Pricing ecological services provided by protected watersheds: Micro-econometric applications in agrarian communities of Indonesia and the Philippines

This dissertation uses quantitative methods from applied welfare economics to determine the economic value of environmental assets in agrarian communities of developing countries. The research topic is drawn from the interface of environmental economics and development policy. The assets are tropical forests that provide soil and water related watershed services to farming households. The conceptual framework is built on a static partial equilibrium model of household profit maximization in which the watershed service is a constraint on agricultural production. Because improvements in the service change agricultural quasi-rents by relaxing the production constraint, the watershed service is valued in terms of the shadow prices and incremental quasi-rents. This focus on producer surplus measures is different from most environmental valuation which has been structured on the theory of consumer welfare. When labor markets are complete, the incremental quasi-rent is also equal to the firm-farm's willingness to pay.; Econometric analyses of household survey data from the Philippines and Indonesia provide two empirical applications of this analytical model. The first case study evaluates soil conservation benefits of publicly supported agroforestry practices of farming households in Leyte, Philippines. Soil conservation is valued in tends of on-site agricultural rents that accrue to farming households choosing to conserve theirs' by planting trees on their own farm land, abstracting from off-site benefits. The second study estimates value of drought control benefits of government managed upland watersheds in Manggarai, Indonesia, as the downstream agricultural rents. Both profit function analysis (revealed production behavior) and the contingent valuation method (stated responses to proposed willingness to pay questions) are used to estimate drought control values. Soil conservation and drought control, thus, are private and public good dimensions of watershed services respectively.; The major findings of the dissertation and the implications for policy and for methodology are as follows. First, watershed services make significant economic contributions to the well being of farming households in developing countries. Values of soil conservation and drought control, estimated from credible economic parameters, constitute 10 to 15% of annual agricultural profits. Second, because both the provision and the use of these services have private and public good characteristics, private enterprise and markets alone will rarely provide these services at socially optimum levels. For efficiency and non-efficiency reasons, the estimated positive values justify public support for provision of these valuable services. Third, characteristics of the institutional settings under which services are provided have implications for both policy (direct provision or indirect incentive packages) and econometric methods (selection models). Fourth, estimation of equation systems, which uses all of the available information on agricultural production, improves statistical and economic significance of the results. Fifth, the definition of a watershed service, developed from agro-hydrological models and household perceptions, influences the choice of functional forms but not the estimated values. Finally, the contingent valuation method provides a referendum of local support for watershed protection, but it generates a different measure of value than the profit function approach. (Abstract shortened by UMI.)...