230
benefits to people who do not consume it, but who
may share in a claim to the benefits of the resource.
For example, some individuals in the water-rich region may receive value from the flow of benefits
that they receive from wetlands, which would be
endangered by declining groundwater levels once
trade with the arid region starts. If they have a legitimate claim to these benefits and this claim is
not taken into account in the water trading, then the
losses to these individuals are said to be external
to the market for water trading. Problems caused
by external costs, public goods, poorly defined
property rights, and other factors can result in situations for which trade cannot assure a socially optimal allocation of resources. In short, the value of
natural amenities is not as great as it could be and
the markets that do exist result in allocations that
do not reflect the true value of the resources to society. One motivation for economic valuation of
ecosystems is to attempt to correct for these market failures. We shall return to a discussion of
causes of market failure in Section 16.6. But first
we focus on the difference between market values
and nonmarket values.
Our example described trade between two regions that resulted in the water resource attaining
its highest value for both regions. The result was
achieved because all assumptions necessary for
trade fully represent the values that all individuals
within each region are assumed to hold. As long as
markets are perfect they reveal the value of goods
and services that are traded in this manner. The
market price is the marginal value that is equated
for all individuals. It is said that the marginal value
is revealed as the price that attains from the market process. Total values can then be calculated as
the area beneath the demand curve and net value
as the difference between total value and total costs.
The net value, or net economic benefits, is represented by the triangle beneath the demand curve
and above the supply curve. Net value is greatest
at the point where marginal value is equal to the
marginal cost. This basic result of microeconomic
theory underlies the preoccupation that economists
have for allowing free markets to determine the
price and quantities of goods, including many supplied by the environment. The notion is that, as long
as the markets are working correctly, that is, all values and all costs are fully incorporated into all decision making, the resulting allocation will be the
one for which the value to society is highest.
However, in many cases, ecosystems and ecosystem services present situations in which the assumption that all costs and all values are completely
incorporated into all decisions is not valid. In these
cases, markets do not reveal the true value of goods
Measuring Ecosystem Values
that are traded. Also, goods and services that are
not traded may provide substantial benefits that are
not revealed at all.
For many ecosystem benefits, there are no markets, and where markets do exist, they often are unable to fully express the full value of the resources
to society. If there are no markets for these environmental amenities, then can we still say that they
have economic value? The simple answer is yes.
Although the value of goods and services may be
revealed in market transactions, markets are not a
prerequisite for economic value. Recall, economic
value arises when any good or service contributes
to the well-being of society. If we are left better off
knowing that a particular ecosystem is left intact
so that species diversity can continue in an undisturbed state there, then we receive benefits from
that knowledge. We can express the value of these
benefits in terms of sacrifices that we may be willing to make to receive them. For example, we may
be willing to live with fewer conveniences if we
know that in return we would be assured that the
ecosystem would be left intact. We may even be
able to quantify the limit of exactly how far we
would be willing to go in terms of sacrificing other
conveniences. And because many of these other
goods and services that we would be willing to sacrifice are valued in markets, we could express this
limit in dollar terms. In this case, the dollar units
we could use to reveal our willingness to pay to
protect the ecosystem are representative of the sacrifice that we are willing to make in terms of other
goods and services that we could receive with the
same financial resources. We may be willing to
forego $500 per year in order to assure that the undeveloped public lands at the end of our block are
not converted to residential lots. However, beyond
$500 per year, we would feel that other uses for the
resources that the money represents would bring
greater value, at the margin, than the knowledge
that the habitat of that ecosystem had been preserved.
The problem is that nonmarket-valued ecosystem services would most likely be undersupplied if
markets alone are relied on for allocation of ecosystems services. This would result in an overall
diminution of the potential economic value of the
ecosystem for society. Many of the benefits associated with preservation of natural ecosystems stem
from nonmarket values. In this way, it could be predicted that uncorrected market activity would likely
be biased toward extractive uses, rather than preservation of ecosystems. Thus many of the efforts to
value ecosystems aim to identify and then quantify
ecosystem values associated with preservation and
other nonmarket benefits.
benefits to people who do not consume it, but who
may share in a claim to the benefits of the resource.
For example, some individuals in the water-rich region may receive value from the flow of benefits
that they receive from wetlands, which would be
endangered by declining groundwater levels once
trade with the arid region starts. If they have a legitimate claim to these benefits and this claim is
not taken into account in the water trading, then the
losses to these individuals are said to be external
to the market for water trading. Problems caused
by external costs, public goods, poorly defined
property rights, and other factors can result in situations for which trade cannot assure a socially optimal allocation of resources. In short, the value of
natural amenities is not as great as it could be and
the markets that do exist result in allocations that
do not reflect the true value of the resources to society. One motivation for economic valuation of
ecosystems is to attempt to correct for these market failures. We shall return to a discussion of
causes of market failure in Section 16.6. But first
we focus on the difference between market values
and nonmarket values.
Our example described trade between two regions that resulted in the water resource attaining
its highest value for both regions. The result was
achieved because all assumptions necessary for
trade fully represent the values that all individuals
within each region are assumed to hold. As long as
markets are perfect they reveal the value of goods
and services that are traded in this manner. The
market price is the marginal value that is equated
for all individuals. It is said that the marginal value
is revealed as the price that attains from the market process. Total values can then be calculated as
the area beneath the demand curve and net value
as the difference between total value and total costs.
The net value, or net economic benefits, is represented by the triangle beneath the demand curve
and above the supply curve. Net value is greatest
at the point where marginal value is equal to the
marginal cost. This basic result of microeconomic
theory underlies the preoccupation that economists
have for allowing free markets to determine the
price and quantities of goods, including many supplied by the environment. The notion is that, as long
as the markets are working correctly, that is, all values and all costs are fully incorporated into all decision making, the resulting allocation will be the
one for which the value to society is highest.
However, in many cases, ecosystems and ecosystem services present situations in which the assumption that all costs and all values are completely
incorporated into all decisions is not valid. In these
cases, markets do not reveal the true value of goods
Measuring Ecosystem Values
that are traded. Also, goods and services that are
not traded may provide substantial benefits that are
not revealed at all.
For many ecosystem benefits, there are no markets, and where markets do exist, they often are unable to fully express the full value of the resources
to society. If there are no markets for these environmental amenities, then can we still say that they
have economic value? The simple answer is yes.
Although the value of goods and services may be
revealed in market transactions, markets are not a
prerequisite for economic value. Recall, economic
value arises when any good or service contributes
to the well-being of society. If we are left better off
knowing that a particular ecosystem is left intact
so that species diversity can continue in an undisturbed state there, then we receive benefits from
that knowledge. We can express the value of these
benefits in terms of sacrifices that we may be willing to make to receive them. For example, we may
be willing to live with fewer conveniences if we
know that in return we would be assured that the
ecosystem would be left intact. We may even be
able to quantify the limit of exactly how far we
would be willing to go in terms of sacrificing other
conveniences. And because many of these other
goods and services that we would be willing to sacrifice are valued in markets, we could express this
limit in dollar terms. In this case, the dollar units
we could use to reveal our willingness to pay to
protect the ecosystem are representative of the sacrifice that we are willing to make in terms of other
goods and services that we could receive with the
same financial resources. We may be willing to
forego $500 per year in order to assure that the undeveloped public lands at the end of our block are
not converted to residential lots. However, beyond
$500 per year, we would feel that other uses for the
resources that the money represents would bring
greater value, at the margin, than the knowledge
that the habitat of that ecosystem had been preserved.
The problem is that nonmarket-valued ecosystem services would most likely be undersupplied if
markets alone are relied on for allocation of ecosystems services. This would result in an overall
diminution of the potential economic value of the
ecosystem for society. Many of the benefits associated with preservation of natural ecosystems stem
from nonmarket values. In this way, it could be predicted that uncorrected market activity would likely
be biased toward extractive uses, rather than preservation of ecosystems. Thus many of the efforts to
value ecosystems aim to identify and then quantify
ecosystem values associated with preservation and
other nonmarket benefits.