British Academy: The UK's National Academy for the Humanities and Social Sciences

Partha Dasgupta: 'The Economics of the Environment'
Copyright © The British Academy, 1996
Printed in Proceedings of the British Academy, Volume 90, pp. 165-221

9. Valuing Environmental Resources

As noted earlier, each of these questions is prompted by the observation that prices in a decentralised economic environment often do not reflect social scarcities of goods and services. For if they did, the criterion of private profitability would suffice, and there would be no need to pay special attention to the environmental resource-base. As they don't, a project's private profitability can't be regarded as an adequate indicator of its social worthiness.

So then, what criterion should we use for choosing public policy? One idea, much pursued in recent years, is to go to the heart of the matter and estimate social scarcities. Quantitative measures of social scarcity are called accounting prices. These prices are notional, and the idea is to use them, rather than market prices, when evaluating public policies. To state it another way, the suggestion is that economic policies should be selected on the basis of their accounting profits. [note 23 (go to Notes)]

How we should estimate accounting prices is a complex matter, but it isn't uniformly complex. There are now standard techniques for commodities like irrigation water, fisheries, timber, and agricultural soil. [note 24] The same techniques can be used for estimating losses associated with water-logging and overgrazing. For commodities such as firewood, and drinking and cooking water, the matter is more complex: they are inputs in household production. This means that we need estimates of the way households convert inputs into outputs; that is, we need to estimate household production functions. As an example, transportation costs (in particular energy costs, as measured in calories) for women and children would be less if the sources of fuelwood and water were not far away and receding. As a (very) first approximation, the value of water or fuelwood for household production can be estimated from these energy needs. In some situations (as on occasion with fuelwood), the resource is a substitute for a tradable input (for example, paraffin or kerosine); in others (as with cooking water) it is a complement to tradable inputs (for example, food grain). Such facts enable one to estimate accounting prices of non- marketed goods in terms of the accounting prices of marketed goods (Mäler, 1974). [note 25]

The approach outlined above allows us to capture only the direct use-value of a resource. As it happens, its accounting price may well exceed this. Why? The reason is that there may be additional values "embodied" in a resource. One additional value, mentioned in Section 1, is applicable to living resources: it is their intrinsic worth as living resources. (It is absurd to suppose that the value of a blue whale is embodied entirely in its flesh and oil, or that the value of the game in Kenyan safari parks is simply the present-discounted value of tourists' willingness-to-pay.) The idea of "intrinsic worth" of living things is inherent not only within traditional religious systems of ethics, but also in the modern utilitarian tradition. The question is not so much whether living things possess intrinsic worth, but rather, about ways of assessing this worth. It is almost impossible to get a quantitative handle on intrinsic worth. So the right thing to do is to take note of it, keep an eye on it, and call attention to it in public debate if the resource is threatened with extinction.

What is the point of basing accounting prices solely on use-value when we know that resources often possess intrinsic value as well? The answer is that it provides us with biased estimates of accounting prices, and this can be useful information. For example, in a beautiful paper on the optimal rate of harvest of blue whales, Spence (1974) took the accounting price of these creatures to be the market value of their flesh, a seemingly absurd and repugnant move. But he showed that under a wide range of plausible parametric conditions, it would be most profitable commercially for the international whaling industry to agree to a moratorium until the desired long-run population size were reached, and for the industry to subsequently harvest the creatures at a rate equal to the population's (optimal) sustainable yield. [note 26] In other words, in Spence's analysis, preservation was recommended solely on commercial ground. But if preservation is justified when the accounting price of blue whales is estimated from their market price, the recommendation would, obviously, be reinforced if their intrinsic worth were to be added. This was the point of Spence's exercise.

There is another source of value for environmental resources, one which is more amenable to quantification. It arises from a combination of two things common to them: uncertainty in their future use-values, and irreversibility in their use. (Genetic material in tropical forests provides a prime example.) The twin presence of uncertainty and irreversibility implies that preservation of its stock has an additional value — the value of extending society's set of future options. Future options have an additional worth because, with the passage of time, more information is expected to be forthcoming about the resource's use-value. This additional worth is often called an option value. The accounting price of a resource is, at the very least, the sum of its use-value and its option value. [note 27]

More: 10, Net National Product as an Index of Social Well-Being
Return to Contents