PART 5
THE VALUE OF BIODIVERSITY



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BioDiversity PART 5 THE VALUE OF BIODIVERSITY

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BioDiversity Native varieties of peppers and corn at a village marketplace near Cuzco, Peru, high, in the Andes mountains. Photo courtesy of Noel D.Viermeyer.

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BioDiversity CHAPTER 21 ECONOMICS AND THE PRESERVATION OF BIODIVERSITY W.MICHAEL HANEMANN Associate Professor, Department of Agricultural and Resource Economics, University of California, Berkeley, California Aanalysis of the value of preserving biodiversity requires the attention of many disciplines. The chapters that follow in this section define the role of economics in this endeavor and assess its contribution. In this chapter, I offer a brief overview of some of the issues involved in the economics of biodiversity. There are many different questions that economists ask in connection with biodiversity. Is economic growth harmful to biological diversity? What are the reasons why it may turn out to be harmful? How can harmful impacts be avoided? What institutions are required to ensure a better outcome? At a more specific level, the questions tend to focus on project analysis and specific environmental policy decisions. For example, what are the benefits and costs of a particular investment project or conservation program? Should they be undertaken? These questions involve a mixture of normative and positive analyses. For the normative issues, economists have something to contribute—the criterion of economic efficiency—but we recognize the fundamental role of equity considerations and value judgments. Our theories reserve a place for the equity criterion and are capable of tracing its implications for private and public decisions, but as economists, we do not have a theory to explain what those value judgments should be. The positive issues are different, however; these fall squarely within our bailiwick and within those of the other social sciences that seek to explain and predict human behavior. As resource economists, it is one of our direct obligations to measure, explain, and predict how individuals and institutions manage natural resource systems, value biological diversity, and make decisions affecting its preservation.

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BioDiversity We may disagree on techniques of measurement and theories of behavior, and some of our measurements and theories may be wrong, but as a discipline, we have standing in this area. In explaining why anyone may rationally choose to deplete natural resources and destroy ecosystems, mainstream economists adduce a variety of arguments. The most important is intertemporal preferences and discounting. In contrast to conventional commodities, a distinctive feature of natural resources is that they are not instantly renewable; they can be restocked, if at all, only with time and subject to the constraints of biological processes. Consequently, harvesting these resources—whether for commercial gain or otherwise—involves a trade-off between present benefits and future costs that depends on how the latter are discounted relative to the former. Economists have theories about how the interest rate level, the nature of the net benefit function and its movement over time, and the dynamics of the resource’s natural growth process combine to determine the optimal intertemporal path of exploitation—whether or not it is desirable to aim for a steady state and if so, what that steady state should be. Other things being equal, the higher the interest rate at which future consequences are discounted, the more it is optimal to deplete the resource now. We have theories about what interest rates will pertain if resource management decisions are determined by market forces side-by-side with commercial investment decisions, and we also have arguments about why market-based interest rates may be inappropriate for natural resource management (as well as other social investment policies). With regard to the latter, Sen (1967) and Marglin (1963) in the 1960s put forth the following two arguments. First, a person acting in a public role, e.g., voting as a citizen on an issue of social policy, may place a different weight on the welfare of future generations than he or she does in making private market decisions. Second, even if each person has a single set of preferences, members of the present generation may be willing to join in a collective contract calling for more savings but all while being unwilling to save more in isolation. In effect, the act of sacrificing present consumption opportunities to benefit future generations is a collective good. Both arguments lead to the conclusion that the intertemporal allocations resulting from a decentralized market system may in fact be undesirable to the present generation. This is separate from the commonly voiced argument that the present generation may place too little weight, in terms of some external ethical criterion, on the welfare of future generations. Not only may the act of conserving natural resources be a collective good, but the resources themselves frequently are collective goods. This is the second major reason why excessive depletion may occur. Either there may not be any well-defined property rights, or the property rights may not create adequate incentives to private individuals to engage in conservation activities. This can result, for example, in a prisoners’ dilemma situation: conservation may be the optimal strategy collectively, but it is not a dominant strategy for each individual privately. The third distinctive feature of many natural systems is the often considerable degree of uncertainty concerning the future consequences of present conservation/ depletion actions. This is partly a consequence of the intertemporal aspects of

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BioDiversity resource management—the further into the future the consequences, the harder to predict them—but it is also due to the enormous variability that is inherent in many natural systems. There is a variety of economic theories about how uncertainty should be factored into decisions made by private persons or public policy makers. These theories focus on the implications of various forms of risk-averting behavior for the optimal pattern of resource conservation over time. To implement the theories, however, one needs empirical measurements of the type of risk preferences possessed by the decision makers, in the case of a positive analysis, or value judgments about the type of approach to decisions about risk that should be adopted, in the case of a normative analysis. As with discounting, there are also economic arguments about why private decision makers may be more or less averse to risk than would be appropriate for making social decisions. For example, the presence of financial constraints may make individuals more averse to risk than society would wish to be. Moreover, as Arrow and Lind (1970) have pointed out, society may have opportunities to pool risks that are not available to individual decision makers; it could therefore be appropriate for society to treat small risks in a risk-neutral manner. An important exception, noted by Fisher (1973), is when collective risks cannot be pooled because one person’s assumption of the risk does not reduce the risk shouldered by others. Many environmental hazards, including the destruction of biodiversity, are likely to be categorized as collective risk and thus require the application of a risk premium even in public decision making. Why private decision makers might be insufficiently averse to risk has been discussed in some of the other social sciences, particularly in psychology, and by Kahneman et al. (1982), who have charted systematic patterns of bias in individual perceptions of risk. While economics is predisposed to assume rationality in human behavior, it is important to leave some room for other varieties of conduct—short-sightedness, wishful thinking, self-deception, and (occasionally) stupidity—as potent explanations of failures in resource management. To the extent that the outcomes of some decisions may be irreversible, such as those leading to species extinction, there is an additional twist to the way in which uncertainty and time combine to influence decisions involving the concept of option value. Because the passing of time brings information about the consequences of present actions, there is a premium on actions that preserve the flexibility to exploit this information. If a current decision is physically or economically irreversible, that flexibility is abandoned. To the extent that decision makers disregard the potential value of future information, they will systematically undervalue policies, such as conservation programs, that maintain flexibility and preserve options for future action. To these explanations of economic decisions that may lead to destruction of biodiversity, Norgaard adds another—the force of specialization on the basis of competitive advantage (see Chapter 23). Whereas an isolated region must produce all the natural resources that its members wish to consume, once the region enters into trade relations with other areas it can satisfy its wants by specializing in the production of a small set of goods and exchanging its surplus production for the

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BioDiversity other needed commodities. Indeed, it is economically efficient to do this: given differences in relative production efficiencies among trading partners, everybody can gain from the exchange. There are some qualifications to this conclusion. First, the argument applies in principle to trade between any areas not yet developed, and developing countries. Second, trade between developed and developing countries has historically involved elements of coercion that are extraneous to the argument based on efficiency. Third, the calculation of relative production efficiencies and the estimate of gains from trade involve trade-offs between gains to the present generation and potential losses to future generations through the depletion of nonrenewable resources and may be biased by the use of an inappropriate discount rate for the reasons mentioned above. All these arguments apply to the management of natural resources in general as well as to the conservation of biological diversity in particular. Insofar as they offer explanations about why decentralized private behavior may result in decisions that are socially undesirable, they also suggest possible remedies, e.g., changes in institutions or specific government policies such as wilderness protection acts, procedures for reviewing proposed development projects, or interest rate subsidies for conservation programs. They are all, of course, economic explanations and, therefore, capture only part of the picture. Ecologists have their own explanations of species extinction, such as the perils of K-selection in a suddenly unstable environment, the requirement of a specialized habitat, or specialized feeding needs, for example. As long as the arguments of economists are regarded as explanations of human behavior rather than as an apologia, they have a legitimate claim to the attention of ecologists and other natural scientists concerned with the preservation of biodiversity. So far I have focused on the larger questions that economists pose about biodiversity. The more specific questions (e.g., What are the benefits of preserving some particular ecosystem?) may be closer to what a lay audience expects of economists and may explain why it has doubts about their role. In this context, it is crucial to distinguish between positive questions (What value do people place on the preservation of the ecosystem?) and normative ones (What value ought they place on its preservation?) Economists deal professionally with the former; the latter is an ethical question about which they may have feeling but no particular expertise to provide an answer. With respect to the positive analysis of ecosystem values, it is useful to distinguish between the environment as a marketed good, or an input to the production of marketed goods, and the environment as a nonmarketed good of concern to people in its own right. The first situation is certainly easier to deal with and represents, I believe, the stereotype of what economic analysis is about. The economist figures out the market price of alligator handbags, say, and multiplies that by the reduction in the quantity of alligator handbags resulting from the destruction of alligator habitat. Although that certainly is part of economic analysis, it has not been at the cutting edge of research in environmental economics for the past decade or more.

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BioDiversity Environmental economists are interested in markets not because they want to use market prices to multiply something but because they are interested in measuring the preferences of individuals and ascertaining their trade-offs between environmental resources and money or conventional market commodities. Organized markets are one forum in which people reveal their preferences through the choices that they make—but markets are not the only forum, and they are not essential to the enterprise of environmental valuation. Instead, economists have come to rely quite extensively on simulated markets, or their analogs, in which individuals reveal their preferences through interviews or experimental games involving trade-offs between money and environmental outcomes. Moreover, when they do analyze actual markets, economists are interested not in the market prices per se but, rather, in the patterns of selection and the types of preferences that these imply. Both direct and indirect techniques for eliciting or inferring the preferences of individuals have been greatly refined in recent years. Rather than attempting to summarize them, I will mention several potential limitations of general concern. First, at what level of aggregation should the valuation be conducted? Should one analyze each species separately or the ecosystem as a whole? In principle, this is an empirical issue, and the solution depends on two sets of factors—the way in which individuals perceive and care for natural environments (What are the aspects that matter to them?) and the way in which the ecosystem functions (What are the biological linkages?) In practice, fashioning a sensible set of units of analysis requires an interdisciplinary approach—a dialog between the natural and social scientists. The second pertains to the complex types of preferences involved when one is dealing with uncertain and intertemporal outcomes. There is conflicting empirical evidence on how people approach these issues and the types of decision rules they use. As noted above, we have a variety of axiomatic systems and theories about how uncertainty and time could be factored into decision making but much less empirical information on what people do in practice. Moreover, there is some evidence from psychologists that raises doubts about whether individuals have consistent risk or intertemporal preferences at all. At the very least, there is evidence that preferences depend on the type of choice available. To the extent that this is so, the problems of identifying the appropriate choice and appropriate measurement technique, or of extrapolating preferences revealed by one type of choice to the valuation of another, are indeed challenging. Third, there is the problem of aggregating preferences or values across individuals. Preferences vary among people: some may even dislike biological diversity and prefer concrete parking lots to natural wilderness. In any case, a resource management program is likely to create both winners and losers. How should one sum the gains and losses and compare them with one another? Is everyone weighted equally (which, in principle, enshrines the existing income distribution), or do some count more than others? The question cannot be answered by economists alone: it must be resolved by reference to some philosophical or ethical system. Fourth, the sheer difficulty of dealing with futurity in resource management and preservation issues can scarcely be overemphasized. So many consequences involve

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BioDiversity future events, which are extremely difficult to predict—long-run ecosystem impacts, economic variables (such as future energy prices), and even the preferences of future generations, who are not around now for one to observe their behavior. Any economic analysis of the benefits and costs of biodiversity preservation involves predictions (i.e., guesses), some of which will inevitably be wrong. One can attempt to counteract this by choosing sophisticated analytical techniques and decision criteria that recognize the uncertainties and the potential for error, but the feeling of unease cannot be avoided. Lastly, the postulate underlying the entire enterprise of positive analysis (the legitimacy of attempting to establish what value people place on biodiversity) is itself a value judgment and one that can be questioned. Consumer sovereignty, and the notion that people may have consistent and stable preferences, can be challenged. People may be ignorant, ill-informed, or fickle in their attitudes. Why should we care about what they think? A justification comes from the utilitarian ethical system that mainstream economics embraces. The issue is discussed eloquently by Randall in Chapter 25. The point I want to emphasize here is that this question defines both the strengths and the weaknesses of economic analysis. In their positive analysis, economists are essentially holding a mirror to society. If the picture is unattractive, that is, if people individually and collectively place a low value on the preservation of diversity (which I actually think is not the case), that is not the fault of the economist. It is critical to distinguish the legitimacy of the homocentric, instrumentalist, and utilitarian ethical framework from the degree of success with which economists measure human values. Moreover, there are the fundamental difficulties in making decisions on broad issues of resource preservation. Economics is certainly not immune to them, but neither is it uniquely susceptible to them. These difficulties must be confronted in any type of discourse about human affairs. In concluding I will return to the special question of biodiversity in Third World countries. Within the economics profession, there has been too little communication between those who specialize in economic development and those who focus on natural resource economics. Except for minerals and energy resources, development economics has paid relatively little attention to biological and environmental implications of economic growth. For its part, environmental economics in countries like the United States, Britain, France, and Scandinavia has its intellectual origins in public finance and cost-benefit analysis. That is to say, it has a domestic focus. Like the doctors in George Bernard Shaw’s play, we resource economists have tended to specialize in the diseases of the rich. I hope that this book will help to alter this state of affairs. In this context I should point out that when economists from the United States and other developed countries urge developing countries to preserve their biological resources, there is a certain awkwardness. It is like an aging rake urging chastity on a young man: the advice is certainly based on a wealth of experience, but it may not be entirely persuasive. It would carry more weight if it were backed up by financial incentives. That is to say, if we want developing countries to protect their biological resources we should be willing to pay them to do so. This topic

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BioDiversity deserves immediate attention from policy makers as well as from the academic community. REFERENCES Arrow, K.J., and R.C.Lind. 1970. Uncertainty and the evaluation of public investment decisions. Am. Econ. Rev. 60(3):364–378. Fisher, A.C. 1973. Environmental externalities and the Arrow-Lind public investment theorem. Am. Econ. Rev. 63(4):722–725. Kahneman, D., P.Slovic, and A.Tversky, eds. 1982. Judgment Under Uncertainty: Heuristics and Biases. Cambridge University Press, New York. 555 pp. Marglin, S. 1963. The social rate of discount and the optimal rate of investment. Q. J. Econ. 77(1):95–111. Sen, A.K. 1967. Isolation, assurance, and the social rate of discount. Q. J. Econ. 81:112–124.

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BioDiversity CHAPTER 22 COMMODITY, AMENITY, AND MORALITY The Limits of Quantification in Valuing Biodiversity BRYAN NORTON Professor of Philosophy, Division of Humanities, New College of the University of South Florida, Sarasota, Florida What is the value of the biological diversity of the planet? That question reminds me of a game we used to play at ice cream socials and church picnics when I was growing up in the Midwest. Someone on the entertainment committee would count an assortment of screws and gimcracks, or nuts and bolts, and put them into a mason jar. At the Christmas party, it was pecans, walnuts, and hickory nuts. Everybody else had to guess: How many whatchamacallits are in the jar? Pretend we’re having an ice cream social on an improved version of the space shuttle. Someone looks down and says, “What’s the value of the life on that planet down there?” The closest guess wins a door prize. But our question is tougher than nuts and bolts. Recently, scientists discovered bones from a dinosaur they have called seismosaurus. That animal was 18 feet tall, more than 100 feet long, and weighed 80 tons. The diversity in size between a seismosaurus and the smallest microbe is staggering. And I used to be thrown off when they put washers of two different sizes in the mason jar! Given the diversity in size among species, not to mention the fact that many species live inside others, it is not surprising that scientists have left themselves some latitude in their guesses as to how many species there are: they estimate that there are between 5 and 30 million species. That’s O.K. I never did very well at the guessing game myself. One time I guessed that a jar contained 452 nuts and bolts. The correct answer was more than 2,000. I won the booby prize for being the farthest off; my prize was the jar and its contents.

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BioDiversity But again, I can’t help mentioning how much more difficult our current task is. We would hardly have begun to place a value on biodiversity if we had known how many species there are. We’re supposed to put a value on them. In what terms? When I looked into a jar, I was always a bit overwhelmed at first, so let’s not give up yet. Eventually, I’d decide to be systematic about my guess. I’d divide the jar into somewhat equal sections and try to do a rough count for one of them. Then, I’d multiply by the number of sections. Despite my lack of success, it’s a reasonable approach; we can call it the divide-and-conquer method. Economists and other policy analysts have adopted a similar method for valuing biotic resources. They usually try to estimate, however roughly, a value for one species (Fisher, 1981; Fisher and Hanemann, 1985). If they could assign a value to a few species, such as the snail darter, the Furbish lousewort, and the California condor, then we might average the values of those species and then multiply that average value by the number of species there are, if we only knew how many species there are. All this averaging and multiplying will require that we use numerical values, so we might as well follow economists in trying to use present dollars as the unit of value. Before introducing the technical terms used by economists, let’s start with some ordinary concepts: species can have value as commodities and as amenities, and they can have moral value. We’ll say that a species has commodity value if it can be made into a product that can be bought or sold in the marketplace. In this category, alligators have potential value in the manufacture of shoes, but they may also have indirect commodity value if it turns out that vinyl shoes stamped in an alligator pattern sell for more than plain vinyl shoes. Indirect value of this sort is especially important in the pharmaceutical industry, since many of our most valuable medicines are synthetic copies of biologically produced chemicals (Lewis and Elvin-Lewis, 1977; Myers, 1983). A species has amenity value if its existence improves our lives in some nonmaterial way, e.g., when we experience joy at sighting a hummingbird or when we enjoy walks in the forest more when we sight a ladyslipper. Hiking, fishing, hunting, bird-watching, and other pursuits have a huge market value as recreation, and wild species contribute, as amenities, to these activities. Bald eagles, for example, have not only inspired the production of millions of dollars worth of Americana, but they also generate aesthetic excitement through a whole area that is blessed with a nesting pair of them. Finally, species have moral value. Here, we begin to encounter controversy. Some philosophers would say that species have moral value on their own. They are, according to this view, valuable in themselves, and their value is not dependent on any uses to which we put them (Regan, 1981; Taylor, 1986). We will not be able to settle this issue. Suffice it to say that species have moral value even if that moral value depends on us. Here, Thoreau comes to mind. He believed that his careful observation of other species helped him to live a better life (Thoreau, 1942). I believe this also. So there are at least two people, and perhaps many others, who believe that species have value as a moral resource to humans, as a chance for humans to form, re-form, and improve their own value systems (Norton, 1984; Norton, in press).

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BioDiversity In the long run, basing our conservation strategy on the economic value of diversity will only make things worse, because it keeps us from coping with the root cause of the loss of diversity. It makes us accept as givens the technological/ socioeconomic premises that make biological impoverishment of the world inevitable. If I were one of the many exploiters and destroyers of biological diversity, I would like nothing better than for my opponents, the conservationists, to be bogged down over the issue of valuing. As shown by the example of the faltering search for new drugs in the tropics, economic criteria of value are shifting, fluid, and utterly opportunistic in their practical application. This is the opposite of the value system needed to conserve biological diversity over the course of decades and centuries. Value is an intrinsic part of diversity; it does not depend on the properties of the species in question, the uses to which particular species may or may not be put, or their alleged role in the balance of global ecosystems. For biological diversity, value is. Nothing more and nothing less. No cottage industry of expert evaluators is needed to assess this kind of value. Having said this, I should stop, but I won’t, because I would like to say it in a different way. There are two practical problems with assigning value to biological diversity. The first is a problem for economists: it is not possible to figure out the true economic value of any piece of biological diversity, let alone the value of diversity in the aggregate. We do not know enough about any gene, species, or ecosystem to be able to calculate its ecological and economic worth in the larger scheme of things. Even in relatively closed systems (or in systems that they pretend are closed), economists are poor at describing what is happening and terrible at making even short-term predictions based on available data. How then should ecologists and economists, dealing with huge, open systems, decide on the net present or future worth of any part of diversity? There is not even a way to assign numbers to many of the admittedly most important sources of value in the calculation. For example, we can figure out, more or less, the value of lost revenue in terms of lost fisherman-days when trout streams are destroyed by acid mine drainage, but what sort of value do we assign to the loss to the community when a whole generation of its children can never experience the streams in their environment as amenities or can never experience home as a place where one would like to stay, even after it becomes possible to leave. Moreover, how do we deal with values of organisms whose very existence escapes our notice? Before we fully appreciated the vital role that mycorrhizal symbiosis plays in the lives of many plants, what kind of value would we have assigned to the tiny, threadlike fungi in the soil that make those relationships possible? Given these realities of life on this infinitely complex planet, it is no wonder that contemporary efforts to assign value to a species or ecosystem so often appear like clumsy rewrites of “The Emperor’s New Clothes.” The second practical problem with assigning value to biological diversity is one for conservationists. In a chapter called “The Conservation Dilemma” in my book The Arrogance of Humanism, I discussed the problem of what I call nonresources (Ehrenfeld, 1981). The sad fact that few conservationists care to face is that many

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BioDiversity species, perhaps most, do not seem to have any conventional value at all, even hidden conventional value. True, we can not be sure which particular species fall into this category, but it is hard to deny that there must be a great many of them. And unfortunately, the species whose members are the fewest in number, the rarest, the most narrowly distributed—in short, the ones most likely to become extinct—are obviously the ones least likely to be missed by the biosphere. Many of these species were never common or ecologically influential; by no stretch of the imagination can we make them out to be vital cogs in the ecological machine. If the California condor disappears forever from the California hills, it will be a tragedy: but don’t expect the chaparral to die, the redwoods to wither, the San Andreas fault to open up, or even the California tourist industry to suffer—they won’t. So it is with plants (Ehrenfeld, 1986). We do not know how many species are needed to keep the planet green and healthy, but it seems very unlikely to be anywhere near the more than quarter of a million we have now. Even a mighty dominant like the American chestnut, extending over half a continent, all but disappeared without bringing the eastern deciduous forest down with it. And if we turn to the invertebrates, the source of nearly all biological diversity, what biologist is willing to find a value-conventional or ecological—for all 600,000-plus species of beetles? I am not trying to deny the very real ecological dangers the world is facing; rather, I am pointing out that the danger of declining diversity is in great measure a separate danger, a danger in its own right. Nor am I trying to undermine conservation; in fact, I would like to see it find a sound footing outside the slick terrain of the economists and their philosophical allies. If conservation is to succeed, the public must come to understand the inherent wrongness of the destruction of biological diversity. This notion of wrongness is a powerful argument with great breadth of appeal to all manner of personal philosophies. Those who do not believe in God, for example, can still accept the fact that it is wrong to destroy biological diversity. The very existence of diversity is its own warrant for survival. As in law, long-established existence confers a powerful right to a continued existence. And if more human-centered values are still deemed necessary, there are plenty available—for example, the value of the wonder, excitement, and challenge of so many species arising from a few dozen elements of the periodic table. And to countenance the destruction of diversity is equally wrong for those who believe in God, because it was God who, by whatever mechanism, caused this diversity to appear here in the first place. Diversity is God’s property, and we, who bear the relationship to it of strangers and sojourners, have no right to destroy it (Berry, 1981; Lamm, 1971). There is a much-told story (Hutchinson, 1959) about the great biologist, J.B.S.Haldane, who was not exactly an apostle of religion. Haldane was asked what his years of studying biology had taught him about the Creator. His rather snide reply was that God seems to have an “inordinate fondness for beetles.” Well why not? As God answered Job from the whirlwind in the section of the Bible that is perhaps most relevant to biological diversity, “Where were you

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BioDiversity when I laid the foundations of the earth?” (Job 38:4). Assigning value to that which we do not own and whose purpose we can not understand except in the most superficial ways is the ultimate in presumptuous folly. The great biochemist Erwin Chargaff, one of the founders of modern molecular biology, remarked not too many years ago, “I cannot help thinking of the deplorable fact that when the child has found out how its mechanical toy operates, there is no mechanical toy left” (Chargaff, 1978, p. 121). He was referring to the direction taken by modern scientific research, but the problem is a general one, and we can apply it to conservation as well. I cannot help thinking that when we finish assigning values to biological diversity, we will find that we don’t have very much biological diversity left. REFERENCES Berry, W. 1981. The gift of good land. Pp. 267–281 in The Gift of Good Land. North Point Press, San Francisco. Chargaff, E. 1978. Heraclitean Fire: Sketches from a Life Before Nature. Rockefeller University Press, New York. 252 pp. Clark, C.W. 1973. Profit maximization and the extinction of animal species. J. Pol. Econ. 81:950–961. Ehrenfeld, D. 1981. The Arrogance of Humanism. Oxford University Press, New York. 286 pp. Ehrenfeld, D. 1986. Thirty million cheers for diversity. New Sci. 110:38–43. Hutchinson, G.E. 1959. Homage to Santa Rosalia, or Why are there so many kinds of animals? Am. Nat. 93:145–159. Lamm, N. 1971. Ecology in Jewish law and theology. Pp. 161–185 in Faith and Doubt. Ktav Publishing House, New York.

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BioDiversity CHAPTER 25 WHAT MAINSTREAM ECONOMISTS HAVE TO SAY ABOUT THE VALUE OF BIODIVERSITY ALAN RANDALL Professor of Agricultural Economics, Department of Agricultural Economics and Rural Sociology, Ohio State University, Columbus, Ohio A wide variety of methodological and ideological perspectives has informed and directed economic inquiry. Nevertheless, in each of the topical areas where economists specialize, it seems that one or, at most, a few approaches are now recognized as mainstream. For evaluating proposed policies to influence the way resources are allocated, the welfare change measurement approach (which includes benefit-cost analysis, BCA) currently enjoys mainstream status. My purpose here is to explain what this approach can contribute to understanding the value of biodiversity. I will distill the basic message into a few simple propositions, stating them one by one and offering a few paragraphs of elaboration on each. WELFARE CHANGE MEASUREMENT IMPLEMENTS AN EXPLICIT ETHICAL FRAMEWORK Each human being is assumed to have a well-defined set of preferences. While the way these preferences are ordered should satisfy certain logical requirements, preferences may be about literally anything in the range of human concerns. Mainstream economists argue that preferences are seldom whimsical or capricious. Rather, people come by their preferences consciously, in a process that involves learning, acquisition of information, and introspection. The mainstream economic approach is doggedly nonjudgmental about people’s preferences: what the individual wants is presumed to be good for that individual. The ethical framework built on this foundation is utilitarian, anthropocentric, and instrumentalist in the way that it treats biodiversity. It is utilitarian, in that things

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BioDiversity count to the extent that people want them; anthropocentric, in that humans are assigning the values; and instrumentalist, in that biota is regarded as an instrument for human satisfaction. There may be other views of the role of nonhuman life forms. For example, animals and plants may be seen as having a good of their own, possessing rights, or being the beneficiaries of duties and obligations arising from ethical principles incumbent on humans. Some people, including some economists, may subscribe to some of these views. Nevertheless, my purpose here is to confine myself to one particular instrumental, utilitarian, and anthropocentric formulation, exploring its implications for valuation. Implications of other approaches will, on their own merits, provide perspectives in addition to those offered here. Having established preferences as a basis for valuation, any utilitarian formulation must come to grips with two additional issues: resource scarcity and interpersonal conflicts. The mainstream economic approach recognizes the role of ethical presumptions in resolving these conflicts and asserts two explicit ethical propositions. First, at the level of the individual, value emerges from the process in which each person maximizes satisfaction by choosing, on the bases of preference and relative cost, within a set of opportunities bounded by his or her own endowments (i.e., income, wealth, and rights). Thus, individuals with more expansive endowments have more to say about what is valued by society. Second, societal valuations are determined by simple algebraic summation of individual valuations. This means that from society’s perspective, a harm to one person is cancelled by an equal-size benefit to someone else. By way of comparison with the ethics of welfare change measurement, note that individualism, as an ethic, accepts the first of these propositions, but explicitly rejects the second and instead, argues for protections against individual harm for the benefit of society as a whole. The classical market, in which all exchange is voluntary, institutionalizes (in principle) the individualist ethic. Many economists are to some extent uncomfortable with the propositions that underlie welfare change measurement—and they are sympathetic with the discomfort of noneconomists—but these propositions have the virtue of explicitness: at least, one knows where mainstream economics stands. THE ECONOMIC APPROACH IS NOT LIMITED TO THE COMMERCIAL DOMAIN The explicit ethical framework of mainstream economics leads to the following definitions of value. To the individual, the value of gain (i.e., a change to a preferred state) is the amount he or she is willing to pay (WTP) for it, and the value of a loss is the amount he or she would be willing to accept (WTA) as sufficient compensation for the loss. For society, the net value of a proposed change in resource allocation is the interpersonal sum of WTP for those who stand to gain minus the interpersonal sum of WTA for those who stand to lose as a result of the change. Because most laypersons have encountered the ideas that economics is concerned with markets and that since Adam Smith economists have believed that an invisible

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BioDiversity hand drives market behavior in socially useful directions, it is important for me to be precise about the relationship between economic values (WTP and WTA) and market prices. If everything people care about were private (in technical terms, rival and exclusive) and exchanged in small quantities in competitive markets, prices would reveal WTP and WTA for small changes. Conversely, prices are uninformative or positively misleading where any of the following is true: where people are concerned about goods and amenities that are in some sense public (i.e., nonexclusive or nonrival); where impediments to competitive markets are imposed (by governments or by private cartels and monopolies); and where the proposed change involves a big chunk rather than a marginal nibble of some good, amenity, or resource. The point is that market prices reveal value (in the mainstream economic sense of that term) not in general but only in a rather special and limiting case. Most issues involved with biodiversity violate the special case where market price is a valid indicator of economic value. Nevertheless, the general theory of economic value encompasses these broader concerns. Here lies the distinction between economic values and commercial values; the essential premises for economic valuation are utility, function, and scarcity; organized markets are essential only to commerce. It is a fundamental mistake to assume that economics is concerned only with the commercial. THERE IS AN (ALMOST) ADEQUATE CONCEPTUAL BASIS FOR ECONOMIC VALUATION OF BIODIVERSITY The total value of a proposed reduction in biodiversity is the interpersonal sum of WTA. This total value has components that arise from current use, expected future use, and existence. Use values derive from any form of use, commercial or noncommercial, and including use as a source of raw materials, medicinal products, scientific and educational materials, aesthetic satisfaction, and adventure, personally experienced or vicarious. Future use values must take into account the aversion of humans to risks (e.g., the risk that the resource may no longer be available when some future demand arises) and the asymmetry between preservation and some kinds of uses (preservation now permits later conversion to other uses, whereas conversion now eliminates preservation as a later option). The concerns have encouraged the conceptualization of various kinds of option values, which are adjustments to total value to account for risk aversion and the irreversibility of some forms of development. To keep the value of existence separate and distinct from the value of use, existence value must emerge independently of any kind of use, even vicarious use. That is a stringent requirement. Nevertheless, valid existence values can arise from human preference for the proper scheme of things. If some people derive satisfaction from just knowing that some particular ecosystem exists in a relatively undisturbed state, the resultant value of its existence is just as real as any other economic value. For evaluating proposals that would have long-term effects, it is a fairly standard practice in economics to calculate present values by discounting future gains and losses. This procedure seems reasonable when evaluating alternative investments

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BioDiversity expected to last no more than one generation. When it is applied to potential disasters in the more distant future, it makes many people, including quite a few economists, uneasy. By discounting at standard rates, the inevitable collapse of the living systems on this planet several hundred years from now could be counterbalanced by relatively trivial economic gains in the immediate future. This unresolved issue of how to deal with long-range future impacts is what led me to insert the caveat “almost” in the heading of this section. TECHNIQUES FOR EMPIRICAL VALUATION EXIST AND ARE APPLICABLE TO MANY BIODIVERSITY ISSUES, BUT LACK OF INFORMATION CAN BE DAUNTING When price information is available and is informative about value, the analytics are relatively simple and familiar to most economists. The challenges in valuation arise where direct price information is unavailable and when price is not a valid indicator of value. For those situations, the valuation methods that have been developed and are considered reputable by economists fall into two broad classes: implicit pricing methods and contingent valuation. The implicit pricing methods are applicable when the unpriced amenity of interest can be purchased as a complement to, or a characteristic of, some ordinary marketed goods. For example, travel services are purchased as a complement to outdoor recreation amenities, which permits valuation of outdoor recreation amenities by the travel cost method (Clawson and Knetsch, 1966). Hedonic analysis of the housing market may be used, for example, to estimate the value of such nonmarketed amenities as access that housing provides to open space or to a shoreline (Brown and Pollakowski, 1977). Contingent valuation methods are implemented in survey or experimental situations (Cummings et al., 1986). Alternative policy scenarios are introduced and the choices made by citizen participants reveal WTP or WTA, directly or indirectly. Like other survey or experimental methods, the results may be sensitive to the design and conduct of the research. Nevertheless, there is growing theoretical and empirical evidence that contingent valuation yields results that are replicable and accurate within broad limits. The major advantage of this type of valuation is its broad applicability: it can determine WTP or WTA for any plausible scenario that can be effectively communicated to the sample of citizens. For estimating existence values, for instance, it may be the only feasible method. With respect to biodiversity, the experts (i.e., ecologists and paleontologists) often have little confidence in their estimates of the impacts of ecosystem encroachment or disturbance. All too often the experts disagree. In these areas, contingent valuation cannot compensate for ignorance. If the experts cannot construct credible scenarios describing the effects of alternative policies on biodiversity, the WTP or WTA of citizens reacting to these scenarios will reflect that uncertainty and misinformation as well as any additional uncertainty they may have about their own preferences concerning biodiversity. More generally, the accuracy of any measure of value based on the preferences of ordinary citizens is limited by the

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BioDiversity reliability of citizen knowledge about the consequences of alternative actions for biodiversity. Some may regard this as an argument that policy should be based on the judgments of experts rather than of citizens. I disagree. It seems that public opinion quite rapidly reflects expert opinion when the latter is confidently held and expressed with convincing argument. On the other hand, confusion, ignorance, and apathy among the laity typically reflect incomplete and dissonant signals from the specialists. POLICY DECISION CRITERIA HAVE BEEN PROPOSED Mainstream economists have proposed two alternative criteria for deciding preservation issues. The modified BCA (benefit-cost analysis) approach attempts to implement the conceptual framework of welfare change measurement by identifying and measuring (insofar as possible) the benefits and costs of the alternative courses of action. This approach requires major efforts to measure the noncommercial components of economic value, including amenity, option, and existence values. The benefit-cost decision criterion itself is modified, however, by assigning any benefits of doubt to the preservation side of the ledger. The logic for this is that more is often known and can be documented about the benefits obtainable from commercial uses than is known about the benefits of preservation. In another approach, the safe minimum standard (SMS) is defined as the level of preservation that ensures survival. Proponents of the SMS approach argue that although measuring the benefits of diversity in every instance is a daunting task, there is ample evidence that biodiversity is (in broad and general terms) massively beneficial to humanity. Whereas the modified BCA approach starts each case with a clean slate and painstakingly builds from the ground up a body of evidence about the benefits and costs of preservation, the SMS approach starts with a presumption that the maintenance of the SMS for any species is a positive good. The empirical economic question is, “Can we afford it?” Or, more technically, “How high are the opportunity costs of satisfying the SMS?” The SMS decision rule is to maintain the SMS unless the opportunity costs of so doing are intolerably high. In other words, the SMS approach asks, how much will we lose in other domains of human concern by achieving a safe minimum standard of biodiversity? The burden of proof is assigned to the case against maintaining the SMS. The SMS approach avoids some of the pitfalls of formal BCA, e.g., the treatment of gross uncertainty as mere risk, the false appearance of precision in benefit estimation, and the problem of discounting. In contrast to the procedure of discounting, the SMS approach simply accepts that the costs of preservation may fall disproportionately on present generations and the benefits on future generations. Its weakness is that it redefines the question rather than providing the answers. Nevertheless, an appealing argument can be made that “can we afford it?”, with a presumption in favor of the SMS unless the answer is a resounding NO, is the proper question.

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BioDiversity THE EMPIRICAL CUPBOARD IS NOT BARE It is customary to draw attention to the scarcity of hard information about the economic value of biodiversity. But for each of the valuation methods discussed above, there has been a smattering of apparently successful empirical application. Fisher and Hanemann (1984) have used ordinary market data to estimate the potential value of the plant breeding that recently resulted in the discovery of perennial grass related to corn (see Iltis, Chapter 10 of this book). Literally dozens of economists have used implicit pricing methods to estimate the values of various environmental amenities. Stoll and Johnson (1984) used the contingent valuation method (CVM) to estimate the existence values for whooping cranes. Bishop (in press) used CVM to estimate the existence values for Wisconsin’s bald eagles and striped shiners (a rather obscure freshwater fish). Bennett (1984) used CVM to estimate the existence value of a unique ecosystem that survives in a remote part of the coastline of southeastern Australia. Bishop (1980) has also completed some empirical analyses based on the SMS criterion. For several cases in the United States (the California condor, snail darter, and leopard lizard) and for mountain gorillas in low-income tropical Ruanda, he found the opportunity costs of preservation to be reasonably low. In such cases, preservation decisions are not difficult. Clearly, the empirical evidence is spotty at this stage, but these examples serve to counter the impression that high-quality empirical work on the value of diversity is not feasible. FURTHER COMMENTS ON THE MAINSTREAM ECONOMICS APPROACH The mainstream economic approach has a built-in tendency to express the issues in terms of trade-offs. In that respect, it has much in common with the common law notion of balancing the interests. This makes the mainstream economic approach potentially helpful in the resolution of conflicts. Perhaps it also makes the economic approach anathema to those who would brook no compromise. Important problems in making decisions concerning biodiversity are seldom of the all-or-none variety. It is easy to provide the mainstream economic answer to the question, What is the value of all the nonhuman biota on the planet Earth? Its value is infinite based on the following logic: elimination of all nonhuman biota would lead to the elimination of human life, and a life-loving human would not voluntarily accept any finite amount of compensation for having his or her own life terminated. Earth’s human population surely includes at least one such person. Thus, across the total population, the sum of WTA for elimination of all nonhuman biota is clearly infinite. Nonetheless, the question posed is not very useful. The meaningful questions concern the value lost by the disappearance of a chip of biodiversity here and a chunk there. For this smaller question, it is often possible to provide an economic answer that is useful and reasonably reliable. The goal of the mainstream economic approach is to complete a particular form of utilitarian calculation. This calculation is expressed in money values and includes (in raw or modified form) the commercial values that are expressed in markets.

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BioDiversity However, it expands the account to include things that enter human preference structures but are not exchanged in organized markets. This extension and completion of a utilitarian account, where preservation of biodiversity is at issue, is useful because it shows that commercial interests do not always prevail over economic arguments. The claim that it is useful to complete this utilitarian account does not depend on any prior claim that the utilitarian framework is itself the preferred ethical system. Environmental goals that may be served by arguments that the biota has rights that should be considered, or that it is the beneficiary of duties and obligations deriving from ethical principles incumbent on humans, may also be served by completing a utilitarian account that demonstrates the value implications of human preferences that extend beyond commercial goods to include biodiversity. Some people would argue that a complete discussion of the value of biodiversity should extend beyond utilitarian concerns. Even these people would, presumably, prefer a reasonably complete and balanced utilitarian analysis to the truncated and distorted utilitarian analysis that emerges from commercial accounts. REFERENCES Bennett, J. 1984. Using direct questioning to value the existence benefits of preserved national areas. Aust. J. Agric. Econ. 28:136–152. Bishop, R. 1980. Endangered species: An economic perspective. Trans. North Am. Wildl. Nat. Resour. Conf. 45:208–218. Bishop, R. In press. Uncertainty and resource valuation: Theoretical principles for empirical research. In G.Peterson and C.Sorg., eds. Toward the Measurement of Total Value. USDA Forest Service, Rocky Mountain Forest and Range Experiment Station General Technical Report, Fort Collins, Colo. Brown, G., and H.Pollakowski. 1977. Economic value of shoreline. Rev. Econ. Stat. 69:273–278. Clawson, M., and J.Knetsch. 1966. Economics of Outdoor Recreation. Johns Hopkins University Press, Baltimore. 327 pp. Cummings, R., D.Brookshire, and W.Schulze. 1986. Valuing Environmental Goods: A State of the Art Assessment of the Contingent Valuation Method. Rowman and Allenheld, Totowa, N.J. 270 pp. Fisher, A., and M.Hanemann. 1984. Option Values and the Extinction of Species. Working Paper No. 269. Giannini Foundation of Agricultural Economics, Berkeley, Calif. 39 pp. Stoll, J., and L.Johnson. 1984. Concepts of value, nonmarket valuation, and the case of the whooping crane. Trans. North Am. Wildl. Nat. Resour. Conf. 49:382–393.

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