Does public funding crowd out private supply?

Public funds for ecological landscape restoration are sometimes spent subsidising the revegetation of cleared land, and the protection of remnant vegetation from livestock. The total area treated, however, is often unclear because such projects are not always recorded, and landholders may undertake similar activities without subsidisation. Consequently it’s difficult to know what value the public funding is generating.
In the absence of empirical data, the Victorian state government assumes that privately funded work matches publicly subsidised sites on a hectare for hectare basis (a so-called ‘x2’ assumption). In other words, for every hectare that is restored using public money, there’s a matching hectare being restored that isn’t using public money.
Working against this assumption is the theory of ‘crowding out’ in which it is suggested that public investment may supplant private motivation. Landowners stop doing voluntary restoration because they come to believe it is only worth doing if the government pays them to do it. David Duncan and colleagues attempted to throw a bit of light on this issue by checking out what was actually happening out in farming landscapes. They used aerial photography to map the extent of revegetation, native vegetation fencing and restoration on 71 representative landholdings in rural south-eastern Australia. They interviewed each landholder and recorded the age and funding model of each site.
Contrary to the local ‘x2’ reporting assumption (which should result in 50% of the total area being subsidised), they found that about 75% of the total area of the 412 sites was from subsidised sites, and that proportion was far higher for the period after 1997. However, rather than displacing unsubsidised activity, our modelling showed that landholders who had recently been subsidised for a project were more likely to have subsequently completed unsubsidised work. This indicates that, at least in terms of medium-term economic impact, the large increase in public subsidies did not diminish privately funded activity, as might be expected according to the theory of crowding out.


 

Reference

Duncan DH, G Kyle, WK Morris, FP Smith (2014). Public investment does not crowd out private supply of environmental goods on private land. Journal of Environmental Management 136: 94-102. http://dx.doi.org/10.1016/j.jenvman.2014.01.041.

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