2. How do economists think?

Joint Nature Conservation Committee

“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)

Part I. How do economists think?

3

Main message

• Economics Finance!

Study of

allocating &

managing

scarce

natural &

environmental

resources

optimally

accounting for

externalities

Environmental and Natural Resource Economics

Scarcity is a basic concept of

economics. When something is scarce, it has

value

One cannot move without

making at least one person worse off

Occurs when a decision causes costs or benefits to individuals or

groups other than the person making the

decision

Natural Resource & Environmental Economics

is away of thinking

& a tool-box that supports

this

1. Environmentaleconomics

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 forSustainable financing:Tax, fees, charges, etc.

Concept & tool

6

“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)

Part 2. How do economists define value?

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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

8

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.

9

Part 3. Why Think Like an Economist?

• Demonstrate and communicate the value of the environment

• Persuade politicians with cost-benefit analysis

• Change behaviour through economic incentives

Why is economic valuation useful?

Environmental& social

benefits (in non $)

Financialcosts (in $)

Financialbenefits

(revenues) (in $)

Financialbenefits

(revenues) (in $)

Financialcosts (in $)

Environmental& social

benefits (in $)

Financialcosts (in $)

Financialbenefits

(revenues) (in $)

Financialcosts (in $)

Environmental& social

benefits (in $)

Financialbenefits

(revenues) (in $)

Why is economic valuation useful?

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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

13

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!

14

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.

15

Discussion