Ecological Economics 25 (1998) 17 – 19
SPECIAL SECTION: FORUM ON VALUATION OF ECOSYSTEM SERVICES
The price-value paradox Robert U. Ayres * INSEAD, Centre for the Management of En6ironmental Resources, Boule6ard de Constance, 77305 Fountainebleau, France Accepted 9 January 1998
A recent article in Nature suggests that the economic value of global ecosystem services is between $16 and $54 trillion, with an average of $33 trillion, which far exceeds the aggregate Gross World Product (GWP) ($18 trillion) (Costanza et al., 1997). This comment is motivated by that result and the underlying analysis. The Nature paper notes that there are three possible theoretical measures of economic value for a commodity or service flow. In order of preference, they are: (1) the sum of consumer and producer surplus, (2) producer surplus (net rent) alone, and (3) the product of marginal price times quantity or (hereafter) the price-quantity product (PQP). However, the first preferred measure requires detailed knowledge of the demand curve, which is difficult to ascertain. It is argued that the latter would be, in general, a lower limit. Unfortunately, it is also a very poor approximation for consumer surplus. In fact, it is easy to cite situations where consumer surplus might be very high, but P and PQP can be nearly zero, or even negative. In fact, this occurs in all cases where there is an optimum supply level. According to Leibig’s Law, every * Tel.: + 33 1 60724128; fax: + 33 1 64987672; e-mail:
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productive system has a limiting factor such that an additional increment of it will increase the productivity of the system as a whole. This is normally the only input that has a positive shadow price.1 Of course, if enough of the ‘scarce’ factor is supplied, some other factor will then become locally limiting. This is why several factors (such as nutrients) can simultaneously have significant positive monetary value in an aggregated system, such as agriculture.2 Implicitly, one can try to estimate the value of bio-geo-chemical systems, such as wetlands or nutrient cycles, indirectly by valuing corresponding mass flows of scarce (i.e. limiting) nutrients in the above conceptual framework. Thus, natural
1 This is a standard result of optimization under linear constraints. 2 The shadow monetary values of natural nutrient cycles can be estimated roughly on the basis of the market value (per unit mass) of fertilizers and water that are purchased on the market. According to recent estimates, natural processes provide 70% of fixed nitrogen and nearly 60% of phosphorus to US agriculture (Smil, 1993). US farmers in 1993 spent over $15 billion on agricultural chemicals (including pesticides) (Agricultural Statistics 1995 – 1996, Table 562). Thus, it would appear that these two nutrients from natural sources were worth about $30 billion at 1993 prices.
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rainfall in summer would have a positive shadow price in most agricultural areas, but a negative shadow price in flood-prone areas. Atmospheric oxygen does not have a non-zero shadow price, since it is presumably already at its optimal (evolutionary) level. Many biologically active materials, including nutrients as well as toxics, are already being mobilized by anthropogenic activity beyond the optimum level of consumption and/or the local carrying capacity of the environment for that substance. These are pollutants. In such cases the shadow price of the substance is negative. Society can increase its welfare by generating (or dissipating) less of these substances. Since markets with negative prices do not exist for pollutants, as such, the cost of control is sometimes used as a surrogate. This approach is justified for welldefined systems, as I hope to show below. Assume, in the spirit of a gedanken experiment, that a new set of sectors is introduced to the economic system to provide currently unpriced ‘ecosystem services’ and that these service providers have the crucial ability to sell or withhold the eco-services they currently provide free of charge. This would enable them to demand appropriate economic rents for their services. Obviously, governments and some private agencies already act to some extent as trustees on behalf of ecosystem services, especially within national boundaries. Doubtless is the current level of environmental protection (and restoration) activity insufficient for long-term sustainability. Also, there are no effective trustees for global environmental services, such as climate and the ozone layer. The amount of money now paid (to trustees) for eco-services is clearly too low, since the underlying environmental assets are being degraded. Sustainability (in the original non-corrupted sense of the word) requires that protective and restorative activities be intensified in most countries and extended to the developing world. In short, the present socio-economic system is not in equilibrium with respect to ‘eco-services’. The question explicitly posed in the Nature article was: how much are the natural capital assets providing such services worth? However,
through the use of PQP measures and a comparison with GDP, the question has been confused with another: how much should we pay for them? The answer, to an economist, is that what we should pay, in money terms, is what we would pay if the eco-services sector(s) or their trustees were fully integrated into the rest of the economy and the system as a whole were in equilibrium. If this hypothetical integration were actually achieved, the marginal price of eco-services would reflect a balance between supply and demand. The eco-sector would also be subject to an accounting balance. Since money is just a medium of exchange, no sector can accumulate money as such, indefinitely. (Money is a measure of value, but it is not a ‘store’ of value.) Money income must be either spent on current needs or saved (i.e. invested).3 Either way, income equals outgo. It follows that the amount of money paid to the eco-sector (i.e. to its trustees) for a unit of eco-services must be exactly what a marginal unit of eco-services is ‘worth’ (in terms of the PQP proxy) by definition. In equilibrium, both the price and the quantity of service must be stable. Incidentally, the accounting identity between income and outgo is what justifies the use of ‘cost of control’ as a proxy for damage cost. Specifically, using the PQP proxy, the (marginal) value of ecological services, in equilibrium, must be exactly equal to the cost of maintaining the various components of that system in a sustainable steady state. The Nature article suggests that the annual value of services provided by the eco-sector is at least $16 trillion and probably more than $33 trillion. However, if this amount were received as income, in equilibrium, the eco-sector should then pay out an equal amount to other sectors (for environmental protection, pollution abatement, etc.). The GWP would have to increase by twice the one-way flow of funds, or $66 trillion! This is implausible, to say the least. How much would the cost of ecosystem maintenance be? The advanced industrial countries have 3 The ‘goldbugs’ have long argued that gold is a ‘store of value’, and recommended gold as a safer alternative to paper money. The arguments on both sides of this proposition are interesting and possibly illuminating, but largely irrelevant.
R.U. Ayres / Ecological Economics 25 (1998) 17–19
actually come close to stabilizing the natural ecosystems within their geographic borders. Air and water pollution have been significantly reduced and the total cost of this ‘cleanup’ effort has not exceeded a few percent of GDP (which could have been less if the money had been more efficiently spent). The problems that remain unsolved are mostly deforestation and land degradation in developing countries or in the ‘global public goods’ category, especially global warming, and over-fishing of the oceans. This is not the place to calculate the continuing economic costs of permanent ecosystem stabilization. However, I believe that a few hundred billions of dollars (spent wisely) would accomplish most of the needed one-time repair and cleanup costs for old messes (such as strip mines). Another few hundred billions would suffice for reforestation and protection of most of the remaining wetlands and wilderness areas in the world; it would also provide permanent protection as habitats for nonhuman species. Maintenance costs and waste treatment would cost no more than a few percent of the conventional GWP thereafter. (Even this seems to be too much for most governments and
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business interests to accept readily, but that is another issue.) It may well be true that the ‘consumer surplus’ of ecosystem services is far more than all other economic goods and services put together. However, paradoxically, this cannot be true of the PQP proxy. In an evolutionary equilibrium the shadow price of most ecological services, supplied at optimum levels, would be zero. For practical purposes, the cost of control and maintenance of environmental capital is the best proxy for the value of the service flows derived therefrom.
References Costanza, R., d’Arge, R., de Groot, R., Farber, S., Grasso, M., Hannon, B., Limburg, K., Naeem, S., O’Neill, R.V., Paruelo, J., Raskin, R.G., Sutton, P., van den Belt, M., 1997. The value of the world’s ecosystem services and natural capital. Nature 387, 253 – 260. Smil, V., 1993. Nutrient Flows in Agriculture, Mimeo. United States Department of Agriculture, National Agricultural Statistics Service, 1996. Agricultural Statistics: 1995 – 1996. United States Government Printing Office, Washington, DC.
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