16.2 Why Measure Ecosystem Values?
a project are omitted, the implicit assumption is that
the value of these environmental impacts is zero.
IT a project is turned down on the basis of environmental impacts, but these impacts have not been
quantified, the implicit assumption is that the costs
of the impacts outweigh any potential gains. This
may be a difficult position to support without any
valuation of nonmarket impacts. Most benefit-cost
analysis texts include extensive sections outlining
the importance of properly measuring quantitative
estimates of nonmarket ecosystem values.
Liability Laws
Full liability implies that any agent who is deemed
responsible for an environmental insult must pay
the full costs of the loss. Identifying and calculating the full costs is important, but not just after the
fact as a means to calculate a penalty. The most
important role of valuation is before any person or
firm makes a conscious decision to use production
methods that threaten ecosystems. As the potential
liability increases for loss of ecosystem services,
the incentive to avoid such losses increases to those
who would be legally liable. Thus, while liability
laws themselves provide an incentive to avoid
losses, it is the recognition of the potential magnitude of a claim that indicates how much precaution
will be taken. Smith and Kopp (1993) provide a
comprehensive summary of the role of natural resource valuation in the context of damage assessment and liability laws.
16.2.2 Is It Useful to Measure
Ecosystem Values for All
Interactions between the
Economy and the Environment?
A measure of the total value of environmental
amenities may not be feasible and, more importantly, measures oftotal value are often not necessary in most specific environmental policy contexts. Many human impacts on the environment do
not cause concern. The majority of forestry, agriculture, and land-use practices, for example, do not
result in situations in which public agencies are
called on to intervene. Why is it that in some circumstances it is important to determine the value
of ecosystem services, but in other circumstances
the impact of human activity on the ecosystem is
not a contentious issue?
The value of ecosystem services is of little policy concern when markets function well and all
costs and benefits are properly accounted for, because the resources are already being used in their
225
most highly valued uses. When we consider the full
range of interactions between society and the environment, we can see that the market works reasonably well as an allocative mechanism. In other
words, as long as current land uses are not creating unaccounted for costs for other people now or
in the future, then the net benefits that are produced
as a result of current uses are most likely greater
than the benefits of ecosystem services that are
foregone. We do not consider it imperative to measure a value for these foregone services simply because we know that they are probably lower than
the value of the current uses. By definition, it is not
necessary to measure values since all resources are
already in their highest-valued use. Indeed, in this
so-called perfect world, the concept of economic
policy or natural resource policy is anathema, since
it implies altering the functioning of an already well
functioning system.
The three examples described previously, market failure, benefit-cost analysis, and damage assessment for liability rulings, share the feature that
they describe situations in which decisions made in
the market alone do not incorporate the full value
of ecosystems. Thus determination of ecosystem
values is one step in a larger process to attempt to
develop policy responses to internalize the full values of ecosystems into economic decision making.
The market is an effective and low-cost means to
distribute resources throughout society. The market is so effective precisely because it is able to reveal the value of all goods and services relative to
one another and relative to the preferences of all
people, provided that it is functioning well. IT the
market is not functioning well and all ecosystem
values are not incorporated, then the market values
and true economic values deviate. This is the focus of much economic analysis of environmental
problems.
The next section describes in more detail the concept of economic value. The main purpose of the
discussion is to illustrate that economic value exists apart from markets. Markets serve as a highly
effective allocative mechanism and, in so doing, reflect economic values of commodities traded. But
the economic values exist without markets. The
problem is that without being able to observe market activities it is much more difficult to reveal the
true economic value of a good or service. So, while
market prices can reveal value, without markets,
analysts need some other proxy for value. The section is intended to demonstrate that the notion of a
person's willingness to pay for a good or their willingness to accept compensation for the loss of this
good can be used as a proxy for measuring economic value. The section also demonstrates two
a project are omitted, the implicit assumption is that
the value of these environmental impacts is zero.
IT a project is turned down on the basis of environmental impacts, but these impacts have not been
quantified, the implicit assumption is that the costs
of the impacts outweigh any potential gains. This
may be a difficult position to support without any
valuation of nonmarket impacts. Most benefit-cost
analysis texts include extensive sections outlining
the importance of properly measuring quantitative
estimates of nonmarket ecosystem values.
Liability Laws
Full liability implies that any agent who is deemed
responsible for an environmental insult must pay
the full costs of the loss. Identifying and calculating the full costs is important, but not just after the
fact as a means to calculate a penalty. The most
important role of valuation is before any person or
firm makes a conscious decision to use production
methods that threaten ecosystems. As the potential
liability increases for loss of ecosystem services,
the incentive to avoid such losses increases to those
who would be legally liable. Thus, while liability
laws themselves provide an incentive to avoid
losses, it is the recognition of the potential magnitude of a claim that indicates how much precaution
will be taken. Smith and Kopp (1993) provide a
comprehensive summary of the role of natural resource valuation in the context of damage assessment and liability laws.
16.2.2 Is It Useful to Measure
Ecosystem Values for All
Interactions between the
Economy and the Environment?
A measure of the total value of environmental
amenities may not be feasible and, more importantly, measures oftotal value are often not necessary in most specific environmental policy contexts. Many human impacts on the environment do
not cause concern. The majority of forestry, agriculture, and land-use practices, for example, do not
result in situations in which public agencies are
called on to intervene. Why is it that in some circumstances it is important to determine the value
of ecosystem services, but in other circumstances
the impact of human activity on the ecosystem is
not a contentious issue?
The value of ecosystem services is of little policy concern when markets function well and all
costs and benefits are properly accounted for, because the resources are already being used in their
225
most highly valued uses. When we consider the full
range of interactions between society and the environment, we can see that the market works reasonably well as an allocative mechanism. In other
words, as long as current land uses are not creating unaccounted for costs for other people now or
in the future, then the net benefits that are produced
as a result of current uses are most likely greater
than the benefits of ecosystem services that are
foregone. We do not consider it imperative to measure a value for these foregone services simply because we know that they are probably lower than
the value of the current uses. By definition, it is not
necessary to measure values since all resources are
already in their highest-valued use. Indeed, in this
so-called perfect world, the concept of economic
policy or natural resource policy is anathema, since
it implies altering the functioning of an already well
functioning system.
The three examples described previously, market failure, benefit-cost analysis, and damage assessment for liability rulings, share the feature that
they describe situations in which decisions made in
the market alone do not incorporate the full value
of ecosystems. Thus determination of ecosystem
values is one step in a larger process to attempt to
develop policy responses to internalize the full values of ecosystems into economic decision making.
The market is an effective and low-cost means to
distribute resources throughout society. The market is so effective precisely because it is able to reveal the value of all goods and services relative to
one another and relative to the preferences of all
people, provided that it is functioning well. IT the
market is not functioning well and all ecosystem
values are not incorporated, then the market values
and true economic values deviate. This is the focus of much economic analysis of environmental
problems.
The next section describes in more detail the concept of economic value. The main purpose of the
discussion is to illustrate that economic value exists apart from markets. Markets serve as a highly
effective allocative mechanism and, in so doing, reflect economic values of commodities traded. But
the economic values exist without markets. The
problem is that without being able to observe market activities it is much more difficult to reveal the
true economic value of a good or service. So, while
market prices can reveal value, without markets,
analysts need some other proxy for value. The section is intended to demonstrate that the notion of a
person's willingness to pay for a good or their willingness to accept compensation for the loss of this
good can be used as a proxy for measuring economic value. The section also demonstrates two