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Externalities occur when the decisions of production and consumption made by one market participant are directly affected by the decisions and actions of others, whilst this impact is not fully reflected in market prices. In case of livestock production, the examples are: agricultural landscape, biodiversity, carbon dioxide and methane emission, unpleasant odour and animal welfare, all called environmental externalities. The aim of the paper is to estimate the potential costs and benefits of possible changes in requirements associated with public goods and externalities generated by agriculture on the example of upgraded animal welfare standards in milk production. It was found, that implementing higher animal welfare standards may lead to a labourious increase in milk production. It may result in a farming scale decrease, an increase in labour costs (and production costs) and consequently lead to the deterioration of financial conditions. Revenues per cow increased in the analysed scenario in the case of the small and medium scale farms and remained stable in the case of the large scale farm. However, farm income decreased in the case of all farms. This is mainly due to employment, depreciation and an increase in financial costs.
The extemal effects of agriculture has got strong link with classical agricultural production. These extemals appear in the soil, in water, in air, and in biodiversity. The key factor of high yield is the soil fertility. The conventional farming system uses all over the filed the highest average amount of fertilizer (synthetic or organic). Precision farming technology is able to ameliorate economic, environmental and social impacts of the agricultural production. The elements of the agricultural production are the same with conventional and with precision farming technology only the amount of the input and the working time are different. So the type of the external is also the same but the dimension of the effect is different. This paper examined the external effects change with adopting precision farming technolog.
Common Agricultural Policy of the European Union, on the eve of the new financial framework 2014-2020, is significantly focusing on qualitative factors related to: the quality of life in rural areas, the quality of the natural environment, animal welfare, food safety and the preservation of cultural habits. In other words, agriculture has to provide benefits (specific public goods and externalities) to all members of society for which the government or other political institutions will pay. The objective of this article is to review the literature on the theory of externalities, with particular emphasis on the criticism of the current shape and applicability of the theory. It seems that the theory of externalities will play a main role in the development of recommendations for EU agricultural policy instruments, which take into account the importance of externalities provided by agriculture. Yet, there is no consensus on the applicability of this theory in practice, especially in its current form.
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