Sustainable development and economic valuation

Below is my address to the East Asia's Sustainable Automobile Society in a meeting in Bangkok last week.

Ladies and gentlemen,

Economy and the environment are not independent one another. In fact, economic activities take place in environment and their outcomes are both affected and affecting the environment. This is true particularly because both consumption and production – the two basic economic activities – use resources from the nature as their inputs. Furthermore, those activities generate both output and waste. The capacity of the environment to assimilate waste will determine the future condition of the environment and hence its ability to support economic activities. Finally it should be mentioned that economic activities end up at the provision of utility to economic agents. Here too, the environment can have direct impact. That is, amenity may or may not enter directly into one's utility function. Recognizing the interrelationship between environment, natural resources, consumption, production, and utility is necessary to put economics into the realm of sustainable development, i.e. development that strikes the balance between economic activities and environmental preservation as well as between generations.


In order to appreciate the role of the environment and natural resources in economic context, one needs to have a framework. This framework would preferably be able to lend itself into the widely used cost-benefit analysis. Here the problem lies: it might be easy to calculate the cost of improving the environmental condition (e.g. building up a giant air purifier, water treatment, etc). But that is just half of the materials to come up with sensible cost-benefit assessment. To justify spending of public money for say, cleaning up the air, there has to be a justification to the proposed costs. That is, we need to calculate the expected benefit of such action. Alas, this is no easy task. Measuring the economic benefits of consuming food or clothes is easy, for they are 'market goods': goods traded tangibly and have price tags on them. The direct proxy of their benefits is simply their market price. But for environmental goods, this is not the case. One needs to apply a particular technique to attach a value to such 'non-market' goods as a proxy of the benefit that later can be contrasted against the cost. That is the objective of economic valuation.


Economic valuation can be based on two different sources of data. First, stated data set. This information is obtained via direct question to respondents. Second, revealed data – information obtained by observing what an economic agent does. There was a time when economists tend to be skeptical on the former, as economics is a 'science of observation'. However, experience has dictated that not every time and for every case historical data are available. This is particularly true for the cases of non-market goods such as environmental quality. Therefore, economists have to rely on stated data: surveys, questionnaires, interviews are employed. Recently, there has been an increasing amount of researches using both resources in combination. One message from these studies is that whatever data resource is employed, what matters is how one can come up with a sensible measure of the value of improving the quality of the environment. The principle here is that, you can not preserve the environment if you have no idea what it is worth. To know the value, you need to calculate how much benefit people will enjoy on top of the cost of the improvement. That again is the use of valuation. 

Thank you