About the price signal…

As the saying goes, “if something has a price of 0 it is worth nothing”. One of the main arguments in favour of assigning a monetary value to ecosystem services is that an appropriate “price signal” would improve public and private decisions concerning the management of ecosystems and natural resources. This is a strong argument, but it suffers from two common misconceptions.

The first misconception is that valuation means assigning a price, i.e. that “price = value”. Yet price and value are two different things: value drives demand but price is set by both demand and supply. A low price thus usually means that supply outstrips demand, not that the ecosystem service in question is worthless. Also, considering that prices equates value would mean that the value of ecosystem services would be ever changing.

Price is what you pay, value is what you get!

The second misconception was recently highlighted by Philip Lawn of Flinders University in a paper on the Ehrlich – Simon bet (paper published in Ecological Economics*). In replying to Kiel et al. (2010**), he reminds us that prices reflect relative scarcity of resources and not absolute scarcity.

This makes prices useful for allocating competing resources to a common goal (e.g. choosing between wetlands and water treatment plants for treating waste water). They are however poor indicators of how scarce a particular resource is (such as a rare animal or plant species). As P. Lawn says:

resources prices should never be used to guide sustainability policy

It is useful to keep these two misconceptions in mind when discussing monetizing biodiversity and ecosystem services. Only by focusing on the “benefits” people expect (e.g. clean drinking water) rather than the ecosystem services themselves (e.g. the water cleansing capacity of an ecosystem) is necessary for ecosystem services to be taken into account in our decisions. Perhaps thinking of ecosystem services in terms of “value for money” would be a fruitful first step?

* Lawn P. (2010): On the Ehrlich-Simon bet: Both were unskilled and Simon was lucky. Ecological Economics 69(11): 2045-2046 – DOI: 10.1016/j.ecolecon.2010.07.009.

** Kiel K., Matheson V. & Golembiewski K. (2010): Luck or skill? An examination of the Ehrlich-Simon bet. Ecological Economics 69(7): 1365-1367 – DOI: 10.1016/j.ecolecon.2010.03.007

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