Environmental resources and economic valuation

Environmental resources provide a number of benefits that allow us to live on and enjoy this earth. As identified by Freeman (2003), these flows can generally be classified into:

1. (a) Inputs into production process whether it is the use of oil to run all forms of economic activity, or top soil for agriculture, or life support services provided by water, the atmosphere etc.;

2. (b) waste absorption services in terms of the ability of the earth and the living atmosphere to mitigate pollution; and

3. (c) amenity services and non-use benefits that allow us to appreciate the world that we live in.

While the services provided by the environment are immensely valuable, as economists, our interest is in valuing incremental changes in the flow of these services. Every day, we make choices that change the flow of environmental resources. Unfortunately, since we live in a world characterized by scarcity, there are always trade-offs to be made between the uses of different resources. These decisions will be flawed if they are not based on an understanding of the relative value of these resources.

In general, economic activity is based on numerous decisions about goods and services that are bought and sold in markets, which assign value to these goods through market equilibrium prices. Prices also signal scarcity, allowing limited resources to be efficiently used. This is true for many regularly traded goods such as tables and chairs as well as natural resources such as iron and gold.