The environment can be thought of as having "competitive functions". The air can be used as a sink for industrial waste emissions, for example, or as a source of health and amenity.

Most of the functions which the environment performs in its undegraded state do not get valued in financial terms. Its functions as land for development or as a sink for wastes, however, are given a price tag. Here the benefits can be precisely calculated. They are equal to the costs of not using the environment for these purposes; of building elsewhere (or not at all) or preventing the pollution. This difference means that where the two types of functions are in direct competition, the degrading of the environment for industrial purposes always appears to offer net benefits. The costs of degradation,- felt in the direct loss of welfare of those using the environment in its undegraded state, do not appear in the balance sheet.

Such losses of environmental value need to be set against the financial benefits of industrial or other use of the environment. This must be done both at the micro level, where individual economic decisions are made, and at the macro level, where the overall benefits of economic policy are counted. This process could be labelled "the principle of optimal environmental quality".

At the micro level, it is not in fact true that the undegraded environment is not accorded any value, or indeed that it has no price. Pollution standards are a recognition that the environment does make a contribution to welfare and that its indiscriminate use as a sink for wastes cannot therefore be permitted. If complying with pollution standards forces firms into additional expenditure, this represents the effective "price" of using the environment.

Pollution standards are not set, however, by calculating the benefits provided by unpolluted air or water and matching these against the costs of not polluting (measured either by the expenditure required to prevent the pollution at source or by the foregone income of the polluting activities). It would be interesting to see the "optimal level" of, say, water pollution generated by such an exercise in cost-benefit analysis. Evidence from opinion polls suggests that the public's valuation of the health-giving, recreational and aesthetic functions of water purity may be high, justifying higher standards of pollution control than currently enforced. There is a powerful case for reviewing pollution standards in the light of such an analysis.

It is also not the case that the countryside and "green areas" in towns are unvalued. Planning regulations, such as those protecting the Green Belt, are a mechanism by which their contribution to welfare is recognised. Here again however the process is ad hoc, and recent trends show a devaluation of the environment, as development is allowed in previously protected areas. There is a clear need for standardised procedures by which the costs and benefits of new developments are assessed...

The key question is how environmental costs and benefits are measured. In cost-benefit analysis (CBA) monetary valuation may be used. That is, the benefits of the environment in its undegraded state are directly weighed in money terms against the financial benefits of the project being assessed.

The Pearce Report describes the range of approaches by which economists have attempted to put monetary values on the environment. These include calculating the changes in property prices or wages resulting from environmental deterioration, asking people about their "willingness to pay" for environmental amenities or "willingness to accept compensation for disamenities" and calculations of the value of the time taken to travel to recreational facilities.

Problems of Monetary Valuation

There are a large number of methodological and practical problems associated with these techniques, some of which throw considerable doubt on their usefulness and accuracy. These are listed by Pearce. I wish to concentrate here on the philosophical and political issues raised by monetary valuation.

• First, there must be serious misgivings about the assumption that all aspects of the environment can be given monetary values. Pearce argues, for example, that the Californian condor or African rhinoceros is not "beyond price" but merely commands a very high one. Many people, however, would regard this as a distortion of what is genuinely a non-monetary valuation. Pearce asserts that "many of us would pay substantial sums" to see these animals preserved. But this is not the only measure of value. Ask the same people, and many others who could not afford to pay "substantial sums", what it would take to compensate them for the extinction of the condor or rhinoceros and they would say "nothing". Extinction of a species, like a human life, is not the sort of thing which can be compensated by money, however much. It doesn't have a price.
• A price is an expression of value obtained in a market. It is therefore dependent on people's incomes. Asked what he or she would be willing to pay to preserve a particular stretch of countryside, for example, a poor person is likely to give a low answer. A rich person, with the cash to pay, is likely to provide a higher valuation. Yet it may be just as valuable to the poor person as to the rich.
• The costs and benefits of a project may not fall on the same people. For example, a new motorway may bring financial benefit to firms and their employees throughout the country, but the costs of destroying the countryside may fall on a relatively small number of people in a local community.

None of these problems of monetary valuation means that CBA should not be used. On the contrary, some systematic method of valuing the enviromnent is required, and the alternative to CBA is too often no valuation at all. Indeed, for all its faults, CBA can be a powerful weapon in the case for environmental protection, proving that the environment does provide more welfare in its undegraded state than when used for development or as a waste dump. But the problems of monetary valuation require the application of cost-benefit analysis to be limited in two ways. Firstly, "sustainability constraints" must be established to protect environmental features with long-term benefits, such as essential natural habitats or the ozone layer. These features will not be given their full weight by CBA, since their major beneficiaries will be people living in the future, whose interests are "discounted" in CBA. Sustainability constraints, set by the processes of planning discussed below, will limit the use of CBA to smaller decisions which do not have damaging long-term effects.

Second, CBA cannot be used to make decisions by itself. Decisions about how to care for the environment cannot be derived from mere calculation; they require judgement. It is not possible simply to give everything a figure and then expect to compute the "correct" answer by addition and subtraction. Environmental decisions are political decisions, in which non-monetary valuations as well as monetary ones must be taken into account. They therefore need to take place in the political arena, not simply in the market.

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