areas in which they are built. Since these natural lands cannot be replaced at
reasonable cost, each project sited in such an area will reduce the supply of these
available natural areas. In this sense, the effects of the project are irreversible. The
habitat alterations may also endanger the continued existence of plants or animal
species - another effect with irreversible consequences.
Projects which may have irreversible impacts must be given special attention. It is
impossible accurately to foresee the future, and irreversible impacts which seem
unimportant today may ultimately be of considerable importance. This uncertainty
about the future implications of today’s decisions mandates that extra care be taken
to ensure correct decisions.
Some economists view an irreversible action as one which limits future options
while others view irreversible results as a constraint in that they limit the range of
actions which can be taken subsequently. In this manner, irreversible decisions made
today may reduce social welfare in the future since all future choices will be
constrained by past decisions which cannot be changed.
One aspect of the value of retaining future options has been referred to as “option
value” described as “the value, in addition to consumer‘s surplus, that arises from
retaining an option to a good or service for which future demand is uncertain”. This
can also be viewed as a “risk premium”, an amount people would be willing to pay to
avoid the risk of not having something available which they may want in the future,
over and above its expected value to them. Estimating option value is not an easy
task: most attempts involve some form of contingent valuation.
Another concept related to irreversibility and uncertainty is referred to as “quasioption value”. This value represents the benefits of delaying a decision when one of
the alternatives involves an irreversible choice and uncertainty exists about the
benefits of the alternatives. Quasi-option value may be viewed as the expected
value of information which could be gained by delaying a decision. It will be
positive in most cases since delaying a decision will usually reduce the uncertainty
of future values, but it can also be negative if development itself leads to better
information for future decisions.
There is no single method for accounting for irreversibility in an economic
analysis. The opportunity-cost approach outlined earlier is one possibility, since it
indirectly provides information on the cost of preservation. In general, if the costs of
retaining an option that would otherwise be foreclosed are relatively low, the
decision-maker should weigh the possibility of retention carefully.
Another possibility is the use of the Safe Minimum Standard (SMS) criterion.
This is appropriate when dealing with resources which are renewable up to a point
but are subject to irreversible damage. These include soil resources as well as genetic
resources such as plants and animals, commonly referred to as biodiversity. Applying the SMS criterion involves calculating a margin of safety to prevent irreversible
damage to the resource. If such a standard can be maintained without “excessive”
costs, the resource should be protected. It is up to the policymaker, of course, to
decide at what level costs become “excessive”.
The question of biodiversity - its current state and policy options - is receiving
increased global attention.
8.10 Economic Measurement of Environmental Impacts: Limits
249
reasonable cost, each project sited in such an area will reduce the supply of these
available natural areas. In this sense, the effects of the project are irreversible. The
habitat alterations may also endanger the continued existence of plants or animal
species - another effect with irreversible consequences.
Projects which may have irreversible impacts must be given special attention. It is
impossible accurately to foresee the future, and irreversible impacts which seem
unimportant today may ultimately be of considerable importance. This uncertainty
about the future implications of today’s decisions mandates that extra care be taken
to ensure correct decisions.
Some economists view an irreversible action as one which limits future options
while others view irreversible results as a constraint in that they limit the range of
actions which can be taken subsequently. In this manner, irreversible decisions made
today may reduce social welfare in the future since all future choices will be
constrained by past decisions which cannot be changed.
One aspect of the value of retaining future options has been referred to as “option
value” described as “the value, in addition to consumer‘s surplus, that arises from
retaining an option to a good or service for which future demand is uncertain”. This
can also be viewed as a “risk premium”, an amount people would be willing to pay to
avoid the risk of not having something available which they may want in the future,
over and above its expected value to them. Estimating option value is not an easy
task: most attempts involve some form of contingent valuation.
Another concept related to irreversibility and uncertainty is referred to as “quasioption value”. This value represents the benefits of delaying a decision when one of
the alternatives involves an irreversible choice and uncertainty exists about the
benefits of the alternatives. Quasi-option value may be viewed as the expected
value of information which could be gained by delaying a decision. It will be
positive in most cases since delaying a decision will usually reduce the uncertainty
of future values, but it can also be negative if development itself leads to better
information for future decisions.
There is no single method for accounting for irreversibility in an economic
analysis. The opportunity-cost approach outlined earlier is one possibility, since it
indirectly provides information on the cost of preservation. In general, if the costs of
retaining an option that would otherwise be foreclosed are relatively low, the
decision-maker should weigh the possibility of retention carefully.
Another possibility is the use of the Safe Minimum Standard (SMS) criterion.
This is appropriate when dealing with resources which are renewable up to a point
but are subject to irreversible damage. These include soil resources as well as genetic
resources such as plants and animals, commonly referred to as biodiversity. Applying the SMS criterion involves calculating a margin of safety to prevent irreversible
damage to the resource. If such a standard can be maintained without “excessive”
costs, the resource should be protected. It is up to the policymaker, of course, to
decide at what level costs become “excessive”.
The question of biodiversity - its current state and policy options - is receiving
increased global attention.
8.10 Economic Measurement of Environmental Impacts: Limits
249