Production Function Approach

Dr. Alin Halimatussadiah

Deputy Director EEI Indonesia

Universitas Indonesia

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SDGs Center

Overview

• Alias: Productivity Approach; Producer surplus approach

• Values losses in production

• Focuses on environmental resources as an input to the production of goods or services

• Input degradation → reduction in the services provided to production → loss in profit for the producer

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Linking environmental degradation to changes in production

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Examples of Applications of the Productivity Method • Soil Erosion →measure the decline in on-site crop yields, and the resulting

downstream effects such as blockage of irrigation systems and sedimentation of reservoirs.

• Air Pollution → damage on human health resulting from air pollution and its impact on workdays.

• Acid Rain → damage to trees can be valued using the lost value of production.

• Pollution of Fisheries → as waters are polluted, it reduces its capacity to sustain fish stocks → effecting fishermen’s income.

• Salinity of Croplands → declining yields and at its most serious eliminates the ability of soil to sustain crops.

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Theory Behind the Productivity

Approach

• Soil (S); other inputs (X)

• A change in an environmental input → a change in the quantity produced → the farmer suffers an economic loss in the form of decreased profits

Two options:1. Do nothing and produce at Q2 instead of Q1, using the

same level of other inputs → looses the value of lostoutput

2. To keep production at Q1, by increasing other inputs, suchas fertilizer, from X1 to X2 → the costs of productionincrease as a result of having to increase other inputs

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Impact to profit

• Two measures for valuing the degradation of land: the value of lost output, or the cost of additional resource inputs. Both affect profit.

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Steps in the Practical Application of the Productivity Approach

• Step 1: Determine the physical impact • It can be very difficult to differentiate impacts associated with a particular

source

• A series of complex biological relationships

• Economists rely on scientists

• Sources of data: Experimental (using field trials); Statistical (using cross-section, or time series data)

Step 1: Determine the physical impact

Step 2: Attaching market values to the

losses

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Steps in the Practical Application of the Productivity Approach • Step 2: Attaching market values to the losses

• The most straightforward approach → to use market prices to value the loss in production, or the cost of increased inputs.

• Note: distorted price (e.g. subsidies, taxes, import protection, monopoly) --> not reflecting the “real” cost to society → need to be adjusted

• Changing market prices → if the change in production is so large →market price change significantly → the market price should be adjusted to reflect the forecasted price in the absence of the environmental change

• Cost consideration → e.g. if increased salinity reduces yields, there will be a corresponding reduction in harvesting costs; a chemical spill killing off a large proportion of the fish population --> costs may go up as it takes more time to catch the same number of fish.

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What if the products are not marketed? Some alternatives:• Benefits of the product. For example, medicinal plants could be

measured as the benefit of avoiding a health outcome.

• Cost of substitutes. For example, the value of the loss of the availability of firewood could be valued by considering the costs of an alternative.

• Cost of increased labor time. Again in the case of reduced availability of firewood, cost could be valued as that of the increased time taken to collect the same amount of firewood.

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An Application of the Productivity Approach: Soil Erosion in Morocco (Pagiola and Bendaoud, 1995)

• Study the long run effects of soil erosion on wheat production in a semi-arid region of Morocco

• Population growth in this area has led to the expansion of agricultural practices with increasingly lower rainfall and shallower soils --> lead to erosion and the loss of productivity

• The study area lies in the commune of Bouguergouh, in Settatprovince, characterized by low and erratic rainfall

• The main agricultural activities in this area include cereal production, and extensive livestock.

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Step 1: Determine the physical impacts

• There was no concrete data on erosion rates → a simulation analysis was used → a crop growth simulation model

as soil loss increases, the grain yield declines

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Step 1: Determine the physical impacts

• Data needed:• soil characteristics → collecting and analyzing the soil

• climatic conditions → from daily observations at a nearby market for the period 1983-1992

• cultural practices → information on cultivating practices was obtained from research by INRA (French Institute for Agronomy Research).

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Step 2: Attach a market value to the losses

• Data needed:• socioeconomic data → a survey of farmers in the area

• prices for most inputs were observed in the area.

• The long-run economic effect of a given erosion rate can be calculated by the net present value of losses due to erosion

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Economic valuation of agricultural losses from soil erosion in Morocco

• presents the annual returns to Karim production, using a 50-year time horizon, and 5mm of soil loss per year

• in the fiftieth year, 250mm of soil will have been lost

• The net present value of losses resulting from annual soil loss of 5mm per year on wheat production is 2,600DH/ha

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Example: Change in Productivity MethodJasa Ekosistem Air untuk Irigasi Sawah di Kasepuhan Karang

• Kasepuhan Karang adalah masyarakat adat yang berada di DesaJagaraksa, Kecamatan Muncang, Kabupaten Lebak, Provinsi Banten. Disana 60% masyarakatnya bekerja sebagai petani (dan pekebun), 20% buruh tani. Jumlah lahan sawah sebesar 360 hektar, yang dialirioleh saluran irigasi tradisional, yang berasal dari mata air yang disanaberjumlah 72 titik mata air.

• Salah satu jasa yang diberikan oleh ekosistem adalah air untukpengairan sawah. Berapa nilai dari jasa tersebut? Gunakan metodeproduction function untuk mengestimasi nilainya!

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Sawah di Kasepuhan Karang

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Perhitungan Nilai Jasa Ekosistem: Air untuk Irigasi

Indikator Asumsi Nilai Satuan Keterangan

A Produktifitas padi sawah 6.57 ton/hadata Lebak dalam angkauntuk Kecamatan Muncang

B Produktifitas padi ladang * 2.36 ton/ha*asumsi produktifitas paditanpa irigasi

CPerbandingan produktifitaspadi sawah : ladang (A/B)

2.78

D Jumlah produksi padi sawah 636,000 kg diambil dari hasil FGD

E Jumlah produksi padi ladang (D/C) 228,457 kg diambil dari hasil FGD

F Harga per kg padi sawah 4,500 rupiah harga gabah padi leutik

G Nilai produksi padi sawah (DxF) 2,862,000,000 rupiah

H Nilai produksi padi ladang (ExF) 1,028,054,795 rupiah

ISelisih nilai produktifitas padi sawah dan ladang (G-H)

1,833,945,205 rupiah

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Conclusion

• Estimates contribution of an ecosystem services to a final commodity

• Improvement in resource base or environmental quality; i.e. enhanced ecosystem services, lowers cost and prices or increases quantity of goods

• Requires knowledge of relationships between ecosystems services and valued end points

• Applicable to regulating and supporting services

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Conclusion

• Pluses:• valuation of impacts is often less controversial than other methods.

• the rationale behind it is simple and can easily be explained and justified.

• Minuses:• The use of market prices generally only reflects use values and does not take

account of non-use values such as existence, non-use, and bequest values. In some cases these can be substantial and considerably higher than use-values; then

• the productivity approach only provides a lower bound estimate of the opportunity costs foregone

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TERIMA KASIHEEI-Indonesia member of EEPSEA

http://sdgcenter.unpad.ac.id/eei-indonesia/www.eepseapartners.org/indonesia-home/

indonesia.eei@gmail.com

SDGs Center - Universitas Padjadjaranwww.sdgcenter.unpad.ac.id

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SDGs Center