Priceless or Worthless: Why put dollar values on the environment?

On Friday, Salon.com wrote a story on Krutilla's Conservation Reconsidered using John's post from last week as a point of departure.  The Salon article makes a reasoned argument for why Krutilla's work should have been unnecessary.  While I respectfully disagree with a couple of Salon's conclusions, it is the comments that really have my hackles up-and I don't even know where my hackles are.

One exchange in particular.  A commenter asks:

Is "priceless" equivalent to "worthless" to an economist? Like if one can't estimate the value of something, does it then have no value?

Another commenter responds:

Yes. Which is one reason economics, no matter how hard it's tried to turn itself into an actual science, has about as much value as reading the guts of a sacrificial goat when it comes to predicting how economies will behave in the real world. Economists stubbornly refuse to recognize that price and value not only aren't the same thing, they have at best a tenuous relationship to each other, and a great many of the things people value most don't fit into that framework at all.

Um...NO!  So I'll take a shot at answering the question: Is "priceless" equivalent to "worthless" to an economist?

No.  Priceless is the equivalent of mispriced to an economist.  First the technical part.  Something that is valued but unpriced by a market system falls under the broad umbrella of market failures.  The key word being failure.  When markets fail to properly price goods and services, that is when the market price fails to reflect the full costs and benefits of consuming and producing the good, then markets fail to efficiently allocate our scarce resources and the price needs to be corrected to reflect that.

Alright, that's enough fancy talk.  When it comes to the environment, overuse occurs because the environment is underpriced.  People place a higher value on the environment than the market price reflects.  Take the Grand Canyon.  Viewing the Grand Canyon is free (once you pay the expenses of getting there), but the view of the Grand Canyon depends on the quality of the surrounding air--the visibility.   The fact that people want to view the Grand Canyon means it has value. 

When a local power plant wants to burn coal to generate electricity, it treats the air as a free waste disposal resource.  Again, the air is free, so waste disposal is costless to the power plant.  But, from the perspective of the Grand Canyon viewer, waste disposal is not costless.  It reduces the value of the view.  So how do we get the power plant to recognize the cost of polluting?  We monetize the value of the view.  In doing so, we correct the price of the air to reflect the true cost of using it.  It is no longer free and the value is placed within the context of the market failure that generated the problem.

Is monetizing the environment the perfect solution?  No.  But it is an extremely valuable tool to battle the perception that the environment is free. 

Economists are often portrayed as the creators of the market system and self-interest--as if a group of economists sat around and said 'OK, we will make everyone act selfishly and then figure out a system to exploit that--damn the consequences.' 

Not true.  Economists don't create markets, but rather study the market system.  We try to understand how people make economic decisions and how markets allocate resources.  We try to understand when resources are allocated correctly, and when they are not.  And when they are not, we try to offer solutions: like correcting prices when they fail to reflect all benefits and costs. 

Whenever someone asks me, how can you place a price on something as invaluable as the environment, I ask them: How can you not put a price on something as invaluable as the environment when most people act as if it is free?

Pricing the environment forces people to recognize that the environment has value.

P.S.  I wanted to post this at Salon, but the comments were closed--or at least I couldn't figure it out.

Comments

[joshua corning]

Economists stubbornly refuse to recognize that price and value not only aren't the same thing, they have at best a tenuous relationship to each other, and a great many of the things people value most don't fit into that framework at all.

Perhaps environmental economists should abandon debate with the reactionary environmental left?

It is not as if they are really listening to you guys anyway. They want the environment to never have a recognizable economic value and any effort to do so they will fight.

Pricing the environment forces people to recognize that the environment has value.

Amen....by the way it also tends to encourage policies that put the two going to the same ends...If my property has a recognized and liquidatable environmental value I am far more likely to conserve that value.

[Dave]

Tim,

If you want to further rustle your hackles, check out the responses in Lomborg's op-ed in the Washington Post today.

I don't care much for Lomborg--I think he tries too hard to pick fights and often seems to be a contratrian just for the hell of it--but he made some excellent points. Man, did folks pounce on him, though!

[dave]

Joshua,

I think you're right. Knee-jerk enviros should be ignored. They are their own worst enemies.

[Jean-Luc Park]

Pollution is the classic "externality" example. Something that is considerd to be outside the market, and therefore mispriced/unpriced.

Your argument is to expand the market to include the externality, that of air. Thereby incorporating a value or price of clean air. By asking one party what they would pay for clean air, you can then charge someone else for destroying that clean air (third party - arms length transaction).

But who forces the market to expand to incorporate the exogenous factor? Government? Transactions are still done based upon proximity: Geographic, social, industrial, etc. If it's not close/relevant to everyone, how do you envelop them together?

[Chris Rywalt]

There's also the problem I learned from my kids. I was looking for a way to keep them from doing certain things they liked to do but shouldn't have been doing -- for example, my son hitting his sister. So what I did was set up a cost chart: Don't clean your room, 50 cents. Hit your sibling, 25 cents. And so forth. Then I set aside five dollars as their allowance every week. They each got whatever they didn't lose through the cost chart.

My son showed me the problem with this almost immediately: It was pretty clear he'd ask himself "Is hitting my sister worth paying 25 cents? HELL YEAH!"

I suppose that means my market underpriced that resource.

[joshua corning]

It was pretty clear he'd ask himself "Is hitting my sister worth paying 25 cents? HELL YEAH!"

You should give the money your son spends on hitting your daughter to your daughter...

I admit it will be pretty messed up having your daughter asking your son to hit her...but I am pretty sure the rate of hitting will drop.

[John Sawdon]

The question shouldn't be posed. "Priceless" is a metaphor, I am sure all economists are not so literal minded, or at least I hope not.