224
society is needed. Otherwise, the incentive mechanism may result in too much or too little forestland being withdrawn from harvest and developed.
Market failure also occurs when an individual's
decision to use environmental resources imposes
costs on other people that are not fully taken into
account in market transactions. An example of market failure in the case of ecosystem benefits is
groundwater recharge and purification functions of
wetlands. The beneficiaries of these services do not
pay for the full value of wetlands when they use
water and thus do not have the incentive to conserve water efficiently. The owner of a wetland
does not receive the full value of the water services
provided by the wetland, and it may thus appear to
the private landowner that the wetland is of greater
value filled in and developed.
The value of a wetland to society is determined
by a number of interacting factors, including substitutes for the ecosystem goods and services, the
costs of substitutes, the existing level of services,
and the types and costs of complementary goods
and services. To be complete, the full economic
value of a wetland includes benefits that are received external to any markets. Groundwater
recharge and purification benefits from wetlands
are not purchased in the marketplace. The water
users who receive these benefits may not have paid
for them in a market, and therefore the full value
of these services is not reflected in a market price
for water. However, water purification and supply
is clearly of value to society. The value of water
services that are provided to the wetland owner
alone are likely to be a very small fraction of the
total value of water services to the large number of
people who depend on the aquifer serviced by the
wetland.
Market failure can result in overexploitation of
environmental resources, thereby reducing the welfare of society now and in the future. Market failures can cause a misallocation within the same time
period, wherein certain groups in society gain at
the expense of others. In the case of the wetland
example, the landowner may choose to develop the
wetland. If the societal value of the wetland's ecological functions in maintaining water quality and
quantity is greater than the added value of the land
after development, then clearly society has lost an
amount that is greater than the private landowner
has gained. Other market failures can cause intertemporal misallocations or resource overexploitation that benefits one generation at the expense of another. Over time, many wetlands may
be developed. At first, it may be that there are so
many wetlands that the loss to society is minimal
in terms of the gain in agricultural acreage. The
Measuring Ecosystem Values
current generation of landowners gain, but the loss
to future generations in terms of reduced water
quality may be greater than the short-term gain to
landowners. Market failure indicates that ecosystem resources are being wasted and that society
would be better off if the full complement of costs
and benefits was incorporated into resource use decisions. This could be done with a variety of economic instruments, such as taxes, permits, or subsidies. But if many ecosystem costs and benefits
are nonmarket in nature, then the first step in designing policy would require identifying these values and attempting to estimate some measure of
their magnitudes.
Full Information for Benefit Cost Analysis
When policy is recommended that would alter the
use of an ecosystem, economic activity is altered
as well. Often large-scale government-sponsored
projects have major impacts on economic activity
and ecosystem function. Large-scale dam and irrigation projects around the world are examples. The
process of identifying potential projects and choosing whether or not to proceed requires the comparison of present-valued net benefits (benefits minus costs) with and without the project or among
alternative projects. Benefit-cost analysis has
become an increasingly important tool for public
sector economic decisions. Properly done, benefitcost analysis can provide criteria to help to determine the trade-off between the benefits of a proposed policy and the costs in terms of foregone economic benefits. Most benefit-cost analysis texts
include extensive sections outlining the importance
of properly measuring quantitative estimates of
nonmarket ecosystem values. Increasingly, environmental impact assessments are required to include benefits and costs of the impacts of proposed
projects. For example, the Canadian Environmental Assessment Act defines environmental effects
that are covered by the act to include "any change
that the project may cause in the environment, including any effect of any change on health and
socio-economic conditions." Accordingly, it is becoming more common to see environmental assessments in Canada include an analysis of economic costs and benefits of nonmarket impacts.
While it is beyond the scope of this chapter to
describe benefit-cost analysis, it is important to
note that economic valuation is necessary in order
to provide required data for any nonmarket costs
or benefits associated with a proposed policy. The
quality of a benefit-cost analysis will depend on
the quality of the valuation estimates. If nonmarket costs and benefits of environmental impacts of
society is needed. Otherwise, the incentive mechanism may result in too much or too little forestland being withdrawn from harvest and developed.
Market failure also occurs when an individual's
decision to use environmental resources imposes
costs on other people that are not fully taken into
account in market transactions. An example of market failure in the case of ecosystem benefits is
groundwater recharge and purification functions of
wetlands. The beneficiaries of these services do not
pay for the full value of wetlands when they use
water and thus do not have the incentive to conserve water efficiently. The owner of a wetland
does not receive the full value of the water services
provided by the wetland, and it may thus appear to
the private landowner that the wetland is of greater
value filled in and developed.
The value of a wetland to society is determined
by a number of interacting factors, including substitutes for the ecosystem goods and services, the
costs of substitutes, the existing level of services,
and the types and costs of complementary goods
and services. To be complete, the full economic
value of a wetland includes benefits that are received external to any markets. Groundwater
recharge and purification benefits from wetlands
are not purchased in the marketplace. The water
users who receive these benefits may not have paid
for them in a market, and therefore the full value
of these services is not reflected in a market price
for water. However, water purification and supply
is clearly of value to society. The value of water
services that are provided to the wetland owner
alone are likely to be a very small fraction of the
total value of water services to the large number of
people who depend on the aquifer serviced by the
wetland.
Market failure can result in overexploitation of
environmental resources, thereby reducing the welfare of society now and in the future. Market failures can cause a misallocation within the same time
period, wherein certain groups in society gain at
the expense of others. In the case of the wetland
example, the landowner may choose to develop the
wetland. If the societal value of the wetland's ecological functions in maintaining water quality and
quantity is greater than the added value of the land
after development, then clearly society has lost an
amount that is greater than the private landowner
has gained. Other market failures can cause intertemporal misallocations or resource overexploitation that benefits one generation at the expense of another. Over time, many wetlands may
be developed. At first, it may be that there are so
many wetlands that the loss to society is minimal
in terms of the gain in agricultural acreage. The
Measuring Ecosystem Values
current generation of landowners gain, but the loss
to future generations in terms of reduced water
quality may be greater than the short-term gain to
landowners. Market failure indicates that ecosystem resources are being wasted and that society
would be better off if the full complement of costs
and benefits was incorporated into resource use decisions. This could be done with a variety of economic instruments, such as taxes, permits, or subsidies. But if many ecosystem costs and benefits
are nonmarket in nature, then the first step in designing policy would require identifying these values and attempting to estimate some measure of
their magnitudes.
Full Information for Benefit Cost Analysis
When policy is recommended that would alter the
use of an ecosystem, economic activity is altered
as well. Often large-scale government-sponsored
projects have major impacts on economic activity
and ecosystem function. Large-scale dam and irrigation projects around the world are examples. The
process of identifying potential projects and choosing whether or not to proceed requires the comparison of present-valued net benefits (benefits minus costs) with and without the project or among
alternative projects. Benefit-cost analysis has
become an increasingly important tool for public
sector economic decisions. Properly done, benefitcost analysis can provide criteria to help to determine the trade-off between the benefits of a proposed policy and the costs in terms of foregone economic benefits. Most benefit-cost analysis texts
include extensive sections outlining the importance
of properly measuring quantitative estimates of
nonmarket ecosystem values. Increasingly, environmental impact assessments are required to include benefits and costs of the impacts of proposed
projects. For example, the Canadian Environmental Assessment Act defines environmental effects
that are covered by the act to include "any change
that the project may cause in the environment, including any effect of any change on health and
socio-economic conditions." Accordingly, it is becoming more common to see environmental assessments in Canada include an analysis of economic costs and benefits of nonmarket impacts.
While it is beyond the scope of this chapter to
describe benefit-cost analysis, it is important to
note that economic valuation is necessary in order
to provide required data for any nonmarket costs
or benefits associated with a proposed policy. The
quality of a benefit-cost analysis will depend on
the quality of the valuation estimates. If nonmarket costs and benefits of environmental impacts of