Agroforestry Economics and Policy

Essentially every living thing on Earth has applied the basic concepts of economics. That is, every living thing has had to use a limited set of resources to meet a minimum set of needs or wants. Although the study of economics is often confused with the study of markets or finance, economics is simply a social science that studies the choices people make. As a social science, economics is the study of human motivations. Or, as Landsburg (1993) put it, " most of economics can be summarized in four words: 'People respond to incentives'. " Those incentives reflect the value of the trade-offs made between a limited set of resources and an unlimited set of wants, needs, and desires. It is true that the concepts of money and price are often used as proxy values for economic decisions, but markets don't always reflect the true value of natural resource benefits and prices do not indicate the actual cost of the services provided by natural processes (Sagoff, 2004). Remember the last time you drove through the countryside on a nice autumn day and admired the beautiful colors. How much did you have to pay for this ben-efit? If you paid nothing, does that mean that it has no value? Economics characterize the mental calculus of a decision maker, whether a private landowner or a policymaker. In particular, economic models are abstract representations of the real world useful for hypothesis generation, forecasting, policy analysis, and decision-making (Buongiorno and Gilles, 2003). Alavalapati and Mercer (2004) recently discussed diverse economic models and their applications to agroforestry (Table 12–1). Some are designed to assess simple cost and benefits of outputs and inputs for which markets are fairly established, while others are amenable to a variety of environmental services and damages for which there are no established markets. Furthermore, some methodologies are more appropriate for assessing issues at a farm or household level, and others are applicable at regional and national scales. The goal of this chapter is to present the concepts of economics and explain how it applies to natural resource management decisions so that students with limited backgrounds in economics may still understand the issues faced by decision makers. This chapter discusses many of the tools used by economists to measure and determine how choices are made at both the micro-(individual) and the macro-(aggregate) level. Financial concepts are the basis for many of the …