Chapter 23, Ecological Economics, Daly & Farley


Economists suggest we find monetary values
for these goods and then use the market to
efficiently allocate them.
Controversy over whether establishing
monetary values is appropriate or
meaningful.




Diamonds-water paradox
In the past ecosystem goods/services were so
abundant that an extra unit had no
appreciable value.
As we approach ecological thresholds the
values will increase rapidly.
Unlike normal market good ecosystem values
would have to be continuously recalculated
and fed back into the market system at a
great expense of time and money.




Lack of knowledge of ecosystem function
Lack of familiarity with valuing nonmarket
goods
Example, the contingent valuation method
creates a hypothetical market by asking
people what they would be willing to pay for
a given nonmarket good/service.
Problems, Ignorance of all the goods and
services provided by healthy ecosystems and
people may not respond truthfully.








Market Price Method
Productivity Method
Hedonic Pricing Method
Travel Cost Method
Damage Cost Avoided , Replacement Cost,
and Substitute Cost Methods
Contingent Valuation Method
Contingent Choice Method
Benefit Transfer Method





Most ecosystem goods & services can provide
benefits in the future
Economists generally look to discounting
Ignore the ethical decisions of
intergenerational distribution
Economists argue it is a question of efficient
allocation, not distribution.
Should the future have a right to resources
and if so how do we determine/enforce this?

We are constantly forced to make decisions
between market and nonmarket goods
◦ More forests or more strip malls?
◦ The differences often make comparisons not only
impossible but also undesirable
◦ Putting dollar values on everything does not make
decision more objective, but obscures the ethical
decisions required to make “objective” valuations.

Ecological Economics, rather than trying to find
the correct price for everything, espouses that we
should act on the knowledge that zero is the
wrong price and try to better understand that
there is significant (often infinite) value even if
we cannot precisely quantify it.




Buyer or seller has more information
Car sale – Owner knows the state of the car,
the buyer does not
Buyer will have a lower price to adjust for risk
than the seller is willing to accept
Daly & Farley provide a few ideas, but
“welcome new and better ideas for addressing
the market failures associated with
advertising”.
◦ Tax Advertising
◦ Full disclosure advertising

Direct Subsidy
◦ Compensate the private sector for its provision of
positive externalities

Tax Relief
◦ Decrease in land taxes for erosion reduction
◦ Tax breaks for businesses investing in personnel
training

Subsidized Credit
◦ If people under-invest in activities with positive
externalities, lower interest payments would
stimulate greater investment.



Governments could make interest free loans
or grants to activities that best promote the
public good, including the provision of
nonmarket goods
This could help in the macro-allocation of
resource towards nonmarket goods
It could also lead to a financial system whose
viability is not based on unending growth.






Ecosystems provide services at local,
regional, & global levels
Causes of degradation are often local while
impacts are local, regional, & global
Policy making is primarily local and national
Scale causes serious problems with regulating
and monitoring
Individuals get the benefits, we all share the
negative impacts.
Brazil is making progress on this matter.




Individual nations are unlikely to pay for the
degradation to ecosystems they cause.
We all benefit, so probably we should all pay,
but how?
Presently, most countries are free riders
Beneficiary pays principle
 Find a way for more developed countries who benefit
from ecosystem services to reimburse lesser
developed countries for keeping those services viable.

This is easier said then done…

International Subsidies for Ecosystem
Preservation
◦ International Pigouvian subsidy
◦ ICMS ecologico
◦ National Pigouvian tax paired with an international
subsidy

Must deal with issues of who to pay and the
possibility of people taking up a behavior just
to get in on the subsidy




Typically, allocative efficiency is achieved
when we put scarce resources to the use the
yields the most monetary values
Ignore diminishing marginal utility of wealth
and the potential gains of redistribution.
Goal of economics is not to maximize
production, but to provide service.
Production of services from manmade capital
requires sacrifice of services from natural
capital.

An appropriate measure of efficiency is the
ratio of services gained from manmade
capital stock (MMK) to the services sacrificed
from the natural capital stock (NK)
1. Service Efficiency
2. Maintenance
Efficiency/ Durability
3. Growth Efficiency
4. Increased by creating
more natural capital
stock or sacrificing
fewer ecosystem
services



Captures the tradeoffs between services
gained and services lost (left hand side)
Uneconomic growth invariably reduces
efficiency
Overall efficiency (right hand side) design,
distribution, durability, growth, & harvesting