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Why is economic valuation needed?

Natural resources are often undervalued

Ecological economics (studies the interaction between ecology and economy)
-There are basic assumptions and exceptions to economics

We must evaluate large development projects for their potential effects BEFORE they proceed (via a cost benefit analysis)


Why are natural resources often undervalued?

costs of environmental damage are ignored

depletion of natural resource stocks are disregarded

future value of resources are discounted

result: people treat the environment in a wasteful shortsighted manner.


What is ecological economics?

Emerging field that studies the interaction between economic and ecological systems

goal is to develop a sustainable world


What are the basic assumptions of economics?

monetary- transcations take place only when beneficial to both parties

everyone acts in self interest

this works great; leads to benefit of all society.


What are the exceptions to the basic assumptions of economics?

existence of hidden costs or benefits: externalities

can result in market failure: society as a whole becomes less prosperous, although some individuals may benefit at the expense of others


What are the two most important negative externalities?

1. environmental damage to open-access resources
-owned by everyone
-not regulated
-e.g., pollution of water, air, soil.

2. overharvesting of open-access resources
-lack of regulation, air
-lack of enforcement


What is the tragedy of the commons?

The value of open-access resources are lost to all because of overuse


What is a negative externality?

A negative externality occurs when an individual or firm making a decision does not have to pay the full cost of the decision.

If a good has a negative externality, then the cost to society is greater than the cost consumer is paying for it.


Why should we evaluate development projects?

must evaluate large projects for their pottential effects before.


How do we analyze development projects?

cost-benefit analysis (sometimes hard to calculate)


Downfalls of cost-benefit analyses

They are difficult to calculate
They are distorted by perverse subsidies
They often use discount rates.


What is a cost-benefit analysis?

environment or economic impact assessments

used to compare values gained against the costs
-of projects or
-of the resource use

e.g., three development alternatives in the Philippines showed the different costs or economic benefits of tourism and logging


Why are cost-benefit analyses hard to calculate?

benefits and costs change over time
they are difficult to measure.

-Precautionary principle: if there is uncertainty about risks, it is better to err on the side of doing no harm


How can cost-benefit analyses be distorted by "perverse subsidies"?

government subsidies that promote specific industries
-energy production

these subsidies may support environmentally damaging or expensive activities
-overfishing in the ocean
-farming in inappropriate areas


What are discount rates in cost-benefit analyses?

rate of reduction of the current value of a resource that will be used at some point in the future

-assumes that money you have now will grow

-economists therefore assign a lower current value to resources to be used in the future

-better to have money now then and invest it for greater wealth

Leads to short-sighted decisions to use resources right away
-should reduce or eliminate discount rates


Attempts to include loss of natural resources in the GDP:

Define what the GDP is

gross domestic product

measures economic activity

but without accounting for all the costs of non-sustainable activities
-costa rican forest loss
-UK agriculture's environmental cost.

Exclusions of environmental costs and loss of resources may distort economic health of a country
-unregulated fishing
-exxon valdex oil spill


What are alternatives to the GDP?



What is the ISEW

index of sustainable economic welfare


What is the GPI?

genuine progress indicator

measures economic activity

includes loss of resources and environmental costs
-impact of acid rain
-loss of wetlands
-number of people living in poverty
-effects of pollution on human health.

Use of GPI reveals that many modern economies are achieving their growth through non-sustainable consumption of natural resources.


What is the ESI?

environmental sustainability index

uses 21 environmental indicators

ranks countries according to:
-the health of and threats to their ecosystems
-vulnerability of their population to an adverse environment
-ability of their society to protect their environment
participation in global environmental protection efforts


Does high ESI imply low competitiveness in world economy?

thought maybe yes because too much protection of environment
apparently not

countries like finland have lots of protection and they're very competitive.


How do we attempt to assign economic value to biodiversity?

There are 3 levels that we assign value to

marketplace/harvest value of resources (meat harvested from wild gaur)

value provided by resources in unharvested states (animal's value in the wild for ecotourism)

future value of resources (potential for cattle breeding program)


What are the two categories of use values?

direct use values (consumptive and productive)

indirect use values (current benefits and option values)


What is the difference between consumptive and productive use values?

consumptive: like collecting and burning firewood
productive: like hunting something and then selling it.


What are two ways we assign economic value to biological diversity

Use values (direct and indirect)
Non-use values (existence value)


Define direct use value

products harvested by people

aka commodity values, private goods.

e.g., timber, seafood, medicinal plants


Define consumptive use.

local use of goods

fuel, food, medicine, materials

value can be asisgned by considering how much people would have to pay if it wasn't available.


What is productive use?

use in the marketplace

valuation based on price paid at first point of sale

huge varity of products


Why did we mention horseshoe crabs?

they have value in several ways: feeding coastal birds and fish's young (keeping populations going), used as cheap bait for fishermen, and their blood is used to test purity of vaccines and injections.