The New Economy of Nature

| July 12, 2002

The New Economy of Nature

Economists once wondered why diamonds had a higher market value than water, when it is water that humans depend on for survival. As we know now, it’s because of a concept termed 'supply and demand.' Yet at the end of the 20th century, with more than 3 million people dying every year of diseases spread by water, including as many as 900 Americans, the demand for clean, safe water may very well edge out the demand for diamonds.

In 1997, New York City’s natural filtration system--a system that had been successfully delivering pure, filtered water for almost a century--was in trouble: Byproducts of excessive new developments, farming and forestry were contaminating the water. But instead of spending $6-$8 billion on an artificial water filtration plant (not to mention $300-$500 million in yearly maintenance expenses), city officials voted to spend $1.5 billion to protect the watershed. 'The agreement was a milestone--a major government body had acted as if an ecosystem were worth protecting for the economic benefits it gives society,' write Gretchen C. Daily and Katherine Ellison in Orion.

In response, other governments around the world began to weigh the costs of building plants against the costs of conserving watersheds. In the process, 'they were learning how ecosystems . . . can be seen as capital assets, supplying human beings with services that sustain and enhance our lives.' This way of appreciating nature could have a phenomenal impact on how we use it. Since humans have traditionally considered services provided by nature to be free, and in turn neglected to appropriate economic value to these assets, many people have had little incentive to protect them.

As economists and ecologists begin to work together to solve environmental problems, assigning financial worth to our natural assets just may be the ticket to ensuring their protection: The owners would be motivated to protect their financial investments, and users and polluters would be motivated by taxes and subsidies. Richard Sandor, an environmentally minded financial innovator, summed it up: 'Without prices being set, nature becomes like an all-you-can-eat buffet--and I don’t know anyone who doesn’t overeat at a buffet.'
--Rebecca Wienbar
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