Presentation 2 - How do economist think

How do economists think?Joint Nature Conservation Committee... Study of allocating & managing scarce natural & environmental resources optimally accounting for externalities Environmenta

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?

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 a way of thinking

& a tool-box

that supports this

1 Environmental economics

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.

Concept & tool

“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?

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

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.

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 $)

Financial

costs (in $)

Financial benefits

(revenues) (in $)

Financial benefits

(revenues) (in $)

Financial

costs (in $)

& social

benefits (in $)

Financial

costs (in $)

Financial benefits

(revenues) (in $)

Financial

costs (in $)

Environmental

& social

benefits (in $)

Financial benefits

(revenues) (in $)

Why is economic valuation useful?

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

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!

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

Discussion