The Valuation Solution

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The Valuation Solution

• Joshua Farley
• Gund Institute Ecological Economics,
• U. of Vermont, Burlington

David Richards EcoAnalysts, Center for Aquatic
Studies, Bozeman, Montana
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Freedom
GYE
Home
Me
Gallatin River
Gallatin River
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MacroAllocation Problem
How much ecosystem structure should be
apportioned toward production of human
goods/services? How much should be left intact
to provide ecosystem services? Existing market
economy fails to solve this problem
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Conventional Valuation Solution
Attempts to calculate value of ecosystem
services and develop policies to internalize
these values in market prices Most economists
and surprisingly an increasing number of
ecologists have bought into this idea
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Conventional Valuation Solution
Is not Economically efficient Socially
just Ecologically sustainable Inappropriate
when Resources essential Resources
non-substitutable
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Goal
Explain marginal valuation Illustrate its
shortcomings
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Economic value and its role in market economy
Economics allocation of scarce resources among
alternative desirable ends Market prices reflect
value, dont they??? How about maintaining/enhanci
ng the quality of life Prices often do not
reflect value
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Paradox
Expensive contribute very little to human
welfare
Relatively inexpensive essential to life
Why?
Why?
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Use Value, Exchange Value, and Marginal Value

• Use value total value
• First units of water infinite value
• Additional units used for less important uses and
  lowers marginal value
• Marginal value exchange value value of last
  unit consumed
• Use value sum of marginal values of each unit
  across all units consumed
• Use value of water infinite

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Use Value, Exchange Value, and Marginal Value

• Market values determined by both supply and
  demand
• Neoclassical economics primarily concerned with
  marginal values

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Price
Demand Benefits Desirable
Supply Cost Possible
Price

• Neoclassical Economics
• Rationing function of price
• Commodities go to individuals willing to pay the
  most
• Willingness to pay value
• Price also scarcity
• resource price

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Problems with Prices in Market Economy

• Market prices fail to solve/exacerbate MAP
• Why?
• Ecosystem structure timber, fish, and land are
  market goods
• Ecosystem services generated by structure are
  not market goods
• Market goods are excludable
• Ecosystem structure excludable
• Ecosystem services non-excludable

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• Markets favor conversion of ecosystem structure
  to economic production
• Those who convert ecosystem structure to economic
  production gain all benefits while sharing cost
  with rest of world
• Could we estimate monetary value of ecosystem
  services?
• Charge those who destroy?
• Pay those who conserve?

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Non-rival resources

• Non-rival resource use by one person does not
  leave less for another persons use
• Most ecosystem services are non-rival
• Markets fail when resources are non-rival

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Does pricing reflect and maximize value?

• If pricing inefficient allocation
• No

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Sleeping sickness vs. Rich hairy women
Vs.
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Does pricing reflect and maximize value?
Rationing function of price
Markets allocate resources to those with money
and unmet wants, not to those with unmet needs
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Do prices measure scarcity?

• Our answer NO
• Example oil prices
• Who here in the audience really has any idea how
  oil prices are determined?
• Obviously, oil is less abundant than 100 years
  ago. But prices didnt change much.
• If best informed geologists dont even know if
  oil is scarce, how can the market?

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GDP and Global Warming

• GDP final
• Many leading NeoC economists global warming will
  do little harm to society
• Climate change mostly affects agriculture and
  forestry which 3 of GDP in USA
• Even I know that almost every economy is based on
  a surplus of agricultural products

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Valuing Natural Capital

• Commoditization of environmental goods felt
  need to value them
• Not obvious to some of us why
• Economists need to create commodities where none
  exist
• Some ecological goods and services may be
  impossible to price

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Valuing Natural Capital

• Monetary value of ecosystem services
• Major theme in environmental and ecological
  economics
• Need to understand how to solve problem
• VNC 3 goals
• Estimate and internalize values in market prices
• Improve national income accounts
• Draw attention to importance of ecosystem
  benefits

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Willingness To Pay

• WTP currently dominant approach to valuation
• WTP underestimates costs of ecological services
• WTP demand preferences/income
• One dollar, one vote not one person, one vote

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Ecosystems Services are a Human Right

• Explicitly stated in several national and state
  constitutions
• Costa Rica
• Brazil
• Hawaii
• Montana

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• Montana
• Article II, Section 3 of the Constitution of
  Montana Inalienable rights. All persons are born
  free and have certain inalienable rights. They
  include the right to a clean and healthful
  environment.

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• Montana
• Article IX, Section 1 (1) The state and each
  person shall maintain and improve a clean and
  healthful environment in Montana for present and
  future generations. (3) The legislature shall
  provide adequate remedies for the protection of
  the environmental life support system from
  degradation and provide adequate remedies to
  prevent unreasonable depletion and degradation of
  natural resources.

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Ecosystem Services Uncertainty and Ignorance

• The Cognitive Problem
• the precise contribution of a functional element
  in the ecosystem is not known-indeed is probably
  unknowable-until it ceases to function

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Catastrophic shifts in ecosystems
Scheffer et al. 2001
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Valuation and Critical Natural Capital

• Critical natural capital natural resources
  essential for sustaining human welfare,
  biodiversity, etc. and
• Substitution is difficult or impossible
• When marginal cost infinite marginal
  valuation fails

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• I wont have time to tell you about all the other
  good stuff in Joshuas paper
• You will have to read it!

jfarley.uvm_at_gmail.com