Economic Value

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Introduction

Giving a price to the environment has always been problematic. Until a few years ago there were only two values the environment could take: nil or infinite. Either environmental resources were exploited and entered the economy free of charge, or they were protected as heritage sites and were consequently considered priceless. Trying to evaluate environmental values from an economic perspective was then the equivalent of trying to value something priceless. A number of economic techniques have been developed to try and achieve this goal. The concept of Total Economic Value (TEV) constitutes a watershed in the importance given to the environment within the decision theory. Before explaining the concept of TEV, it’s important to ask ourselves “what do we mean by the value of nature?” There are several possible meanings. If we define value as “the contribution of something to a condition of state of the system” then structures and functions of natural systems, by definition, have value. For instance the value of a tree to a forest is its role in perpetuating forest conditions, including nutrient and hydrological cycling functions. If we define value as a “contribution to a goal”, which is a purposeful condition, natural systems have value insofar as they contribute to that goal [1] and the major goal of human interaction with natural ecosystems is the support of human welfare. This goal is the criteria against which human activities and the conditions of natural systems are often measured. Ecologists use the term value to mean “that which is desirable or worthy of esteem for its own sake; something or some quality having intrinsic worth”. Economists use the same term to describe “a fair or proper equivalent in money, commodities, etc” where equivalent in money represents that sum of money that would have an equivalent effect on welfare or utilities of individuals.

Total Economic Value

In order to determine the value of the environment, the unpaid prices of the environment must first be revealed. Total economic value (TEV), an emerging concept of the 90’s proposed by the London School, provides a synthetic view of the efforts of the Environmental Economics to establish the different values associated to the environment. It distinguishes use values and non-use values, but these values are finally incorporated in a single utility approach and are defined in monetary terms, leading to include the environment in an enlarged cost-benefits analysis, the decision support method advocated by the neo-classical economic approach. In fact, there are three main categories of values used to determine the TEV:

  • use values
  • non use values
  • option values

Use values reflect the satisfaction that the individual derives from using the resources directly or indirectly. The individual has to arbitrate between variation of the quality of the environmental element and a variation of income in a given set of options according to the maximization criterion of utility – well being – ad rationality criterion. An arbitration between alternative uses of environmental resource can in this way be realized on the base of classical rationality criteria of economic efficiency.

''Non-use values'' are used to estimate the patrimonial dimensions of environmental assets where the patrimony is defined as an identity and a choice sets for future decisions. My patrimony determines who I am and who I can become. Three kinds of non-use values are defined because they are associated with benefits and satisfactions that individuals derive from the knowledge of the existence of environmental assets per se (Existence value), for the pleasure of others (Altruistic value) or for the future generations (Bequest value).

Finally, two more category that contribute to the measurement of the TEV, are the Option Value and the Quasi Option Value. The first one was introduced by Weisbrod [2] and is defined as the price that individuals are willing to pay for conversation of an element in view of its possible use in the future. Option value is not related to current use and is typically used to measure the value attached to future use opportunities. Instead, Quasi-option value is a term used to describe the welfare gain associated with delaying a decision when there is uncertainty about the payoffs of alternative choices, and when at least one of the choices involves an irreversible commitment of resources. Quasi-option value stems from the value of information gained by delaying an irreversible decision to develop a natural environment; it is not a value that individuals attach to changes in the natural resource[3]

The last two types of values alongside the traditional use values are extremely important for the measurement of a resource especially from the sustainability point of view because they contain the notion of preserving the freedom of choice for the future generation as the Bruntland definition said “a development that meets the needs of present without compromising the ability of future generations to meet their own needs”.

Each value has a varying level of concreteness (“tangibility”). In other words, the values on the left hand side of the diagram are more easily assessed and allocating monetary values to these options is quite straightforward. The further right you go on the diagram the more difficult it is to assess the importance of the values (Fig. 1).

Total Economic Value

So, given the real difficulty of measuring all costs as the result of ecological degradation, a range of authors have embraced the concepts of resilience[4] and strong sustainability[5] as guides to resource management. These concepts involve maintaining the structure and functioning of ecosystems to provide sustained benefits for future generations, even when such benefits cannot be quantified in economic terms. Keep in mind these two concepts in resource management it’s absolutely necessary because we are trying to value complex systems that are metastable and can undergo rapid transitions to a new equilibrium state and all changes that happen may not be reversible such as, for example, many of the different effects of climate change (sea level rise, pressure on freshwater resources, water supply and quality, loss of productivity and biodiversity, and the increased likelihood of drought, flooding, storm and extreme events). An important function of understanding complex systems should be to inform decision-makers about when, or under what circumstances, and undesirable substantive state change is likely to occur, one that will diminish or enhance the value of ecosystem services.

References

  1. Costanza,R. (2000)Social goals and the valuation of ecosystem services. Ecosystems: 3, p4-p10.
  2. Weisbrod, B. (1964) Collective-consumption services of individual-consumption goods. Quarterly Journal of Economics 78.
  3. Freeman, M. (1993). The Measurement of Environmental and Resource Values: theory and methods. Resources for the future, Washington, DC.
  4. Barbier E.B., Burgess, J.C., Folke, C., (1994) Paradise lost? The ecological economics of biodiversity. Earthscan, London
  5. Howarth, R.B.(1997) Sustainability as opportunity. Land Economics 73: p569-p579.

See also

The main author of this article is Ciampalini, Francesca
Please note that others may also have edited the contents of this article.