Total Economic Value of Environment
As you know it is difficult to identify and compile an inventory (or a complete list) of environmental functions. The identification problem comes up because a large array of functions emanating from environment is not marketed and thus omitted in decision-making. Traditionally, as these goods and services do not enter into formal markets, these are assumed to be either free or of little value.
We will try to explain the problem through an example - the value of quality air. Oxygen contained in the air helps in sustenance of life for human beings and animals in addition to being used in production of many commodities such as chemicals. We breathe the air available to us in the atmosphere, for which no market exists in the sense that there are no sellers and buyers and we do not have to pay for the air we breathe. Moreover, there is little choice before us regarding the quality of air we breathe; we as individuals cannot buy better quality air for a higher price. The reason for such a situation is the non-excludability feature of air; once it is available in the atmosphere no one can be excluded from breathing it. However, the quality of air deteriorates due to gaseous emissions from industries, transport vehicles and sewage.
The quality of air concerns us as there is a cost associated with the deterioration in its quality such as the loss of productivity due to ill health, increase in health expenditure, and increase in the probability of falling ill. Air pollution is an externality to the production process in an industry or running a vehicle or dumping of household wastes as the cost of pollution is not borne by the polluter. Pure air has an important function in the sense that it helps us to stay tit. However, we presume air to be free good and ignore its value in decision-making. A question arises: what is the value of pure air? As no market for air exists, it is difficult to find out. An indirect method of ascertaining the value of quality air could be the total cost involved in the loss of productivity and health expenditure. You can find out numerous examples similar to the above and appreciate the value of various environmental functions.