Professor Jeff Bennett
Asia Pacific School of Economics and Government
The Australian National University, October 2003
5. A role for economic valuation
To a large degree, the task of identifying if government intervention with regard to biodiversity is no different to the cases of provision (or other forms of intervention) by the state of other goods with public good characteristics like defence, health services and education.
Economics has a well-established framework for assessing if proposals for intervention are socially desirable. This is known as benefit cost analysis (BCA)3. In a BCA of a proposed intervention, the benefits of that intervention are compared against the associated costs. The benefits and costs are estimated relative to some ‘base-case’, usually that in which the proposed intervention is not enacted. The final question asked in order to justify or disallow intervention is: are the marginal benefits in excess of the marginal costs?
Importantly, the BCA process requires the estimation in monetary terms, of all the costs and benefits of the intervention under analysis. This is problematic when the benefits of intervention are outside the market. Of course, when values with public good characteristics are the subject of the analysis they are normally not marketed. As shown in the previous section this is frequently the case for the benefits of biodiversity protection. This is in contrast to the situation for the costs of biodiversity protection. These are predominantly the benefits of resource development that are foregone because of their incompatibility with biodiversity protection. These are usually goods and services that are bought and sold in markets.
The irony, thus, is that BCA is called into action when there is market failure yet it requires the estimation of benefits and costs using the unit of measurement of the market.
To implement BCA in the case of biodiversity focused interventions, it is therefore necessary to have value estimation techniques available that can encompass the full range of values being generated by biodiversity protection. The suite of techniques that has been developed range from the purely market based tools to those that are outside the market completely.
3. See Hanley and Spash (1993) as an introductory text on the subject.