Species extinction without market failure
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According to Hotelling’s model, even when market prices fully reflect the value of a species, it will be efficient to exploit a species to extinction or totally degrade an ecosystem if the value of the species or the ecosystem over time is not increasing at least as fast as money deposited in an interest-bearing bank account. Hotelling’s logic was distressingly simple. If the value of the biological resource is not increasing as fast as the rate of interest, both an individual owner of a biological resource and society at large would be economically better off exploiting the resource faster and putting the returns from the exploitation in the bank where it would be invested in the creation of human-produced capital that earned a return greater than the rate of interest. In this view, biological resources are a form of natural capital that can be converted into human-produced capital and should be so converted if they do not earn as high a return as human-produced capital. This argument both describes why economically rational owners of biological resources exploit them to extinction or destruction and prescribes that they “should” do so. So long as [[market]s] reflect true values, historic and ongoing losses of genetic, species (Species diversity), and ecosystem diversity are efficient and “should” occur. Hotelling’s reasoning currently dominates resource economic theory and policy advice from economists, but the section on intergenerational equity shows how Hotelling’s argument is inappropriate for most decisions regarding conservation.
This Informational Box is an excerpt from An Introduction to Ecological Economics by Robert Costanza, John H Cumberland, Herman Daly, Robert Goodland, Richard B Norgaard. ISBN: 1884015727
