The First, and Still Best, Method for Non-market Valuation

Harold Hotelling proposed the first method for non-market valuation. Most of us believe this is the Travel Cost Method. In this paper I argue that the first method is from Hotelling's seminal study on the extraction of exhaustible resources. The first method is dynamic optimisation as applied to the management of natural resources. Dynamic optimisation imputes the price of stocks that are neither bought nor sold in a market. Non-market valuation for the environment is usually a question of imputing the value of environmental stocks. Pollutants are almost always stocks. Ecosytem services are flows from environmental stocks. Greenhouse gases, biodiversity, wildlife, national parks, old growth forests, all are stocks. Indeed our ecosystem, is a system of stocks. Yet our methods for non-market valuation, the Travel Cost Method, Hedonic Pricing, Contingent Valuation, Choice Modelling and the Random Utility Model, are based on static theories of consumer behavior. They do not model environmental stocks, nor include other participants in the economy such as producers and citizens who, in effect, own the ecosystem. In this paper, I develop a simple but dynamic model of an economy with ecosystem stocks and services. The model shows how the price of ecosystem services can be discovered, provides an example of demand and determines the willingness to accept and willingness to pay for ecosystem services. I conclude that models based on consumer behaviour are misleading. Consumers are complicit with producers in despoiling the environment. Those willing to pay for a healthy ecosystem are citizens.