6.3 Environmental valuation

Learning objectives

After reading this module, students should be able to

1. understand why it might be useful to develop estimates of the values of environmental goods in dollar terms.
2. know the difference between the two economic measures of value, willingness to pay and willingness to accept.
3. be familiar with valuation methods in all three parts of the environmental valuation toolkit: direct, revealed preference, and stated preference methods.
4. understand the strengths and weaknesses of those valuation methods.

Use values

Externality, public good, and common-pool resource problems yield suboptimal levels of environmental quality and excessive rates of resource exploitation. Many factors complicate the process of deciding what to do about these problems. One is that environmental goods are not traded in any marketplace, and hence analysts struggle to identify quantitative measures of their values to society.

Environmental valuation    is controversial. Some environmentalists object to efforts to place dollar values on elements of the environment that might be viewed as priceless. Such values are important, however, for making sure that society does not fail to take the value of nature into account when making policy and investment choices. All U.S. government regulations, for example, are subjected to benefit-cost analyses to make sure that government actions don’t inadvertently make society worse off (see Module Evaluating Projects and Policies ). If we do not have dollar values for the environmental benefits of things like clean water and air, then estimates of the benefits of pollution control will be consistently lower than the true social benefits, and government policy will chronically underinvest in efforts to control pollution.

Environmental and natural resource economists have worked for decades to develop valuation methods that can be used to generate reasonable estimates of the dollar values of environmental amenities. Thousands of journal articles have been published in this effort to refine valuation methodology. In the early years of valuation studies, most of the work was focused on generating estimates of the social values of water and air quality. Over time, economists broadened their focus to study how to value a broader range of amenities such as wetland habitat and endangered species.

The United Nations launched an international effort in 2000 called the Millennium Ecosystem Assessment which was to evaluate the current state of earth’s ecosystems (and the services that flow from nature to humans) and identify strategies for conservation and sustainable use. Reports from this effort ) have helped scientists and policy makers develop a new framework for thinking about how nature has value to humans by providing a wide range of ecosystem services    . Since then, a surge of multidisciplinary research has emerged to quantify the physical services provided by the environment and estimate the values to humanity of those services. Economists recognize two broad categories of environmental values: use and non-use. Use values flow from services that affect people directly, such as food production, flood regulation, recreation opportunities, and potable water provision. Non-use values are less tangible: the desire for endangered tigers to continue to exist even on the part of people who will never see them in the wild; concern about bequeathing future generations a planet with healthy fish populations; a sense that people have an ethical responsibility to be good stewards of the earth. Economic valuation methods exist to capture all of these environmental values.