VI.11 The Economics of Ecosystem Services
In lieu of an abstract, here is a brief excerpt of the content:

VI.11 The Economics of Ecosystem Services Charles Perrings OUTLINE 1. Introduction 2. The valuation of ecosystem services 3. Ecosystem service externalities 4. Economic instruments for ecosystem externalities 5. Concluding remarks Why does ecosystem change matter? Why should nonecologists care about trends that alarm most ecologists? The answers to questions like these lie in the economics of the ecosystem change. For many ecologists, however, such a statement is itself part of the problem because they understand the ‘‘economics of ecosystem change’’ to mean ‘‘the money that people make from ecosystem change.’’ Of course that is part of the story. The money people make from ecosystem change does in part drive that change. But economics is not just about money. Economics is about the decisions that people make, the factors that drive those decisions, and their consequences for human well-being. The economics of the environment has much to say not just about the reasons why the pursuit of self-interest leads to undesirable ecosystem change but about why this matters to people and what can be done about it. GLOSSARY The following brief definitions cover some of the terms commonly used by economists that may not be familiar to readers of this book. complementarity. Two goods are said to be complements if an increase in the price of one induces demand for the other to fall—formally, when the cross elasticity of demand is negative. existence value. This is intended to capture peoples’ willingness to pay for the mere existence of something . It is often used loosely, though, to refer to spiritual or aesthetic values, and sometimes as a substitute for intrinsic value (see below). externality. External economies or diseconomies of production and consumption are called externalities . An externality is a third-party effect of a transaction that is not taken into account by the parties to the transaction. External effects may be positive or negative and drive a wedge between the private and social net benefits of a transaction. intrinsic value. This is not a term in general use by economists. Noneconomists use the term to refer to the value that other species have independent of their value to people. As with existence value, the term is often used very loosely and in practice may refer to anthropocentric spiritual or aesthetic values. joint product. When a production function (see below) generates multiple outputs, they are said to be joint products. nonuse value. This is the value of an allocation that benefits someone other than the user. It derives from the fact that the user cares for the beneficiary. Note that the beneficiary may be some other species or a member of a future generation. option value. The value of the option to use a resource in the future. private optimum. The allocation that optimizes a private decision maker’s objective function. If there are externalities, this will be different from the social optimum (see below). production function. A function relating the inputs to and outputs of a production process. It embeds both the technological and the biogeochemical aspects of the production process. renewable resources. Resources are said to be renewable when they regenerate themselves within a timeframe that is relevant to the decision process. shadow price. This is the social opportunity cost of a resource—its true value to society. If there are externalities , implying that markets are incomplete, the shadow value will be different from the market price. Formally, it is the value of the co-state-variable along the optimal path in the solution to a state-space optimization problem. social optimum. The allocation that optimizes the social welfare function or index of social well-being. substitutability. Two goods are said to be substitutes if an increase in the price of one induces demand for the other to rise—formally, when the cross elasticity of demand is positive. use value. This is the value of resources when used by the valuer. The value of resources that are used by someone other than the valuer are said to be nonuse values (see above). 1. INTRODUCTION Ecosystem services were defined by the Millennium Ecosystem Assessment (MA) as the benefits people obtain from ecosystems (MA, 2005). It recognized that people care about the environment because of the services it offers. These services include not just the provision of foods, fuels, and fibers but a range of nonconsumptive benefits such as recreation, amenity, and spiritual renewal. Where the MA went much further than...