Answer questions 1-7

1. Agriculture affects and is affected by a wide range positive externality. Usually when externalities are of environmental problems, from local air and present, the unregulated market does not achieve a water quality to global change. socially efficient outcome. 2. The environment is like many other economic 5. Soil represents a critical asset to the agricultural assets; people are willing to pay for a better envi- enterprise. It is valued because it provides the ronment, and there is a cost to providing a clean foundation for farm production for many years to environment. In other words, there is a demand come. The resource must be valued, therefore, in curve for environmental quality and a supply terms of both its present and future value. To do curve. this, economists use the principle of discounting and present value. 3. However, unlike most other goods and services discussed in this book, the market economy typi- 6. Water is also a critical asset to agriculture, but in cally does not provide the efficient level of envi- this case it is shared by many users. Whether the ronmental services. The reason for this is that the water is deep below the ground or lies at the sur- three conditions that are necessary for the efficient face in rivers or lakes, economic efficiency requires provision of a good or service are not all satisfied that the water be allocated between competing for most environmental services. In particular, uses, both now and in the future. An efficient allo- when we consider environmental pollution, it is cation is one in which the marginal net benefit to clear that some of the costs associated with many all users is the same. production processes do not exclusively fall upon 7. Agriculture in the United States exists within a the individuals or firms that reap the benefits- policy environment in which there is a range of everyone in the path of the pollution can suffer the regulations and incentives that encourage environ- environmental costs. mental and natural resource stewardship. Because of these many positive and negative incentives, 4. An externality is present when costs or benefits farmers today must be aware that their operations fall on people other than those who are directly have impacts on the environment that cannot be involved in a market exchange. For example, when ignored. TERMS