Over-Exploitation of Resources
It is often argued that over-exploitation takes place because stakeholders take into account only private costs and benefits, that too for the current period, in decision- making and ignore the externalities and the long-term aspects. In such circumstances, market forces cannot take care of environmental conservation because costs and benefits of environmental degradation are not in the same hands. For example, a cement factory in order to cut costs does not install pollution abatement technology and pollutes the air in the locality. Thus the benefits accrue to the owner of the factory. However, the cost of pollution is borne by inhabitants in the locality in terms of increased health expenditure.
Beneficiaries of environment, households and firms, have a short-term parochial interest where private costs and benefits are taken into account. Valuation of environment in a social and long term perspective would help policy formulation to make the beneficiaries pay for the cost. Thus it would help in internalization of externalities.
In recent years attempts have been made to extend the product boundaries of environment. Environmental functions which were ignored earlier on the ground of being freely available have been given due recognition. It is difficult to assign proper value to these functions as they are intangible in nature and do not have a formal market. It has been emphasized in numerous studies that proper accounting for environmental resources used up in economic activities is a difficult task. Lack of a market for these resources, inappropriate policy measures to internalize the externalities, and inadequate standards of measurement invariably results in under- valuation of environmental resources. However, proper valuation of environmental resources by extending the traditional product boundary provides a better tool for policy formulation and decision-making. It allows comparison of advantages and disadvantages of alternative scenarios [Lettee and de Boo 20021.
In order to give due importance to environment, the stock of natural capital and its quality is included while estimating the environment adjusted GDP (usually called EDP, which is equivalent to GDP plus the value of environment). Whenever there is depletion to the stock of natural capital or there is deterioration in its quality, estimated EDP declines accordingly (see Unit 7). In order to estimate EDP it is important to find out the total economic value (TEV) of environment. Valuation of the resources provided by environment is considered to be a complex issue. The problem comes up at two levels: identification of environmental functions and assigning value to these functions. The problem of identification comes up, as it is difficult to ascertain the uses to which the environment is subjected to. While some of the environmental actions are tangible in nature others are intangible. Moreover, even though some of the functions can be identified it is difficult to assign values to them.-In many cases the market for these functions are incomplete while in others the market does not exist at all. The literature on total economic value of environment is still blurred with ambiguity. However, in recent years many studies have been undertaken to find out empirical methods of valuing environment.