6. Values and externalities

Joint Nature Conservation Committee

2

External and non-market effects

Externalities – an impact (positive or negative) on anyone not party to a given economic transaction

Non-market impacts - fall outside market systems. Hence no market price is available

3

Terminology and jargon

Fish factory

FishWaste

4

Various dimensions of economic value

• Total and Marginal Economic Value

• Financial and economic value

• Producer and consumer surplus

• Use and non-use value

• Direct and indirect values

• Market and non-market value

• Costs and benefits

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Total versus marginal values

• Total Values– Demonstrating value of biodiversity– Revising national income accounts

• Marginal Values– Influencing policies and projects– Assessing biodiversity impacts of non-

biodiversity investments – Determining liability for biodiversity loss – Setting charges, taxes and fines– Setting priorities for conservation within limited

budget

Marginal approach often better for influencing policy

Net benefitsfrom coastal

ecosystem

Time

Net benefitsfrom coastal

ecosystem

Time

Benefitswith MPA

MPA implementation

Cost of MPA

Benefits without MPA

Costs ofmanagement

Benefits of management

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Total Economic Value (TEV)

Total Economic Value

Use values Non-use values

Direct use Indirect use Option valueBequest

valueExistence

value

Example:-Timber-Tourism -Drinking water

Example:-Coastal protection-Water purification-Carbon sequestering

Example:- Genetic materials- Biodiversity- Clean soils

Example:- Avoided damage from climate change

Example:- Rare species- Indigenous rights

Warning for using TEV:• Different management regimes result in different flows of benefits.• If ecosystem are not sustainably managed, future benefits decline.• At large scales, observed prices unlikely to be applicable.• Rare to lose all ecosystem services.

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Use Value

• Direct Use Value: Value from direct human use of natural resources. – Extractive Use Value e.g.

timber, fisheries – Non-Extractive Use Value e.g.

recreation, tourism, education

• Indirect Use Value: Ecological functions that indirectly provide support and protection.– e.g. erosion and flood protection,

water purification, carbon sequestration

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• Value based on intangible human benefits.– Existence Value: Value

from simply knowing that nature exists e.g. charismatic species

– Option Value: Value from retaining options that may arise in the future e.g. medical discoveries

– Bequest Value: Value from conserving nature for future generations

Non-Use Value

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Producer and consumer surplus (1)

5.0 willingness to pay

3.0 price

0.5 cost

2.0 is my ‘benefit’(consumer surplus)

2.5 is his ‘profit’ (producer surplus)

Economic value is: 2.0 + 2.5 = 4.5

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CSCS

PS PS

Q*

P*

supply

$

quantity

demand

Producer and consumer surplus (2)

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Financial and economic value

5.0 willingness to pay

3.0 price

0.5 cost

2.0 is my ‘benefit’(consumer surplus)

2.5 is his ‘profit’ (producer surplus)

Economic value = 4.5

Financial value = 3.0

Directly observable

Not directly observable

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Example 1: TEV of world’s ecosystem services

• US$33 trillion (US$16-54 trillion a year)

• Hugely controversial– Variation in values

across different sites – Estimates of average

value based on marginal changes

– Exceeds total global economic income

– Not policy focused

Costanza et al. Nature. (1997)

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Grasslands $ 232/ha/yrOpen ocean $ 252/ha/yrCoral reefs $ 675/ha/yrTropical forests $ 2,007/ha/yr Lakes/rivers $ 8,498/ha/yrWetlands $ 14,785/ha/yr

Example 1: TEV of world’s ecosystem services (2)

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Example 2: Conservation or Conversion?

• TEV of managing ecosystems sustainably often higher than TEV of converted ecosystems.

• Benefit-cost ratio of global programme for conservation = 100:1

• Habitat loss costs US$250 billion per year

Balmford et al. Science. (2002)

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Example 2: Conservation or Conversion? (2)

Example 3: Economic value of Coral Reefs in Guam

Coastal protection

7%

Biodiversity2%

Fishery3%

Amenity8%

Recreation7%

Tourism73%

Annual values of coral reefs in Guam amount to US$127 million, equivalent to 7% of GDP.

Fish

Tourism

Protect

Amenity

Biodiv.overlay

Priority intervention

areas

economic

value

Threatsmap

Spatial Distribution of Economic Values

Example 3: Economic value of Coral Reefs in Guam (2)

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Assignment

• Identify the main economic values of your project.

• In doing so, do consider using the following categorisations:– Costs & benefits– Use & non-use values– Direct & indirect values– Local & global values– Market & non-market

values– Internal & external effects