A market economy is exceptionally effective at communicating values between innumerable competing options for human resources. Choosing what products or services we purchase with our limited incomes makes a statement regarding what we are willing to sacrifice for that product or service.
When we make a purchase, we implicitly sacrifice the purchase (or partial purchase) of other goods or services. The sacrifice is the true value of our purchases. We routinely measure the value of these sacrifices in our currency. We trade our labour services for currency which we, in turn, trade for goods and services. We understand the value expressed by other people’s choices through the choices we make.
Environmental services have no defined market. This stems, in part, from the fact that there are ill-defined property rights for environmental assets. Who owns the air? Who owns the ocean? Where markets do not exist, the choices we make do not require the same type of binding sacrifice. In other words, decisions to conserve our consumption of those “free” services are self-imposed.
Environmental service values are harder to understand because we cannot relate, through a common currency, to the nature of someone else’s sacrifice. Furthermore, without requiring a binding sacrifice, there is little incentive to ration the use of the environmental services. As a result, we commonly witness over-consumption and/or degradation of our natural resources through over-use.
Pricing environmental services requires an understanding of the nature of environmental impact imposed by using those services. If we understand the impacts, we can estimate prices for these impacts. We must understand that pricing environmental services is always a game of best approximation. And, that approximation is meant to simulate the binding sacrifices that would be made through a market system.