To a layperson, the title of this session, “The Economics of Biodiversity,” may sound like something of an oxymoron.  Most economics is about markets and equilibrium prices, but biodiversity is not a market good and doesn’t have any evident price.  Like many other environmental amenities, biodiversity is obviously important, but is difficult to evaluate.  In fact it’s difficult to even quantify—a problem we’ll ignore here.

Biodiversity is a good example of what economists call a “public good.”  A public good has two peculiar characteristics.  First, one person’s enjoyment or use of it does not preclude anyone else’s enjoyment or use of it.  And second, it’s impractical to exclude other people from enjoying or using it.  For example, when I plant flowers in my front yard for my own enjoyment, my neighbors get to enjoy them too, for free.  There’s no reliable way to make my neighbors contribute to my flower fund, short of erecting a big fence and charging them admission to my garden.  So I just pay for the flowers myself and only plant enough to suit myself.  (Note that a public good isn’t necessarily publicly provided.)

The problem is that public goods are typically undersupplied.  If all of my neighbors did contribute what they were actually willing to pay for their view of flowers in my yard, I could plant more flowers and the garden would look nicer.  But there is no market mechanism to make this happen.

Biodiversity is a public good in much the same way: we all benefit from it, although we largely rely on others (mostly private landowners) to provide it, and we don’t give them much incentive to provide it.

To correct the undersupply of biodiversity, we need to create appropriate incentives for landowners to maintain it.  This raises two questions.  First, how much would we collectively be willing to pay for biodiversity?  Second, how can we translate this hypothetical willingness to pay into an efficient set of landowner incentives?

The economic valuation of environmental amenities is sometimes misunderstood.  We are not proposing to buy or sell biodiversity any more than we would buy or sell human lives.  But rational policy-making requires that we make hard choices—choices that involve opportunity costs and/or cash expenditures.

Determining Willingness to Pay

Environmental economists have two basic approaches to estimating the values of environmental amenities such as biodiversity.  The first method analyzes how the environmental amenity affects markets for related goods.  For example, an improvement in water quality at a lake may increase the value of lakefront real estate, increase expenditures for water-based recreation, reduce the number of work days lost to illness from water-borne parasites, reduce expenditures on water filtration systems, etc.  In theory, we could quantify all these separate effects and add them up.  In practice, economists typically quantify the effects of an environmental quality change in a single related market, thus deriving partial valuation estimates.

Keia Benefield, the next speaker on this panel, will be speaking about ecotourism, which generates observable expenditures that can be linked to biodiversity.  But biodiversity does not leave many other “traces” in related markets, and I would propose that the partial benefits manifested in ecotourism represent only a small fraction of biodiversity’s total economic benefits.

The second valuation method is to simply ask people, hypothetically, how much they would be willing to pay for the amenity, or how much compensation they would need to forego the amenity.  For example, you might conduct a survey in which you provide respondents with some information about a rare species such as the pickled strumpet (Trollopensis bibulosa) and then ask them to state the maximum amount they would be willing to pay to assure that the species will survive.  This procedure elicits a set of bids from the respondent sample that can be extrapolated to the population to obtain an estimate of aggregate public willingness to pay.  Even purely psychic benefits, such as the “existence value” of a species, can be evaluated in this manner: respondents are often willing to pay to prevent a species’ extinction even though they expect never to encounter it themselves.

“Contingent valuation” surveys are typically vulnerable to various biases, however.  Whatever information the researcher provides about the amenity is likely to influence the respondent’s stated bid for it, so the researcher may be accused of “leading” the respondent.  The respondent knows her payment is only hypothetical and is free to exaggerate.  Some respondents may misunderstand the purpose of the valuation exercise and “protest” it with a zero bid, even though they may value the amenity quite highly.  Some of these biases can be controlled by reformulating the valuation question as a yes-or-no referendum, or by embedding it in a hypothetical policy choice question.

Translating Public WTP into Protection Incentives

Once we have obtained some defensible measures of public willingness to pay for various levels of biodiversity protection, we need compare these benefits against the costs of various levels of protection, and then formulate some policy to achieve the efficient level of protection at which total net benefits (benefits minus costs) are maximized.

Maintaining biodiversity basically means preventing fragmentation of critical habitat areas by development.  The big question here is who should bear the costs of habitat protection?  This is an issue of fairness, not economic efficiency, and economists don’t have any better claim to judge what’s fair than anyone else; it’s a political decision.  If we simply impose regulations that prohibit landowners from altering prime habitat areas, then the owners bear the opportunity costs, i.e. the lost profits from land development.  The US Constitution’s Second Amendment constrains such “takings” of property without compensation.  Alternately, we could provide incentives for landowners to preserve or even enhance the critical habitat areas on their lands.  Although some environmentalists may balk at the public costs of such incentive programs, the opportunity costs of uncompensated land regulation are just as real to the affected landowners.

Most people here can at least intuit that the economic benefits of maintaining biodiversity are pretty substantial, even if they are hard to quantify.  So naturally these benefits justify substantial cost commitments to achieving an efficient biodiversity objective.  This is where we need some political courage.  We probably can’t rely on land-use regulations alone, and we should never pretend that such regulations don’t impose real costs on affected landowners.  We need to educate the public about what’s at stake, then convince our politicians that they have public support for committing significant public funds to biodiversity protection, and then convince landowners to participate in the incentive programs. Delaware already has policy tools such as the Open Space Program that are readily targeted to biodiversity protection.  This Symposium has highlighted several other appropriate policy prescriptions that would incorporate biodiversity considerations into land-use decisions: e.g. focus development within designated growth areas; make critical habitat areas eligible for the same preferential property tax assessments as cropland.

Public perceptions of biodiversity are often focused on a few high-profile species.  It is relatively easy for conservation groups to rally public support for glamorous species such as whooping cranes or giant pandas, which can be anthropomorphized or romanticized.  But biodiversity actually means protecting whole ecosystems with broad ranges of species, including lots of drab little plants, bugs, etc.  This is a lot tougher to sell, and we have a lot of work to do.