How to measure wealth that does not exist, Ana Lopes

With increasing concerns over climate change and their impacts on sustainability, environmental economics’ importance has increased substantially in the last few decades. In particular the so-called “ecosystem services”, or the services that ecosystems provide human beings, while sometimes unnoticed, have been recognized as having great importance.

These services, like most services provided, have an economic value, even if it is not explicit. However, even though there is such a value, it is a challenge in the literature and in practical terms to obtain it. There is a wide range of techniques developed to measure this “unmarketed” value, such as contingence valuation towards obtaining individual WTP, travel cost methods or the cost associated with having a man-made infrastructure provide the service instead of the ecosystem, among others. Whereas these are commonly used, they have several limitations, and ultimately any study is subject to (human) error.

To give a well-known example, recreation (for example, fishing, hunting) is a service provided by a variety of ecosystems and for which people are willing to pay a value. However, seldom does it have a functioning market. This causes in some cases under provision of the service by diminishing the stock of ecosystem. Thankfully a lot of techniques have been developed and applied to value recreation.

Ecosystems services are only but a few of the unmeasured values in the world surrounding us. Everyday millions of important decisions around the world are made based on expectations and incomplete information. Just think about it. If you had more information before buying that expensive item, wouldn’t you have decided differently? And if you are constantly dissatisfied with a particular aspect in your daily life, won’t you take the time to list the pros and cons and make an implicit estimation of the value of changing that aspect. While correcting part of this lack of information is not cost-efficient, as any study would take funds and expertise, some unknown information is crucial in decision-making that can change the life of many people and have profound impacts in the economic framework of a country. The consequences of wrong policy-making justify further research and serve itself as an opportunity cost for careful estimations of policy impact.

Therefore, when designing policies, or even taking smaller but important decisions, measuring costs should not be dismissed on account of not being cost-efficient. Instead, lessons should be learnt from other areas in economics and creative and alternative ways of valuing an action can be used. In a country whose human capital has become more skilled and entrepreneurial, creativity and new ways of thinking are emerging, and that could be put to very good use.

By this I am not trying to imply that all measures taken in terms of policy making lack appropriate research. Unfortunately, I have heard several times arguments dismissing further effort due to excessive costs or approaching deadlines (even though the actual work takes a long time to reach higher ranks of hierarchy). Although it is tempting to interrupt a research project as soon as the desirable outcome is reached, it may be even more fulfilling to explore these unvalued costs, services and limitations. Particularly when the consequences are important.

About the author: Ana Lopes is a Masters student at NOVASBE and she is currently writing the master thesis entitled “The Economic Value of Portuguese Pine and Eucalyptus Forests” with Professor Antonieta Cunha e Sá. Her particular interests include environmental economics, energy policy and microeconomic policy analysis.

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