Ecosystem services from agriculture: Steps for expanding markets

Farmers in the United States produce a wide variety of commodities for food and fiber. Farmers can also produce a variety of non-commodity ecosystem services for which markets do not exist or are imperfectly formed. Such services may be valued by society, but due to their nature or institutional arrangements, farmers often do not receive a price signal for them. This results in inefficient allocations of resources, in that farmers under-produce non-commodity ecosystem services. One possible way to increase private investment in ecosystem services is to create a market for them. We draw lessons from six different markets for providing ecosystem services from farms (water quality trading, wetland mitigation, carbon cap-and-trade, over-the-counter carbon, eco-labeling, and fee hunting) on what is required for a market to function, and the problems these markets might face.