It’s hardly a stretch to say that the American commons encompasses a massive wealth of natural resources that accrue incalculable benefits not just to the citizenry of the United States but possibly to the entire human race. The challenge in protecting said commons lies in the adjective “incalculable,” a dilemma rooted in the misconception that, to an economist, if one can’t estimate the value of something, then that thing has no true value. In simple terms, the persistent myth is that priceless means the same as worthless, which seems to bode poorly for assets as essential to life as clean air and water.
Fortunately, an economist has stepped forward to set the record straight. Tim Haab, a Professor in the Department of Agricultural, Environmental and Development Economics at The Ohio State University, explains with remarkable lucidity where the distinction lies:
Priceless is the equivalent of mispriced to an economist. …Something that is valued but unpriced by a market system falls under the broad umbrella of market failures. The key word being failure. When markets fail to properly price goods and services, that is when the market price fails to reflect the full costs and benefits of consuming and producing the good, then markets fail to efficiently allocate our scarce resources and the price needs to be corrected to reflect that.
So, in economic parlance, priceless means mispriced, not worthless. That critical distinction suddenly makes the task of defending our commons from private interests far more tenable. Mr. Haab explains how:
…When it comes to the environment, overuse occurs because the environment is underpriced. People place a higher value on the environment than the market price reflects. Take the Grand Canyon. Viewing the Grand Canyon is free (once you pay the expenses of getting there), but the view of the Grand Canyon depends on the quality of the surrounding air–the visibility. The fact that people want to view the Grand Canyon means it has value.
When a local power plant wants to burn coal to generate electricity, it treats the air as a free waste disposal resource. Again, the air is free, so waste disposal is costless to the power plant. But, from the perspective of the Grand Canyon viewer, waste disposal is not costless. It reduces the value of the view. So how do we get the power plant to recognize the cost of polluting? We monetize the value of the view. In doing so, we correct the price of the air to reflect the true cost of using it. It is no longer free and the value is placed within the context of the market failure that generated the problem.
The idea of pricing environmental benefits, while novel, isn’t entirely new. In some instances, this requires calculating a service as tangible as natural water purification in order to compare the costs of protecting important watersheds against those of building filtration plants. In other cases, the challenge becomes to introduce the price of externalities, which is to say those consequences of economic activity that are experienced by unrelated third parties, into existing pricing schemes. While some assets, like the life of a single species of owl, may be extremely difficult to put a price on in the context of current ecological and economic paradigms, other resources from intact woodlands to healthy fisheries have obvious market value.
Pricing the priceless does seem a bit tawdry to some. To those who would ask how you can place a price on something as invaluable as the environment, Mr. Haab posits a far more practical question: “How can you not put a price on something as invaluable as the environment when most people act as if it is free?”