Multifunctionality in agriculture: externalities and non-traded goods

Abstract

The multifunctionality nature of agriculture has been used to justify continuing protection for the agricultural sector. The farm sector produces a variety of outputs, some of which are marketable (or tradable) and others not. Protectionism, under the guise of multifunctionality, is then justified to support the non-marketed dimensions of the agricultural sector. We examine the impacts of trade policies on the loss or gain of economic welfare caused by the divergence between social and private marginal cost. Next, we analyse how social and marginal costs are affected by the assignment of property rights and the implications of non-traded goods. Critical in each of these formulations is the magnitude and direction of the divergence between social and private marginal cost. In the USA, agriculture faces increasing regulations, recognising that agriculture produces negative and positive externalities. In this context, we examine the policy implications of multifunctionality.