Economics, Environment

30 – Thinking like an economist 8: Putting a value on the environment

Now and then I get involved in discussions with non-economists about the potential contribution of economics to improved environmental management. I find that the first thing many of them think of (either positively or negatively) is the capacity to put dollar values on intangible environmental benefits, such as the satisfaction one gets from knowledge that a species has been protected from extinction. Economists refer to these benefits as “non-market” benefits, as they cannot be bought or sold in the same way that more tangible goods can be.

I think some people hope that valuing non-market values will help the environment hold its own in the struggle for public resources. Personally, I suspect this is often not true, either because policy makers are skeptical about the idea of assigning dollar values to these intangible benefits, or because they would support the protection of environmental assets just as strongly on the basis of biological or physical information alone.

Some non-economists hold a contrasting view of non-market valuation: almost a horror at the very idea. It’s as if any attempt at valuing non-market benefits is an act of profanity

The diversity of attitudes to non-market valuation among non-economists is mirrored within the economics discipline, although the points of disagreement are different. There has been a spirited academic debate about the validity and usefulness of non-market valuation methods, particularly the survey-based method called contingent valuation (CV), which is the most widely used technique. Arguments put forward by advocates of CV have included:

(a) When done well, the technique gives plausible and realistic results; and

(b) Even though the techniques are not perfect, it is important to attempt to measure non-market values using the best available methods because it assists in having environmental values fully and properly considered in public planning and policy making.

On the other hand, some economists reject argument (a). For example, a famous American economist, Charlie Plott, summarized the findings of a major workshop on the subject as follows:

“The basic conclusion of all the papers is that CV should be discarded as a public-policy tool for determining economic damages to the environment [because] (1) The numbers are too variable to be reliable. (2) The numbers do not measure what they are supposed to measure. (3) In fact, the object to be measured by the methods might not be measurable at all. (4) The appropriateness of CV for assessing damages, as opposed to more procedural methods, is challenged.”

Much of the critique is technical (mostly based on arguments that results from actual CV studies are illogical in a variety of ways). A different survey-based technique, Choice Modelling (CM) avoids some of the problems associated with CV, and its advocates make reasonable claims that it is a superior technique. However there are some more general concerns about CV that would also affect CM.

The first relates to the reliability and validity of survey-based techniques in general. To investigate this, survey specialists have set out to check the answers people give to simple, factual questions asked in surveys, such as “Do you have a driving license?” or “What is your age?” Typically, error rates in responses to such simple questions are between 5 and 17 per cent. This can’t help but raise doubts about the capacity of surveys to probe more subtle or complex questions, such as non-market environmental values.

Secondly, the great majority of people surveyed have low levels of knowledge of the complex issues about which they are being surveyed. They obtain some knowledge from the survey’s introductory material, but realistically this knowledge would not be deep. One study found that survey respondents themselves were concerned about this issue. On this theme, Diamond and Hausman argued that

“It makes no more sense to rely directly on ill-informed members of the public to evaluate the dollar value of such environmental damage than it would be to rely on an ill-informed public to choose between alternative designs for airplanes or nuclear power plants.”

With sufficient investment of time, effort and interest, most people would, no doubt, be able to express meaningful opinions on the specific environmental issues being examined, but they are not given this opportunity in a survey.

Argument (b) (that we need to measure non-market values so that they are given due weight in policy and planning) may perhaps have some merit. One potential concern is whether the improvement in decision making is sufficient to justify the considerable expense of conducting valid and reliable surveys, estimated by Dumsday to be “anywhere from $40,000 to $200,000”. In a compromise approach that moderates the expense, work is underway to develop a process of “benefit transfer” in which a database of past non-market valuation studies is used to provide indicative valuations that are relevant to new issues.

Despite argument (b), some continue to believe that it is adequate to quantify environmental outcomes in terms that are biologically meaningful, such as the number of species affected, or the area of habitat affected, or the increased probability of preventing extinction of a species. This does not avoid the fact that somebody still has to weigh up the information and make a choice between the management or policy options, and that this choice implicitly values the environmental assets at some monetary value. But it does not follow from this observation that a non-market valuation survey is mandated.

Finally, regardless of the process and the techniques used, the quality of the outcomes is limited by our ability to answer basic (non-monetary) questions such as:

  • What would be the effects of different management options on environmental outcomes?
  • In what ways are the environmental outcomes significant (e.g. in ecological terms) and why?

My own view is that research to improve the quality of answers to these question is often a more pressing need than research to value the results in monetary terms.

David Pannell, The University of Western Australia

Further reading

Pannell, D.J. (2003). Heathens in the chapel? Economics and the conservation of native biodiversity, Presented at a workshop of the Cooperative Research Centre for Plant-Based Management of Dryland Salinity, “Biodiversity Values in Agricultural Landscapes”, Rutherglen, Victoria, 14-15 October 2003. Forthcoming in Pacific Conservation Biology. full paper (109K)