ABSTRACT
MORE THAN FORTY YEARS AGO Emery Castle (1965) challenged agricultural (and would-be resource) economists to rethink the methods used to evaluate land management policies. He highlighted the importance of the physical interdependencies underlying externalities in economic analyses of land use (see box). Emery's insights have broad relevance today. Once these interdependencies are recognized as a major source for externalities, it is a short step to acknowledge a multiplicity of interactions that stem from the interdependencies among producers and consumers outside markets. 1 Indeed, within a general equilibrium model, the physical world implies that all external effects are reciprocal. The importance of this reciprocity is determined by the activities involved and the media providing the links between economic agents. 2 Castle's Treatment of Externalities
… The distinguishing characteristic of the diseconomies being treated here is that they are non-pecuniary; they do not enter the decisionmaking framework through the stimuli provided by a decentralized pricing system. Externalities, of course can go both ways. A's production may also be a variable in B's production function. By the same token this type of interdependence may be reflected between production and functions as well as between consumption functions. These relationships may be illustrated by the following diagram. Assume four decision units—two producers, Pa and Pb, and two consumers, Ca and Cb.
https://s3-euw1-ap-pe-df-pch-content-public-p.s3.eu-west-1.amazonaws.com/9781936331338/65d23fc5-a174-4806-8664-87d5325deb1b/content/ufig4_1_B.tif" xmlns:xlink="https://www.w3.org/1999/xlink"/>Interdependencies between producers may exist as follows.
With the four decision units, the possibility of 12 external relations exists. (Possible externalities are n2 − n where n is the number of decision units.)
Physical interdependence is the main reason for the importance of externalities in the economics of land. Society has long been aware of externalities as they affect land management; the wide variety of institutional arrangements that have evolved to deal with them are testimony to this fact. As economic development proceeds, externalities become important in different contexts than was previously the case (Castle 1965, 547–48).
