Friday, September 19, 2008

Valuing the apples and bananas

It has come up for discussion in blogs, at bbqs, and international conventions, but we are still no closer to a workable solution for valuing the environment. When I say environment, what I mean specifically are natural ecological systems. And when I say valuing, I mean determining the contribution of these systems to the welfare of humanity. The difficulty for environmental economists is determining the value of these ecological systems in a common measure with the value we derived from conventional consumption – that is, in dollar terms. If we can establish a value for the environment it becomes a simple procedure to evaluate the human welfare implications of any land development.

So how do we go about comparing apples (the welfare we gain from the environment) and bananas (the welfare we gain from consumption)? One approach often used is to estimate the contribution of one particular ecological service, for example pollination by insects, to the economic production ( But this conventional approach estimates the contribution of ecological services to the production of real goods – in the pollination example, the contribution to agricultural production. By this only tells half the story. It tells the banana story, as it only looks at the value to production. The apple story is the welfare we gain from pollination in terms of its role in ecological systems that provide us with clean air, water, and any other non-economic way it which it improves the human experience. We cannot maximise human welfare without an estimate of apples and bananas.

The only reason we have certainty that conventional consumption (the stuff money can buy) provides us with increased welfare is because we are willing to pay for it. If we are voluntarily willing to give up other consumption for consumption of that good we must be benefiting. But if we take this willingness to pay principle to the environment, we face some hurdles. First, imaging your willingness to pay for a day’s breathable air. For me, it is almost infinite (if there is no alternative way of getting breathable air). Then we can look at water. A man dying of thirst in the desert would pay his life’s fortune for a little clean water. So in a way, we could say that these environmental services we get each day for free are infinitely valuable.

But most of us still receive these free environmental services each day even though we have severely disrupted the ecological systems that support it. So how do we know whether development that destroys ecological systems leads to a reduction in the welfare?

These are just some of the hurdles we face when trying incorporate the value to humanity from the environment into consideration. If you know of other concerns, please let me know. This is a big topic that will be the focus of much future research.


  1. Not everyone gets these items for free...

    Bottled water & rates.. - has a price for clean water been set already?

    Pollution filters exist - my car has a pollen filter that costs me $60 to replace every major service....

    I think with air (and water) there is a major qualitative component. i.e. how much do people in China pay for air filters?

    Like valuing carbon, we've got to start somewhere. How long will it take for us to value a tree in the carbon scheme?

    One might argue bamboo might absorb more carbon than a gum. However, it's not native or encouraging native wildlife and diversity. You can spend all the time in the world perfecting a valuation, but by then it'll be too late.

  2. Water - the price we pay is a traditional price for any production. What we want the the value of the cycle that evaporates surface water and rains clean water. There is obviously an environmental service here, since we know we can get acid rain when there are environmental distortions.

    Yes, the qualitative component of value is what we cannot overcome here.

    And yes, we will spend way too much time deciding how to value this, and act too late - paralysis of choice. I will deal with choice in my next blog.

    Keep up the comments Dan.
    And for an intro to choice see

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