Environment & the World

Friday, November 3, 2006

The Price of Nature?

Filed under: Development, Economics — amirj @ 12:43 pm

Environmentalists have for a long time taken issue with the economic concept of externalities. From Wikipedia:

“In economics, an externality is an effect from one activity which has consequences for another activity but is not reflected in market prices. Externalities can be either positive, when an external benefit is generated, or negative, when an external cost is generated from a market transaction.

An externality occurs when a decision causes costs or benefits to stakeholders other than the person making the decision, often, though not necessarily, from the use of common goods (for example, a decision which results in pollution of the atmosphere would involve an externality).”

As the Wikipedia entry suggests in the last sentence, the environment often bears a negative brunt from economic transactions that take place without fully considering negative side effects. Air pollution is a big externality because those who generate it are not always held responsible. The scarring of our landscape from mountaintop removal mining and subsequent toxic runoff is external to the costs of mining. The loss of coastal wetlands and their importance as a natural buffer is usual external to coastal development.

Because the concept of externalities enables people who make decisions in an economistic framework to shrug off environmentally destructive consequences of their decisions, we often hear a call to reform of sorts: internalize the externalities. Internalizing external costs would entail reflecting the cost of environmental damage in the market transaction. So the price of coal would be more expensive than it is now if its price included externalities from the process of mining coal like the costs in health to the miners, the cost of mountaintop removal, etc. when appropriate.

The useful in this approach is that when consumers pay for something, they pay a price that is reflective of the good and the bad that goes into creating a product. Ideally, the products that can be manufactured with the least amount of negative effects would be cheaper. In this scenario the market would indeed favor more ethical and responsible business.

Unfortunately, assigning a price tag to externalities is not always simple. How would you price air pollution? Disease? Biodiversity? Coastal wetlands? One can think creatively to come up with a numerical value to these things, but it certainly is neither straightforward nor obvious.

As arbitrary and fickle as it seems to put numbers to these natural “services,” serious research into this problem is here.

“Researcher Kai Chan of the University of British Columbia said the model will help estimate the dollar value to people of such “ecosystem services” as mangroves and wetlands.

Such modeling could allow decision-makers to include the costs and benefits of nature conservation when planning developments such as housing, agriculture zones or hydroelectric dams.”

One impulse is to laud this research because we may now have a way to internalize the externalities in economic terms. This is supposed to be a good thing that would make the costs of environmental damage explicit.

Yet, when I read the article, I couldn’t help but feeling queasy. A model that will estimate dollar values to nature?!? Why do we need such a model to tell us that nature conservation is good and worthwhile when planning development projects? The researcher concedes the arbitrary element to this project, “Chan said that until now there has been no way to effectively measure the value of nature to people, although he noted in some ways its value is “infinite” because without nature people cannot survive.”

Just like the MasterCard commercial, some things in life are priceless. I used to think that protecting a swath of land and enjoying the great outdoors were one of them.

While providing an explicit dollar value to nature may discourage some grossly destructive practices, it by no means guarantees preservation or sustainable development. What if, for example, we find a more “cost effective way” to protect coastal towns than protecting coastal wetlands? Or what if we decide it’s simply more “cost effective” to pollute the air as opposed to cleaning it up and holding big polluters accountable?

The intentions of these researchers probably are in the right place, but I still worry. Do they realize that the primary outcome of their research may not be to breathe new life into the “value” of nature, but rather to strengthen a way of thinking about the world that has gotten us to the complicated and destructive state we’re in?



  1. […] The Price of Nature? […]

    Pingback by More Thoughts on Environmentalism and Economics « Environment & the World — Wednesday, November 22, 2006 @ 2:47 pm

  2. […] I see nothing wrong, in principle, with using market instruments for environmental policy.  In some cases they work remarkably well and at much less cost than regulatory approaches – the classic case study being the sulfur dioxide emissions reductions from US power plants in the 1990s as a result of a sulfur emissions trading scheme.  But the danger is to assume that market instruments are therefore the best solution to any problem.  My fear is that this is becoming the fashionable attitude among some environmentalist circles.  As we have discussed in previous posts, perhaps attempts to treat environmental problems as economic externalities and to develop ways to integrate them into the current capitalistic system are serving to prop up the very system that caused many of these problems to begin with.    […]

    Pingback by Is “Command and Control” Really so Bad? « Environment & the World — Sunday, November 26, 2006 @ 4:44 pm

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