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.
