Joint Nature Conservation Committee
2. How do economists think?
Part I. How do economists think?
“Academic disciplines are often separated by gulfs of
mutual incomprehension, but the deepest and widest
may be the one that separates most economists from
most environmentalists….
What underlies this is not so much disagreements
about facts as disagreement about how to think.”
(Economist, 2002)
Main message
• Economics  Finance!
3
Environmental and Natural Resource Economics
Scarcity is a basic
concept of
economics. When
something is scarce,
it has value
Study of
allocating &
managing
scarce
natural &
Occurs when a
decision causes
costs or benefits to
individuals or
groups other than
the person making
the decision
environmental
resources
optimally
accounting for
externalities
One cannot move
without making at
least one person
worse off
Concept & tool
1. Environmental
economics
Natural Resource
&
Environmental
Economics
is a
way of thinking
& a tool-box
that supports this
2. Evaluation tools:
Cost benefits & cost
effectiveness analysis
3. Valuation tools:
CVM, HP, TCM, PF, CE
4. Economic survey:
Focus groups, face-to-face,
experiments
5. Economic instruments for
Sustainable financing:
Tax, fees, charges, etc.
Part 2. How do economists define value?
“Almost all economists are intellectually
committed to the idea that things
people want can be valued in dollars
and cents…
Most environmentalists not only
disagree with this idea, they find it
morally deplorable…
Yet, the fact remains that difficult
choices must be made.”
(Economist, 2002)
6
Valuing the environment
• Environmental resources are
scarce and valuable
• Often no markets or prices
exist for ecosystem services
• Valuation makes value of
environment explicit
• Valuation techniques estimate
values based on human
decisions, either actual or
hypothetical
7
Common Misunderstandings
• Values are put in monetary
terms as the most convenient
measure of ‘utility’, not
because only money matters.
• Valuation reflects more than
financial gains from resource
extraction.
• Valuation does not ignore
cultural and spiritual values.
8
Part 3. Why Think Like an Economist?
• Demonstrate and
communicate the value of the
environment
• Persuade politicians with costbenefit analysis
• Change behaviour through
economic incentives
9
Why is economic valuation useful?
Financial
costs (in $)
Financial
costs (in $)
Financial
benefits
Financial
(revenues) (in $)
benefits
(revenues) (in $)
Environmental
& social
benefits (in non $)
Why is economic valuation useful?
Financial
Financial
costs
(in $)
costs (in $)
Financial
Financial
benefits
benefits(in $)
(revenues)
(revenues)
(in $)
Environmental
Environmental
& social
& social
benefits
(in $)
benefits (in $)
Practical arguments for valuation – Money talks!
• Limited budgets; unlimited wants
• Communicate value of biodiversity
• Justify conservation & sustainable use
• Increase transparency & accountability
• Important element of other tools e.g. market–
based instruments
12
Part 4. Why Economists remain Imperfect?
• Empirical methods flawed or
imprecise
– Not all ecosystem services
easy to value
– Limitations of methods
• Philosophical issues
– Intrinsic value not included
• Money is wrong unit
– Affected by income
distribution and ability to pay
• Valuation only ever part of the
answer!
13
Importance of Science
• Biggest challenges in valuation
is ecological understanding:
– how ecosystem provides
services
– related cause-effect
relationships
• The more is known about
ecology, the more robust the
valuation.
14
Discussion
15