16.3 Concept of Economic Value
for both regions become equalized. At some point
it is inevitable that the value of one more unit of
water is the same for both parties. After that point,
it is not worthwhile to continue to exchange water
for other goods. The fact that this equilibrium point
exists does not imply, however, that the physical
quantities of water are the same for each region at
the equilibrium point. The point at which exchange
stops is where the unit value of one more unit of
water is the same for each region. The region with
the higher costs would likely have less water, while
the region with lower costs would have more. The
point is that trade would ensue with each unit of
water commanding a lower and lower price until
the two parties are not willing to trade for another
unit of water. Thus the value of water and the quantity of water that each region eventually has are simultaneously determined in this situation.
One factor that determines how much water will
flow between regions and, simultaneously, the
value of the last unit of water exchanged is the level
of overall wealth that each region has to start. Suppose that the water-rich region has absolutely no
other resources but water, while the arid region is
rich in many resources. The value of a unit of water would be very different in this case than it would
be in a situation where all other resource endowments are similar between regions. That is, the
value of the water relative to all other potential
goods in exchange is a function of the initial distribution of resources across all people in society.
If we were to suddenly redistribute all resource endowments, all exchange values would be altered,
and the value of any resource relative to all others
will be changed. If the water-rich region is poorly
endowed with any other resources, while the arid
region is heavily endowed, the economic value of
water will change to reflect the ability to pay of the
group that wants more water. In general, the economic value of any good or service in society is
determined in part by the overall pattern of the initial endowments of wealth. These endowments determine the relative values of all resources in terms
of their exchange values. If a war or government
policy redistributes wealth, the relative economic
values of all goods and services can be affected. 2
2 This issue is recognized as being particularly relevant
when government policy redistributes endowments that
may represent a fairly large proportion of any person's
overall endowment. The result is that the original sets of
relative prices and the subsequent sets of relative prices
for goods and services are not strictly comparable using
standard efficiency criteria. It is easy to see this in terms
of the adage "a dollar is worth more to a poor person
than to a rich person."
227
Finally, the relative value of a unit of water is
also determined by the ability of individuals who
control access and wish to gain access to interact
with one another. If people of the arid region and
the water-rich region have little information about
each other's reserves, then there is an initial cost
associated with any potential exchange. The value
of a unit of water may be very different within each
of the two regions, and the situation would likely
stay that way until the initial cost of gathering information about alternatives is low, relative to the
use value of water within the arid region, or low
relative to the potential exchange value of water for
the water-rich region. The costs of acquiring information to facilitate exchange thus also affect the
value of ecosystem resources.
Another way in which information costs affect
the value of ecosystem services is by new information that directly affects the use value of the services for society. For example, suppose that the
people in the water-rich region were not previously
aware that the surface water that they divert to the
canals that transport water to the arid region is connected to groundwater stocks. Suppose that new
scientific evidence suggests that diversions will
eventually lead to land subsidence and loss of wetlands that purify groundwater and provide habitat
for waterfowl and fish. Since the people of the region value waterfowl and fish and do not wish to
invest in a water treatment plant to substitute for
wetland services, they may revise their preferences
regarding water. The value of the water for their
own needs becomes greater due to the new information about the role that water plays in their overall level of well-being.
Finally, information can affect the value of
ecosystem services in terms of an individual's
awareness that the potential for new information
might in the future affect our understanding of the
role the ecosystem plays in our well-being. As long
as the possibility exists that new information might
be forthcoming in the future that would alter people's choices now, then there is economic value in
waiting to decide at some future time whether or
not to engage in an activity that may irreversibly
alter ecosystem functions. This is technically a
value for information; but since the information has
value in how it may affect ecosystem values, it is
typically attributed to the resource itself. Economists have defined this as quasi-option value.
This example is intended to illustrate the complexity of the concept of economic value and the
dependence of economic value on the underlying
social structure. This example shows that the value
of a unit of water for each region thus depends on
the following:
for both regions become equalized. At some point
it is inevitable that the value of one more unit of
water is the same for both parties. After that point,
it is not worthwhile to continue to exchange water
for other goods. The fact that this equilibrium point
exists does not imply, however, that the physical
quantities of water are the same for each region at
the equilibrium point. The point at which exchange
stops is where the unit value of one more unit of
water is the same for each region. The region with
the higher costs would likely have less water, while
the region with lower costs would have more. The
point is that trade would ensue with each unit of
water commanding a lower and lower price until
the two parties are not willing to trade for another
unit of water. Thus the value of water and the quantity of water that each region eventually has are simultaneously determined in this situation.
One factor that determines how much water will
flow between regions and, simultaneously, the
value of the last unit of water exchanged is the level
of overall wealth that each region has to start. Suppose that the water-rich region has absolutely no
other resources but water, while the arid region is
rich in many resources. The value of a unit of water would be very different in this case than it would
be in a situation where all other resource endowments are similar between regions. That is, the
value of the water relative to all other potential
goods in exchange is a function of the initial distribution of resources across all people in society.
If we were to suddenly redistribute all resource endowments, all exchange values would be altered,
and the value of any resource relative to all others
will be changed. If the water-rich region is poorly
endowed with any other resources, while the arid
region is heavily endowed, the economic value of
water will change to reflect the ability to pay of the
group that wants more water. In general, the economic value of any good or service in society is
determined in part by the overall pattern of the initial endowments of wealth. These endowments determine the relative values of all resources in terms
of their exchange values. If a war or government
policy redistributes wealth, the relative economic
values of all goods and services can be affected. 2
2 This issue is recognized as being particularly relevant
when government policy redistributes endowments that
may represent a fairly large proportion of any person's
overall endowment. The result is that the original sets of
relative prices and the subsequent sets of relative prices
for goods and services are not strictly comparable using
standard efficiency criteria. It is easy to see this in terms
of the adage "a dollar is worth more to a poor person
than to a rich person."
227
Finally, the relative value of a unit of water is
also determined by the ability of individuals who
control access and wish to gain access to interact
with one another. If people of the arid region and
the water-rich region have little information about
each other's reserves, then there is an initial cost
associated with any potential exchange. The value
of a unit of water may be very different within each
of the two regions, and the situation would likely
stay that way until the initial cost of gathering information about alternatives is low, relative to the
use value of water within the arid region, or low
relative to the potential exchange value of water for
the water-rich region. The costs of acquiring information to facilitate exchange thus also affect the
value of ecosystem resources.
Another way in which information costs affect
the value of ecosystem services is by new information that directly affects the use value of the services for society. For example, suppose that the
people in the water-rich region were not previously
aware that the surface water that they divert to the
canals that transport water to the arid region is connected to groundwater stocks. Suppose that new
scientific evidence suggests that diversions will
eventually lead to land subsidence and loss of wetlands that purify groundwater and provide habitat
for waterfowl and fish. Since the people of the region value waterfowl and fish and do not wish to
invest in a water treatment plant to substitute for
wetland services, they may revise their preferences
regarding water. The value of the water for their
own needs becomes greater due to the new information about the role that water plays in their overall level of well-being.
Finally, information can affect the value of
ecosystem services in terms of an individual's
awareness that the potential for new information
might in the future affect our understanding of the
role the ecosystem plays in our well-being. As long
as the possibility exists that new information might
be forthcoming in the future that would alter people's choices now, then there is economic value in
waiting to decide at some future time whether or
not to engage in an activity that may irreversibly
alter ecosystem functions. This is technically a
value for information; but since the information has
value in how it may affect ecosystem values, it is
typically attributed to the resource itself. Economists have defined this as quasi-option value.
This example is intended to illustrate the complexity of the concept of economic value and the
dependence of economic value on the underlying
social structure. This example shows that the value
of a unit of water for each region thus depends on
the following: