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Jun 1, 2017

The Economic Value Of The Natural Environment

Sponsored Content provided by Robert Burrus - Dean , Cameron School of Business - UNC-Wilmington

This Insights article was contributed by Dr. Peter Schuhmann, Professor of Economics, Cameron School of Business

What is clean air worth? Is clean water good for the economy? Do parks, wetlands, beaches and coral reefs have real economic value? 

These are important and timely questions to consider as politicians and policymakers debate the merits of environmental protection.  Arguments for scaling back environmental regulations often include suggestions that environmental protection limits “free” market forces, increases costs to businesses, results in less economic activity and causes the economy to preform worse than it would if such regulations were absent.  

Underlying this argument is an assumption that there will be more profits, more jobs and lower prices without environmental regulations.  The purpose of this post is to provide an alternative perspective. Environmental protection often creates real economic benefits that can improve our lives and make our economy stronger.  

As an economics professor in the Cameron School of Business at UNCW, part of my job is to teach students about the power of markets.  We know markets do many things very well. Markets allow each of us to focus on what we are good at doing, which enhances overall productivity and allows us the time and freedom to enjoy leisure. By trading with each other we can have: comfortable homes; safe transport; clothes to keep us warm and fashionable; access to goods and services from all over the world; the ability to instantly communicate with people across the planet; and access to countless forms of entertainment.

Why do markets work so well to provide things we value? Because people (as all living things) are adapted to look after themselves and advance their own interests. When combined over millions of individuals, the incentives created by self-interest guide markets to provide mutually beneficial outcomes, a la Adam Smith’s invisible hand.  We become collectively better off when we voluntarily trade with each other. Markets and trade improve our lives.

But there are other sources of value, and there are many valuable goods and services that “free” markets do not provide.  For example, we derive real value from many goods and services provided by the natural environment but if left alone, “free” markets will not provide us with the optimal amount of parks, green space, wetlands, clean air or clean water. 

Unlike goods and services produced by businesses and consumed by individuals, the benefits from the goods and services provided by the natural environment are shared. Most goods and services provided by the natural environmental cannot be neatly packaged and made available to buyers.

Because people are generally unwilling to pay for things when the benefits will be shared with many others, and since businesses cannot survive in the absence of profit, these characteristics eliminate the incentives that drive markets to mutually beneficial outcomes.

Further, many market goods and services create costs that are not “paid” by the buyer or seller. Many common examples fall under the general category of pollution which imposes real, but “hidden” economic costs on our economy.

For example, a recent study by researchers at Carnegie Mellon University published in the journal Energy Policy suggests that pollution from energy extraction and generation in the U.S. resulted in costs of $131 billion in 2011, mostly associated with human illness and mortality. Not surprisingly, this research suggests human health costs are highest in states with a significant amount of coal-fired power generation. The combustion of coal produces fine particulate matter (PM 2.5) that leads to heart and respiratory ailments and cancer. Auto emissions are another significant source of PM 2.5.  

Importantly, the authors of this study find that these hidden costs of pollution have decreased over time, in part due to more stringent air quality regulations and the movement toward renewable energy sources. A 2013 MIT study calculated that more than 200,000 premature deaths occur every year in the United States because of air pollution, principally from road transport and power generation, and largely related to PM 2.5. 

The evidence goes on. The 1990 amendments to the Clear Air Act, designed to reduce harmful emissions and passed with strong bipartisan support by both the House and Senate under President Bush resulted in $2 trillion in benefits at a cost of $65 billion, a benefit-cost ratio of more than 30:1. The removal of lead from paint and gasoline which began in the mid-1970s - initially decried as costly and disruptive by DuPont, the National Petroleum Refiners Association and the lead industry - resulted in enormous economic gains, mostly though improvements in the health of children. 

A study by researchers at Kansas State University suggests that freshwater pollution (mostly nitrogen and phosphorus from runoff) costs the U.S. at least $2.2 billion annually in lost property value, additional costs of water treatment and diminished recreation opportunities.  

Again, these are real economic costs, losses in economic value and activity created by pollution. With less pollution, we can spend fewer resources caring for sick people and trying to clean the environment. Those resources can be put to more productive uses for the benefit of the economy. “Free” market disposal of pollutants is indeed quite costly.    

On the other side of the coin, numerous studies have illustrated the economic benefits of clean water for recreation, parks and trails, and the protection of endangered species. It is clear the natural environment produces real economic benefits that improve our lives.  These non-market benefits are not flowing from gains created by trade and market forces, but rather from the natural assets that surround us.  Unfortunately, these benefits are “hidden” from view, because markets do not reveal the value of non-market benefits. But hidden does not mean invaluable. The American Lung Association recently named Wilmington, N.C. as one of the cleanest cities in the U.S. in terms of air quality. In addition to illustrating the benefits we’ve been enjoying from breathing clean air, this designation will likely serve to attract businesses to the area. 

Readers may have noticed I used quotes around the word free in “free” markets throughout this post. My purpose in doing that is for readers to consider what it means for a market to be “free.” Typically, we think of a free market as one that lacks government intervention in the form of taxation or direct subsidies. We should consider that when market activity directly harms human and environmental health, we are implicitly subsidizing those markets through real losses in our quality of life. Can we consider a market to be “free” if we are subsidizing it with our health to the tune of $131 billion per year?

When deciding whether a particular policy is good or bad for society, we must consider its costs and benefits. For goods and services provided by the environment, many of the costs and benefits are hidden from view. Though hidden, the costs of pollution are real economic costs. Though provided for “free” by the natural environment, the benefits provided by natural systems are immensely valuable. Care should be taken to measure these costs and benefits, whenever possible, so they are understood by policy makers and the public at large. Of course, scientists and economists can do a better job at publicizing these hidden values and the public can do a better job at listening. 

In future posts I will highlight research methods that can be used to estimate the economic value of goods and services provided by natural capital. I’ll also discuss policy interventions that harness the power of markets to enhance environmental and economic sustainability.

Robert T. Burrus, Jr., Ph.D., is the dean of the Cameron School of Business at the University of North Carolina Wilmington, named in June 2015. Burrus joined the UNCW faculty in 1998. Prior to his current position, Burrus was interim dean, associate dean of undergraduate studies and the chair of the department of economics and finance. Burrus earned a Ph.D. and a master’s degree in economics from the University of Virginia and a bachelor’s degree in mathematical economics from Wake Forest University. The Cameron School of Business has approximately 60 full-time faculty members and 20 administrative and staff members. The AACSB-accredited business school currently enrolls approximately 2,000 undergraduate students in three degree programs and 200 graduate students in four degree programs. The school also houses the prestigious Cameron Executive Network, a group of more than 200 retired and practicing executives that provide one-on-one mentoring for Cameron students. To learn more about the Cameron School of Business, please visit Questions and comments can be sent to [email protected].


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