16.2 Why Measure Ecosystem Values?
ticular, is necessary to develop policies that can realign individual with social interests, thereby correcting for market failures.
Section 16.3 describes the concept of economic
value. The definition is built up by demonstrating
how value is revealed by trade between members
of a simplistic world with two regions. The example is simply to introduce the reader to the notion
that, under specific conditions, the market theoretically results in the highest-valued allocations of
goods and services in society. The example is
overly simple to introduce the reader to the concepts of marginal value, marginal cost, demand,
and supply. The section ends by acknowledging
that, in reality, the idealized conditions that must
hold in order for markets to fulfill their promise fail
for a great many situations commonly encountered
in services that are generated by natural environments.
Section 16.4 describes several categories of economic values of ecosystems and describes how alternative uses of an ecosystem may not prevent the
flow of various sources of value, albeit they may
be at altered levels. The goal of economic analysis
of alternative uses of an ecosystem is to first identify all values that may be altered among the alternative uses. Those that would be expected to remain unaltered need not always be measured in
order to make an informed policy decision. The key
is to identify which values would change and by
how much. Section 16.5 outlines the major methods of nonmarket valuation used today. Finally,
two examples are given to illustrate the importance
of the policy context, in terms of achieving useful
and reliable estimates or ecosystem valuation.
16.2 Why Measure
Ecosystem Values?
Individuals, firms, and public sector agents regularly make decisions that involve explicit and implicit trade-offs among alternative uses of environmental resources. The results of these decisions
imply an underlying structure of incentives that affect how people choose to interact with their environment. When choices made by individuals or
firms are likely to cost society more than it can
gain, the market has failed. Similarly, policy failure is said to occur when environmental policies
and management guidelines cost society more than
it can gain. Policy can be developed to alter economic incentives that influence individual and firm
behavior and to bring individual and social inter223
ests more closely into alignment. Measurements of
the extent to which economic markets and policies
fail are useful to develop regulations and economic
instruments to effectively alter incentive structures
and thereby protect environmental resources from
overexploitation.
16.2.1 Examples of Situations for
Which Nonmarket Values
Inform Decisions
Three commonly encountered situations illustrate
how quantitative measurements of ecosystem values can assist in decision making. The first is to
guide policy decisions under conditions of market
failure. The second is to rank the societal desirability of alternative uses of publicly owned lands.
The third is the need to set a protocol for determining the value of ecosystem damages in liability suits, which in tum creates the incentive structure for resource users to practice caution to prevent
damages. In each type of situation, policy action is
indicated to resolve economic problems.
Correction of Market Failures
In terms of economic theory, many environmental
problems can be said to result from market failure.
Market failure occurs whenever any of the basic
assumptions necessary for markets to function
properly is not met. These assumptions include perfect information and a well-defmed system of property rights. The nature of many environmental resources is such that these basic assumptions are not
met. Most notably, market failure can occur when
the flow of benefits from an ecosystem is not fully
represented within the market. Consider the benefits of a standing forest in providing oxygen, oldgrowth habitat, and watershed protection. The
value of these services may not be incorporated into
the decisions to harvest the forest and redevelop the
land for other purposes. The benefits that do not
flow directly to the owners of the forest are not realized in the market, while the benefits to the owners of harvest and land conversion are realized in
the marketplace. In this case, the omission of some
of the values of the standing forest may lead private decision makers to choose an option that
would cost society as a whole more than the owners of the forest would gain. A correction of this
problem might involve setting up incentives for private owners to maintain forest lands. Tax rebates
for woodlots are one example of such an incentive
mechanism. For such a mechanism to be most effective, some estimate of the value of woodlots to
ticular, is necessary to develop policies that can realign individual with social interests, thereby correcting for market failures.
Section 16.3 describes the concept of economic
value. The definition is built up by demonstrating
how value is revealed by trade between members
of a simplistic world with two regions. The example is simply to introduce the reader to the notion
that, under specific conditions, the market theoretically results in the highest-valued allocations of
goods and services in society. The example is
overly simple to introduce the reader to the concepts of marginal value, marginal cost, demand,
and supply. The section ends by acknowledging
that, in reality, the idealized conditions that must
hold in order for markets to fulfill their promise fail
for a great many situations commonly encountered
in services that are generated by natural environments.
Section 16.4 describes several categories of economic values of ecosystems and describes how alternative uses of an ecosystem may not prevent the
flow of various sources of value, albeit they may
be at altered levels. The goal of economic analysis
of alternative uses of an ecosystem is to first identify all values that may be altered among the alternative uses. Those that would be expected to remain unaltered need not always be measured in
order to make an informed policy decision. The key
is to identify which values would change and by
how much. Section 16.5 outlines the major methods of nonmarket valuation used today. Finally,
two examples are given to illustrate the importance
of the policy context, in terms of achieving useful
and reliable estimates or ecosystem valuation.
16.2 Why Measure
Ecosystem Values?
Individuals, firms, and public sector agents regularly make decisions that involve explicit and implicit trade-offs among alternative uses of environmental resources. The results of these decisions
imply an underlying structure of incentives that affect how people choose to interact with their environment. When choices made by individuals or
firms are likely to cost society more than it can
gain, the market has failed. Similarly, policy failure is said to occur when environmental policies
and management guidelines cost society more than
it can gain. Policy can be developed to alter economic incentives that influence individual and firm
behavior and to bring individual and social inter223
ests more closely into alignment. Measurements of
the extent to which economic markets and policies
fail are useful to develop regulations and economic
instruments to effectively alter incentive structures
and thereby protect environmental resources from
overexploitation.
16.2.1 Examples of Situations for
Which Nonmarket Values
Inform Decisions
Three commonly encountered situations illustrate
how quantitative measurements of ecosystem values can assist in decision making. The first is to
guide policy decisions under conditions of market
failure. The second is to rank the societal desirability of alternative uses of publicly owned lands.
The third is the need to set a protocol for determining the value of ecosystem damages in liability suits, which in tum creates the incentive structure for resource users to practice caution to prevent
damages. In each type of situation, policy action is
indicated to resolve economic problems.
Correction of Market Failures
In terms of economic theory, many environmental
problems can be said to result from market failure.
Market failure occurs whenever any of the basic
assumptions necessary for markets to function
properly is not met. These assumptions include perfect information and a well-defmed system of property rights. The nature of many environmental resources is such that these basic assumptions are not
met. Most notably, market failure can occur when
the flow of benefits from an ecosystem is not fully
represented within the market. Consider the benefits of a standing forest in providing oxygen, oldgrowth habitat, and watershed protection. The
value of these services may not be incorporated into
the decisions to harvest the forest and redevelop the
land for other purposes. The benefits that do not
flow directly to the owners of the forest are not realized in the market, while the benefits to the owners of harvest and land conversion are realized in
the marketplace. In this case, the omission of some
of the values of the standing forest may lead private decision makers to choose an option that
would cost society as a whole more than the owners of the forest would gain. A correction of this
problem might involve setting up incentives for private owners to maintain forest lands. Tax rebates
for woodlots are one example of such an incentive
mechanism. For such a mechanism to be most effective, some estimate of the value of woodlots to