Valuation of Ecosystem Services

This section defines and explains some important concepts related to how economists approach ecosystem services valuation.

The Valuation of Ecosystem Services can be a controversial and challenging task. There is a criticism against them for trying to put a “price tag” on nature.

However, agencies in charge of protecting and managing natural resources must often make difficult spending decisions. These decisions involve tradeoffs in allocating resources. These decisions are economical and thus have an explicit or implicit based on society’s values. Therefore, economic valuation can be helpful by providing a way to justify and set priorities for programs, policies, or actions. All of which protect or restore ecosystems and their services (see The Big Picture for more information).

It is helpful to review some important definitions and concepts to understand how economists approach ecosystem valuation.

Valuation of Ecosystem Services: Ecosystem Functions and Services

Ecosystem functions are the physical, chemical, and biological processes or attributes that contribute to the self-maintenance of an ecosystem; in other words, what the ecosystem does. Some examples of ecosystem functions are providing wildlife habitat, carbon cycling, or the trapping of nutrients. Thus, ecosystems, such as wetlands, forests, or estuaries, can be characterized by the processes, or functions, that occur within them.

Ecosystem services are the beneficial outcomes for the natural environment or people that result from ecosystem functions. Some examples of ecosystem services are the support of the food chain, harvesting of animals or plants. Additionally is the provision of clean water or scenic views. For an ecosystem, there is a requirement to provide services to humans, some interaction with, or appreciation by, humans. Thus, functions of ecosystems are value-neutral, while their services have value to society.

Valuation of Ecosystem Services: Some Factors that Complicate Ecosystem Management Decisions

Decisions about ecosystem management are complicated because various types of market failures are associated with natural resources and the environment. Market failures occur when markets do not reflect the total social costs or benefits. For example, the price of gasoline does not fully reflect the costs, in terms of pollution, imposed on society by burning gasoline. Market failures related to ecosystems include the facts that:

  1. Many ecosystems provide services that are public goods.
  2. Externalities affect many ecosystem services.
  3. Very often there is no clear definition between property rights in relation to ecosystems and their services.

Ecosystem services are often public goods.

This means that they may be enjoyed by any number of people without affecting other peoples’ enjoyment.  For example, an aesthetic view is pure public good.  No matter how many people enjoy the view, others can also enjoy it. 

Other services may be quasi-public goods, where at a certain level of use, others’ enjoyment may be diminished.  For example, public Ecosystem services are often public goods, which means many people may enjoy them without affecting others’ enjoyment. For example, an aesthetic view is pure public good.

No matter how many people want the idea, others can enjoy it. Other services may be quasi-public goods, where others’ enjoyment may be diminished at a certain level of use. For example, a public recreation area may be open to everyone. However, crowding can decrease peoples’ enjoyment of the site. The problem with public goods is that, although people value them, nobody is willing to pay to maintain the good. Thus, collective action is required to produce the most beneficial quantity.

Ecosystem services may have affection by externalities or uncompensated side effects of human actions. In the case of a polluted stream by runoff from agricultural land, people experience a negative externality. The problem with negative externalities is that generally there is no compensation to people (or ecosystems) for the damages they suffer.

Finally, if property rights for natural resources are not clearly defined, they may be overused because there is no incentive to conserve them. For example, unregulated fisheries are an open-access resource – anyone who wants to harvest fish can do so. Because no one person or group “owns” the help, open access can lead to severe over-harvesting and potentially severe declines in fish abundance over time.

Ecosystem valuation can help resource managers deal with the effects of market failures by measuring their costs to society in terms of lost economic benefits.

The society charges can then be imposed, in various ways, on those responsible or can be used to determine the value of actions to reduce or eliminate environmental impacts. For example, we could increase in the case of the crowded public recreation area, benefits to the public by decreasing the crowding. This decrease can happen by expanding the site or limiting the number of visitors. We could compare the costs of implementing different options with the increased economic benefits of reduced crowding.

In the case of a stream polluted by agricultural runoff, we can compare the benefits from eliminating the pollution to costs of actions to reduce the runoff, or we can use it to determine the appropriate fines or taxes to those responsible. In the case of open-access fisheries, we can compare the benefits from lowering overfishing to regulatory costs or costs to the commercial fishing industry in case of restricted access.

Ecosystem Values

Ecosystem values measure how essential ecosystem services are to people – what they are worth. Economists measure the value of ecosystem services to people. They estimate the amount people are willing to pay to preserve or enhance the benefits (see Basic Concepts of Economic Value for more detailed information). However, this is not always straightforward for a variety of reasons.

Most importantly, while some ecosystems services, like fish or lumber, have a price in markets, many ecosystem services, like a day of wildlife viewing or a view of the ocean, do not. Thus, people do not pay directly for many ecosystem services. Additionally, because people are unfamiliar with purchasing such goods, there is no clear definition of their willingness to pay. However, this does not mean that ecosystems or services haven’t or cannot get value in dollar terms.

Ecosystem services don’t have to be a market subject to measure their value in dollars. There is a requirement of measuring how much purchasing power (dollars) people are willing to give up to get the service of the ecosystem, or how much would need to pay people to give it up if there is a question to make a choice similar to one they would make in a market. (Overview of Methods to Estimate Dollar Values gives an overview of, and Dollar-Based Ecosystem Valuation Methods describes in more detail, the methods that economists use to estimate dollar values for ecosystems and their services).

Valuation of Ecosystem Services: Types of Values

Economists classify ecosystem values into several types. The two main categories are use and non-use, or “passive use” values. Whereas the is a base for use-values on actual use of the environment, non-use values have no association with actual use or even an option to use, an ecosystem, or its services.

Thus, use-value is the value that derives from the actual use of a good or service, such as hunting, fishing, birdwatching, or hiking. Use values may also include indirect benefits. For example, an Alaskan wilderness area provides direct use values to the people who visit the area. Other people might enjoy watching a television show about the site and its wildlife, thus receiving indirect use-values. People may also receive indirect use values from an input that helps produce something else that people use directly. For example, the lower organisms on the aquatic food chain provide indirect use values to recreational anglers who catch the fish that eat them.

The option value is the value that people place on having the option to enjoy something in the future, although they may not currently use it.

Thus, it is a type of use-value. For example, a person may hope to visit the Alaskan wilderness area sometime in the future. Therefore, he would be willing to pay something to preserve the site to maintain that option.

Similarly, bequest value is the value that people place on knowing that future generations will have the option to enjoy something. Thus, bequest value measures peoples’ willingness to pay to preserve the natural environment for future generations. For example, a person may be willing to pay to protect the Alaskan wilderness area. Therefore, future generations will have the opportunity to enjoy it.

There is no association between Non-use values, referred to as “passive use” values, and actual use or even the option to use a good or service. Existence value is the non-use value that people place on simply knowing that something exists, even if they will never see it or use it. For example, people might be willing to pay to protect the Alaskan wilderness area, even though they never expect or even wants to go there, but simply because they value the fact that it exists.

A single person may benefit from the same ecosystem more than one way. Thus, the total economic value is the sum of all the appropriate use and non-use values for a good or service.