December 17, 2008

The optimal amount of ecosystem services

What is the socially optimal amount of ecosystem services, and how can we achieve it? Let us add a supply curve to the graph in my previous post. The following graph is from David Pearce's paper Do we really care about Biodiversity? (By the way, his answer to the title question was no.)

The broken line is the demand curve and the solid line is the supply curve of ecosystem services. The demand curve represents the marginal value of ecosystem services to society at different amounts of ecosystem services, which are represented in the x-axis, and the supply curve represents the marginal cost of protecting those services. The amount of ecosystem services at which the lines cross is the socially optimal one. The vertical line is the minimum amount of ecosystem services required for human survival.

The current amount of ecosystem services is not the socially optimal one because markets and government policies do not capture the real social costs and benefits of ecosystem services. We don't know whether the current actual amount lies to the right or to the left of the optimal amount. Pearce argued that in any case the actual amount is moving to the left. This is true if we exclude services provided by human-made ecosystems. There are fewer natural ecosystems, so the flow of services from them is decreasing. But there are more and better managed agricultural ecosystems that provide us with increasing amounts of food. So, if we include human-modified ecosystems, human-kind may be moving the amount of ecosystem services to the right.

The curves in the graph are not static. The opportunity cost of protecting ecosystem services has risen through time, shifting the supply curve and the optimal amount of ecosystem services to the left, as human activities that conflict with ecosystem services demand more land or degrade more severely the environment. We could reverse this trend by making those activities more efficient.

The demand for ecosystem services also changes through time. It may increase, shifting the demand curve and the optimal amount of ecosystem services to the right, as the human population expands or as people's relative preference for those services increases (for example, as the proportion of birdwatchers in the population increases). The demand may also decrease (shift to the left) as we find substitutes for ecosystem services. Finding substitutes also flattens the demand curve and shifts the vertical line to the left.

The challenge for humanity is to drive the actual amount of ecosystem services close to the socially optimal amount. We cannot currently count on markets to do so because of the lack, and often the physical impossibility, of adequate property rights over some ecosystem services. We cannot rely on governments either because they suffer from similar problems of perverse incentives and externalities - for example, Pearce cited that governments worldwide spend less than 10 billion U.S. dollars per year in protecting natural ecosystems, but about one trillion in subsidizing activities that degrade ecosystems.

Maybe there is a solution somewhere. Maybe not. And maybe we will never need one.

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