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01 April 2021

Dorset Economic blog: Choice and Value

Dorset Economic blog: Choice and Value

"In a post-pandemic world of climate change and environmental scarcity, new and improved valuation methods are needed to get to optimal valuation and decision making about natural and other resource choices."

Emeritus Professor, Nigel Jump, shares the next in his series of blogs, looking at the impact of the COVID-19 pandemic on the local economy.

Economics is the study of choice: how human beings/societies allocate scarce resources (natural, intellectual, physical and temporal) to create individual utility and collective well-being. To make ‘good’ choices, we have to know what is valued and the net cost-benefit of the alternatives available, including a sustainable contribution from the environment. Thereby, a sense of relative, sustainable progress is derived for health, happiness, wealth and prosperity.

The environment gives the economy value in several ways. For example, the foods and materials we consume depend upon environmental assets, such as soils and minerals, and flows, services such as clean air and carbon capture. We enjoy direct and indirect benefits from using the environment and from not using the environment - i.e., the option to enjoy nature intrinsically or altruistically now and in the future.

Value is not the same as price, largely because not everything that is valued is priced and pricing is not always ‘perfect’. But, because we measure most things in monetary terms – as a unit of account, a medium of exchange and a store of value, there is a relationship between the two. Money can be a useful measure of, or proxy for, value. 

Often, environmental factors are not priced in any market and remain outside the scope of normal demand and supply. They are called externalities. There is a danger that we consume too much, or too little, or uncarefully undermining renewability, when environmental externalities and their effects are not properly taken into account.

We try to address this by finding ways to measure the value of externalities, such as a beautiful view, biodiversity or pollution, in monetary terms via suitable proxies. Some people object to ‘monetising’ the environment but without it, it is difficult to compare and contrast the different and difficult choices to be made. Meanwhile, climate change and biodiversity loss make this externality assessment increasingly relevant to economic choice. We need to improve our valuation of nature, the resources it provides and the use or misuse of the environment over time.

Economists often use ‘willingness to pay’ or ‘willingness to compensate or accept’ to estimate these values. This involves three steps: a qualitative assessment of impact - what is affected; a quantitative assessment – how much is affected; and then the valuation – what is the monetary value of the effect. For example, if a choice to develop a site in Dorset prevents me walking and viewing part of the natural beauty of an area, there is a both qualitative loss to me from not enjoying or getting health benefits from a visit and a local quantitative loss of my expenditure because I no longer visit. The valuation would then depend on what society was ‘willing to pay’ to prevent or ‘willing to accept’ to mitigate the impact of the development. 

More broadly, we would have to analyse who are affected, the numbers and activities lost, as well as the health and other benefits of preservation. Then, we could ascribe money values to each factor by reference to a range of proxies, such as property values, travel costs, visitor spend, and other knock-on effects. This is often done by surveys of users and residents: calculating the ‘revealed preferences’ and/or ‘aversion expenditure’ of those affected. Local authorities and other development agents need to consider these values and replacement costs in their planning frameworks and decision making.

Doing choice and valuation research on externalities is not easy. There are inherent uncertainties and data gaps in ascribing monetary values and identifying an appropriate weighting of the interested constituencies. Often, existing historic evidence is used rather than new research conducted specifically to support new investment, policy and budget allocations. Nevertheless, such valuations are important for calculating the importance of natural assets and environmental flows in cost-benefit analysis and in estimating new, viable business opportunities. Adding environmental valuations to existing financial or business valuations should contribute to better and more sustainable outcomes. Understanding and measuring the complexity about access, location and condition, and context matter. Their assessment is important if sustainable and sustained resource choices are to be made.

In a post-pandemic world of climate change and environmental scarcity, new and improved valuation methods are needed to get to optimal valuation and decision making about natural and other resource choices. This is key for drawing an accurate link between incomes and wellbeing. Concepts of wellbeing have to address how people feel about what they are doing and how they view purpose and meaning as well as what they consume. We must explore the diminishing marginal returns of extra income for personal and social satisfaction beyond the basics of food and shelter. We should incorporate aspects of mental and physical health, sustainability and social capital (skills and culture). The pandemic has brought this into stark focus as we consider its impacts on different age groups, social groups, workers and children.

There appears to be a concave relationship between GDP/income and sustainable development goals and a convex relationship with wider wellbeing. With economic progress, wider wellbeing becomes more important for people than simple incomes, but the transition is difficult, with winners and losers created, and the latter likely to be more vocal about what they have lost than the former are about what they have gained.

‘Nudging’ policies can encourage more ‘good’ behaviour. In theory, the winners can compensate the losers and society retains a net gain. In practice, such policies are not easy to devise, adopt, implement and distribute. The winners may not be keen to compensate the losers. Increasingly, however, such methods are desirable in a highly populated country with a complex socio-economic and landed reality. A real debate about how we incorporate and integrate environmental and economic choice and valuation measures would be welcome, especially in this year of UK preparation to lead the UN Climate Change Conference in Glasgow (November 2021).

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