive private net benefits may not hold up. We would expect adoption to be rapid if the private net benefits were large, but otherwise, not necessarily. Here we will examine the consequences of these more realistic assumptions.

In the simple framework of Figure 3, we assumed that extension would be enough to prompt immediate adoption for any project in the "Extension" area. In reality, there are (a) lags to adoption that extension may shorten, but will probably not eliminate, and (b) costs and impediments to learning that must be overcome. Learning costs would include all factors that inhibit the transition from current management to the new management system. It may include the cost of obtaining and analysing information about the new practice, social pressures for or against its adoption, and constraints on financial equity. The existence of positive learning costs mean that landholders may not make the transition to a new practice, even if its adoption would ultimately yield positive private net benefits. 

I will assume that in the "Extension" area, an incentive that is big enough to cover the costs of leaning will result in immediate adoption of the new land management system. In the "Positive incentives" area, the incentive needs to cover both the private net cost of the land-use change, and the costs of learning about it. I presume that the learning costs would be the same, regardless of the level of private net benefit.

Even without extension or incentives, the lag to adoption would probably be low if private net benefits are high enough. As private net benefits fall, the lag (in the absence of incentives) would increase, and it would probably be very long indeed as the benefits of adoption are reduced to zero. Figure 5 shows a plausible relationship for adoption that we will use for illustration.

Figure 5. Possible lag to adoption as a function of private net benefit from adoption.

Combining Figure 5, with learning costs of $10/ha/year (annualised), and a real discount rate of 5 percent, we can map out the area of the figure where positive incentives would generate sufficient public benefits to be worthwhile: anywhere above the BCR = 1 line in Figure 6.

Figure 6. Benefit:cost ratios from use of incentives, allowing for adoption lags and learning costs.

This area differs from Figure 3 in two ways:

• The boundary of the positive incentives area (i.e. BCR = 1) has been raised by $10 in the left part of the figure, to cover learning costs. In other words, given higher costs of achieving land-use change, the resulting public benefits have to be correspondingly larger.

• There is now a small area in the right side of the figure where positive incentives reduce adoption lags by enough for it to be worthwhile putting incentives in place. They would be paid where private net benefits of changing land use are low (so that, without intervention, the lags to adoption are long) and public benefits are sufficiently high.

In the left part of the diagram, the boundary rises as we move away from the vertical axis because the required incentive is increasing. In the lower-left part of the diagram, it is not worth paying incentives because the incentives required are larger than the public benefits they would generate.

In the right part of the diagram, the boundary rises because the lag to adoption in the absence of incentives is falling, so the benefit of paying incentives is falling. In the lower-right part of the diagram it is not worth paying incentives because the lag to adoption without them is not sufficiently long (due to the large private net benefits) and hence the benefits of incentives are low, especially where there are also relatively low public net benefits from the land-use change.

Examining the three different BCR lines in Figure 6, for a given level of public net benefits, the benefit:cost ratio of applying incentives is highest where the private net benefits are zero. In applying incentives, we should be looking for cases where the practices we hope to get adopted are borderline in their adoptability. This is where incentives have the greatest scope for causing practice change most cost-effectively.

Extension (e.g. education, technology transfer, communications generally) is a relatively cheap policy instrument that helps landholders to learn about the available land management practices, including practices that environmental managers would like to see adopted. (By "cheap" I mean cheap per hectare of adoption that it generates, when used in appropriate circumstances, relative to, say, payment of financial incentives.)

Only for projects that fall in area B of Figure 2 is extension likely to accelerate adoption of the land practices with high public benefits (e.g. environmental benefits). We know that those are the practices with positive public benefits because they are in the top half of the graph. Extension can work to generate adoption for these projects because the private net benefits of adoption are positive – they are on the right side of the graph – and extension could help landholders to realise this. Extension alone  could not generate sustained adoption for projects in say the "Technology development" area because, from the perspective of private landholders, those projects generate costs larger than the benefits.  

In the simple framework of Figure 3, we didn't consider the fact that, even though private net benefits from land-use change are positive in the top-right area, there may still be costs and impediments to learning that must be overcome. We also did not discuss the effect that extension can have on the lags to adoption. In reality, extension may shorten, but will probably not eliminate, the lags. 

We noted above that adoption lags (in the absence of extension or incentives) would be related to the level of private net benefits, with longer lags for practices with lower private net benefits. If we use the illustrative adoption curve from Figure 5, and make some other assumptions, then we can map the area where extension will generate sufficient public benefits to offset the costs of the extension – where the benefit:cost ratio from extension is at least 1. For the purpose of this discussion, I will assume that (a) extension reduces the adoption lag for any project by two years, (b) the real discount rate is 5%, (c) extension costs $2/ha/year (20% of the assumed learning costs associated with land-use change, expressed in annualised form). Given those assumptions, extension could pay off anywhere above the BCR =1 line in Figure 7.

Figure 7. Benefit:cost ratios from use of extension, allowing for adoption lags and learning costs

It is not worth paying for extension if the public net benefits are too low (below about $25/ha/year in this example). If we require higher BCRs from our investment in extension, we need to select projects that will generate higher public net benefits, and also higher private net benefits, up to a point (the point where the lag without extension is shorter than the benefit of extension). As we move further to the right side of the graph, increasing the private net benefits starts to reduce the net benefits of extension, because landholders are more inclined to adopt the new practices even without extension.

Figure 7 above can be combined with the comparable graph for incentives (Figure 6) to generate a new map of where positive incentives or extension would be preferred (Figure 8). This is a modified version of the original map in Figure 3, allowing for the additional complexities we have now built in.

Figure 8. Revised map of efficient policy mechanisms allowing for adoption lags and learning costs.

The differences between Figure 3 and Figure 8 are:

• Public benefits need to be a little higher to justify positive incentives, so we would be slightly more likely to fall back on technology development;

• Extension is not worthwhile if public net benefits are not sufficiently high, and is replaced (or perhaps supplemented) by positive incentives if there are low private net benefits.

Realistically, a BCR of 1 is not sufficient to offset program fixed costs. Figure 9 shows a version of the map if we require a higher benefit:cost ratio of 2.0 to justify positive incentives or extension. The effect is to require higher public net benefits to justify the selection of projects.  

Figure 9. Revised map of efficient policy mechanisms allowing for adoption lags and learning costs, if positive incentives and extension require BCR = 2.

"Negative incentives" means that landholders are encouraged to NOT change their land management in particular ways (e.g. clearing of environmentally valuable vegetation) using tools such as command-and-control regulation, environmental taxes, or, potentially, subsidies as a reward for not changing.

The reasons for recommending negative incentives in area D of Figure 2 are (a) projects in that area generate negative public net benefits, (b) they generate positive private net benefits, so landholders are likely to adopt the changed land-use practices unless they are prevented from doing so, and (c) the public net costs outweigh the private net benefits, so there are overall benefits to be gained from preventing the land-use changes that the private landholders would like to adopt.

We have seen that it is possible to refine the set of projects suited to a particular policy mechanism by accounting for further complexities, such as the likely lag to adoption, and the same is possible in this case. In Figure 5 we presented an illustrative (plausible) relationship between the adoption lag and the level of private net benefits from adoption. The lag to adoptions would probably be low if private net benefits are high. As private net benefits fall, the lag (in the absence of incentives) would increase, and it would probably be very long indeed as the benefits of adoption are reduced to zero.

Allowing for this relationship, and assuming that monitoring and enforcement costs the same per ha as assumed for extension ($2/ha/year), the region where negative incentives would pay off shrinks slightly, as shown by the BCR = 1 line in Figure 10. The shrinking occurs because, if there is a lag to adoption, the public outcomes are not as significant as they would have been without the lag – other projects with more immediate impacts would tend to rise in the priority list.

Figure 10. Benefit:cost ratios from use of negative incentives, allowing for adoption lags

In almost a mirror image to the result for positive incentives, if we seek to apply negative incentives only in cases where the BCR is higher, it will be in cases where the public net costs are higher and/or the private net benefits are low (see the BCR = 2 and BCR = 3 lines in Figure 10).

In this context, technology development means development of improved land management options, such as through strategic R&D, participatory R&D with landholders, and perhaps provision of infrastructure. Examples could include plant breeding and selection to generate more productive perennial plants, or farming systems research to test and improve management of new plants in an agricultural context.

Figure 11 shows the revised map of efficient policy mechanisms from Figure 8. This section of the map is for cases where public net benefits are positive. The reasons for recommending technology development in the lower-left area of the figure are: (a) Private net costs exceed public net benefits, so the management changes required in the project do not yield positive net benefits overall. This means that positive incentives are not appropriate; and (b) Technology development may provide a cost-effective strategy to generate new technologies or alter existing technologies so that they do yield net benefits overall.

Figure 11. Revised map of efficient policy mechanisms allowing for adoption lags and learning costs.

To explain what I mean in (b), here is an example. Suppose that point a Figure 11 represents a project that aims to plant 40% of the area of a watershed to woody perennial plants. The project would generate modest public net benefits per ha (about $15/ha/year in the figure), but it would do so at a net cost of $25/ha/year to private landholders. Without some incentive mechanism, the land-use change would not be voluntarily adopted, and there is no case to introduce an incentive mechanism because, overall, costs would outweigh benefits.

Technology development could be undertaken to develop new woody perennial plants that would be more profitable to farmers than their current land use in the relevant location, while providing at least the same public net benefits. If this technology development was successful, it would move the project to, say, point d.  Although the recommendation for the new project would then be "no action", the profitability of the new woody perennial plants would prompt voluntary adoption of the new plants, probably after a lag during which landholders learned about the technology and gained confidence in it. In this way, the investment in technology development would yield public environmental benefits by enhancing adoption via the mechanism of generating increased profits for landholders.

Alternatively, technology development could attempt to improve the environmental benefits of the technology, moving the project up to, say, point b. For example, this might involve developing new harvesting systems so that the woody perennials provided better habitat for wildlife. If the improvement was substantial enough, it would then be worth using positive incentives to get landholders to adopt the new land-use option. At point b, the incentives required to compensate growers for adopting would be less than the public net benefits from the land-use change itself.

If both dimensions could be improved, we might move the project to, say, point c, where extension is recommended, as private net benefits are positive enough for incentives to be unnecessary – landholders would adopt the change reasonably rapid without them.

The merits of technology development as a strategy for the indicated set of projects depends on a set of additional factors that cannot be illustrated on this diagram, including: the likelihood of R&D delivering sufficiently improved technologies, the time lag until delivery of improved technologies, and the cost of the R&D. Overall, R&D does have an outstanding track record of delivering improved technologies for agriculture, and in my view, it has been neglected as a strategy for investment in environmental programs. A particular attraction of technology development is its potential to prompt adoption of changed practices over large areas, without the need for incentives.

In the previous section we looked in more detail at the individual areas of the map, and refined its recommendations. Here we pull together those refinements to present a revised overall framework.  The refined map shown in Figure 12 is based on environmental managers requiring a benefit:cost ratio of at least 1.0 in order to invest in incentives or extension.

Figure 12. Efficient policy mechanisms for encouraging land use on private land, refined according to account for lags to adoption and learning costs, and assuming that managers require BCR > 1.

In broad terms, the framework indicates the use of:

• positive incentives if the public net benefits of land-use change are high, and the private net benefits are not too negative;

• extension if the public net benefits of land-use change are high, and the private net benefits are moderate;

• no action if private net benefits are positive and public net benefits are not sufficiently high;

• no action if private net benefits are greater than public net costs;

• negative incentives if private net benefits are less than public net costs; 

• no action if public net benefits and private net benefits are both negative;

• technology development if private net benefits are negative and public net benefits are not sufficiently high to warrant incentives;

Figure 12 is broadly similar to Figure 3, with the main difference being in the extension area, which is more targeted to projects with higher public net benefits or lower but still positive private net benefits.

Figure 13 shows a comparable diagram based on a  required BCR of at least 2.0, which is probably a more reasonable guide to investment than Figure 12, given that program resources are limited and there are more worthwhile projects available than the program can afford to fund. (Also, we might need a BCR of at least 2 to outweigh the overhead costs of running the program.) This more targeted strategy shows that, broadly speaking, the higher priority projects are those where private net benefits are closer to zero, and/or public net benefits are more extremely positive or negative.   

Figure 13. Efficient policy mechanisms for encouraging land use on private land, refined according to account for lags to adoption and learning costs, and assuming that managers require BCR > 2.

A much smaller number of projects would qualify for incentives or extension in the more targeted approach of Figure 13. For example, over 35% of the area of Figure 12 is occupied by incentives or extension, whereas in Figure 13, they occupy less than 15%. If we allow for the reality that most projects involve negative private net benefits and modest environmental benefits, the proportion qualifying as high-priority targets for intervention is lower again.

6.1 Targeting

Figure 13 has strong implications for the targeting of positive incentives, negative incentives and extension. If they are to generate substantial net benefits, these instruments need to be carefully applied to projects that fall in the indicated areas. This presumes that there are, in fact, projects available within those areas. If not, then these are not the right instruments to use. 

It is notable that the areas for positive incentives, negative incentives and extension are small sub-sets of the total. A project chosen at random has only a small chance of falling into any one of these areas.  Environmental managers need to take care to ensure that they are not applying these mechanisms to inappropriate projects. There seems a high risk of this unless they have very good information about both the public and private net benefits, or use a mechanism that reveals this information.

A well designed conservation auction process should identify any projects that do fall into the positive incentives area of the graph, because it will find projects that offer the best cost-effectiveness. However, the possibility that even the best is not good enough should be considered. For example, in the case of dryland salinity in Australia, it is likely that very few projects will fall into the positive incentives area (even less than suggested by its small size) because of the high cost of the substantial land-use changes required, and the limited responses of groundwaters to those changes in many cases. These would combine to push projects towards the lower left of the graph. 

In my experience, environmental managers do pay attention to the environmental (public) benefits of their funded works, but often neglect the private benefits. This framework reveals that the selection of cost-effective environmental projects is probably even more sensitive to private benefits than to public benefits.

A notable implication from the framework is that projects are more likely to generate high payoffs to investment in positive incentives or extension if the private net benefits are closer to zero. For those projects with net private benefits that are not too different from zero, land-use change can be prompted with modest incentives, or extension can accelerate the adoption of practices that would not otherwise be adopted quickly.

As noted earlier, most agricultural land probably falls into the technology development area. For most land, the best available environmental projects involve negative private net benefits and positive, but not extremely high, public net benefits. This highlights the important role of technology development and its relative neglect in current programs.

The recommendation of "No action" in the lower-right area of Figure 3 implicitly assumes that we are happy with the current distribution of property rights, whatever that distribution is. For example, if the rights rest with the landholders, they would be free to adopt the new land management practices and reap the available benefits, in the process generating more benefits for themselves than the costs they generate for others. On the other hand, if the rights rest with the public, landholders would need to pay for the right to pollute.

The government could potentially choose to allocate the rights to the public throughout the area where public net benefits are negative, but this would not alter the environmental outcomes compared to "no action", since landholders would be willing to compensate the public and proceed with projects in the lower right triangle, and landholders were never going to adopt the new practices in the bottom-left area (as private net benefits are negative). It would, however, alter the distribution of wealth, since landholders wishing to implement projects in the lower-right triangle would need to pay some of the resulting benefits to the public.

If the environmental manager is using a change in property rights to generate the negative incentives for projects in the "Negative incentives" area, it may be practically difficult or expensive to avoid doing the same thing in the lower "No action" areas. If this occurs then, as before, it would not alter the environmental outcomes (e.g. polluters would prefer to compensate pollutees in the right "No action" triangle and continue polluting), but it would alter the distribution of benefits between landholders and the public. It would also involve costs from monitoring and enforcement for a much larger area, which would need to be weighed up when considering the overall merits of the approach.

Property rights approaches, as discussed in the last two paragraphs, are relatively flexible, in that they cause external effects of their actions to be felt by landholders, while leaving the ultimate decisions to them. The landholders can therefore weigh up whether the private net benefits outweigh the public net costs when reaching their management decisions. Mechanisms in this category include tradeable pollution permits, pollution taxes, subsidies and conservation auctions.

If a less flexible mechanism, such as command-and-control regulation, is used across the whole area where public net benefits are negative, there would probably be significant net costs in the lower-right "No action" triangle of Figure 3, as landholders would be prevented from doing things that yield relatively large net benefits to them, and relatively small net costs to the public. Thus we would at least partly (and perhaps fully) offset any net benefits generated in the negative incentives area.

6.3 Uncertainty

I have assumed that environmental managers know where a particular project lies within the framework. This is not necessarily true. I have not throught through the full consequences of this, but I will note one issue in relation to the use of flexible versus inflexible negative incentives.

In area C of Figure 2, if it is not known whether private net benefits are sufficient to outweigh public net costs, a relatively flexible negative incentive instrument might be used to communicate the public net costs to land managers (e.g. a pollution tax, or a property-rights-based approach such as tradable permits), leaving the ultimate decision about land-use change to the land managers. Inflexible negative incentives, such as command and control, should not be used in this case, as they might result in changes where the costs outweigh the benefits. Flexible policy instruments (if implemented properly) would not actually result in any additional public benefits (if the project was really in area C) as the positive incentive they created for land-use change would not be enough to outweigh the private costs of that change. Depending on the way they were set up, they might result in a redistribution of wealth (e.g. from polluters to pollutees).

Also I note that the recommendations of the framework depend on the landholders having reasonably accurate perceptions about the private net benefits of adoption. If this is not true, there may be roles for extension, positive incentives or negative incentives in other parts of Figure 13.

6.4 Estimating net benefits

It is notable that the choice of policy response depends at least as much on the level of private net benefits from the land-use change as on the public net benefits. Indeed, in the more targeted version in Figure 13, results are even more sensitive to private than to public net benefits. This is an important finding as many environmental managers focus predominantly on the public benefits, but pay little attention to the estimation of private net benefits. As a consequence, they are under-informed about the landholders' likely responses to any proposed changes in land use, which is one of the key factors that should influence the choice of policy response.

This begs the question, how should environmental managers estimate the costs and benefits? A glib answer is, "as best they can". In the case of public net benefits, the framework does not require environmental managers to do things that they should not already be doing. Somehow they are choosing which environmental projects are of highest priority, so there must be some assessment of the environmental benefits, even if only implicitly. It is unrealistic to expect that projects could be ranked according to their environmental benefits with any great precision, but even relatively qualitative ratings could be applied within this framework.

To estimate private net benefits, one option is to invest in some good quality economic modelling. Another is to look at what farmers are currently doing. If they are choosing not to adopt a practice that has been around for a while and with which they are familiar, this provides a strong indication of their assessment of its private net benefits (including issues beyond just short-term financial returns). A third option is to run a conservation auction, in which landholders reveal their willingness to act in response to a subsidy level chosen by them.

The framework highlights the importance of targeting funds in environmental programs to selected areas, based on the levels of public and private net benefits. Currently, environmental managers do pay some attention to the level of public benefits when selecting their investments, but in my experience few pay adequate attention to the level of private net benefits, which, perhaps surprisingly, turns out to be even more important as a driver of policy decisions.

It is worth noting that the rules underlying the framework are based on an objective of efficiency (biggest environmental benefit per dollar spent). In practice, governments often also pursue other objectives, ranging from perceived equity to raw political motives. I hope that by improving the understanding of what an efficient policy would look like, this framework can make it easier for that objective to be pursued.