An Economic Analysis of Global Impacts, Adaptation and Distributional Effects
- New Horizons in Environmental Economics series
4. The Ricardian method The traditional Ricardian method (Mendelsohn et al., 1994) examines how the value of farm land varies across a set of exogenous variables (such as climate and soils). The model assumes that farmers, given these exogenous constraints that they cannot control, choose a set of outputs and inputs to maximize profits. By regressing land value on these exogenous variables, using a cross-sectional analysis, the Ricardian method measures how these variables affect land value. Because farmers are adjusting inputs and outputs to match local conditions, the Ricardian method implicitly captures adaptation. However, because the adjustments are not explicitly modeled, the technique treats adaptation as a ‘black box’. It does not reveal the explicit adjustments that are being made by individual farmers to take advantage of the conditions they face. This chapter reviews the foundation of the traditional Ricardian model in detail and discusses critical issues raised about the model. The chapter then discusses modifications that have been made to the model to make it suitable for studying developing countries. TRADITIONAL RICARDIAN MODEL The Ricardian method was named after Ricardo because of his original observation that in a competitive market, land rents would reflect the net revenue of farmland (Ricardo, 1817). Farmland value (V) consequently reflects the present value of the future stream of income from a parcel of land (measured as net revenue per hectare).1 This principle is captured in the following equation: V 5 3 PLE e2ft dt 5 3 c a PiQi (X, F, Z)...
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