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Economic valuation and the natural world

  • Pearce, David

Economic valuation is controversial largely because its purpose has not been clearly conveyed to non-economists. The purpose of valuation of the natural world is to elicit measures of human preferences for, or against, environmental change. As a procedure, it thus faces two immediate limitations. First, economic values are not the same as intrinsic values - values in things rather than values of things. Economic valuation makes no claim to measure intrinsic values, although through the concept of existence value it may be capable of capturing human perceptions of intrinsic value. Second, measuring preferences focuses on efficiency gains and losses from environmental change. It says little about the distribution of costs and benefits within a time period or between time periods. Within a time period, the use of efficiency gains and losses as a guide to policy or project evaluation assumes that the prevailing distribution of income is socially acceptable, since it is that distribution which weights the measures of willingness to pay. Between time periods, the use of another efficiency concept - the discount rate - biases the outcomes of evaluation in favor of the present, and against future, generations where future costs and benefits are both distant and significant. But economic valuation is useful in several contexts. Project and program appraisal cannot be comprehensive or adequate without it. National environmental policy priorities will be better informed if economic values are known with some degree of certainty. The entire objective of sustainable development almost certainly cannot be interpreted without some idea of the value of environmental services and assets. Empirical work on valuation remains limited, even in the developed world. It is fairly new in the developing world, although many project evaluations have used some form of indirect valuation. Its importance for the development process is that revealed economic values for environmental conservation and environmentally improving projects and policies have often been found to be large. Valuation demonstrates that there is an economic case for protecting the environment and can help improve decision making. In so doing, it could make public choices more cost-efficient, thus allowing limited public income to be optimally spent.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 988.

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Date of creation: 31 Oct 1992
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Handle: RePEc:wbk:wbrwps:988
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  1. Bergstrom, John C. & Stoll, John R. & Titre, John P. & Wright, Vernon L., 1990. "Economic value of wetlands-based recreation," Ecological Economics, Elsevier, vol. 2(2), pages 129-147, June.
  2. Nordhaus, William D, 1991. "A Sketch of the Economics of the Greenhouse Effect," American Economic Review, American Economic Association, vol. 81(2), pages 146-50, May.
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