Agricultural & Applied Economics Association

The Role of Economics in Interdisciplinary Environmental Policy Debates: Opportunities

and Challenges
Author(s): Kathleen Segerson
Source: American Journal of Agricultural Economics, Vol. 97, No. 2 (March 2015), pp. 374-
389
Published by: Oxford University Press on behalf of the Agricultural & Applied Economics
Association
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 The Role of Economics in Interdisciplinary
Environmental Policy Debates: Opportunities
and Challenges

Kathleen Segerson

Economists in the field of environmental and from the Science Advisory Board of the U.S.
natural resource economics or agricultural Environmental Protection Agency (EPA)
economics who want to be policy-relevant on the need for more social scientists within
face both unique opportunities and unique the agency, social science in general and eco
challenges relative to economists in many nomics in particular continue to represent
(most) other fields. Those of us who work only a small fraction of the focus of EPA
in academic departments or agencies/ and its work (U.S. Environmental Protection
organizations with economists who are in Agency 2011). This reflects the fact that the
fields like labor, macro-economics, taxation, relevance of economics for environmental
or industrial organization have undoubtedly protection has historically been either ques
seen the contrast. Unlike these other fields, tioned, or at least under-appreciated. Thus,
the field of environmental economics, and while no less important, it is more difficult
often agricultural economics, is inherently for economics to get a seat at the table in
interdisciplinary and linked to the rela- environmental policy debates than in other
tionship between people and nature, either policy contexts. In addition, once at the table,
explicitly or implicitly. Importantly, this rela- economists must work with individuals with
tionship is bidirectional: human well-being different backgrounds and disciplinary per
depends in many ways on goods and ser- spectives who often approach environmental
vices provided by nature, and the supply of policy in very different ways,
those goods and services are affected by and One reason for this seems to be the public
hence ultimately depend on human behavior perception of what the study of economics
(Millennium Ecosystem Assessment 2005). entails and its sphere of relevance. In my
Nonetheless, economics very often plays view, this stems at least in part from how eco
a limited role in interdisciplinary environ- nomics portrays itself. The traditional view
mental policy debates. In some contexts, such of economics is epitomized by the ubiquitous
as monetary policy or tax policy, economists "circular flow" diagram that is introduced
are generally the primary source of policy early on in almost every principles of eco
advice. Federal agencies providing this advice nomics class (see figure 1 for an example),
are largely populated with economists, and This diagram provides the over-arching
the use of economic analysis as the basis for framework that guides how most economists
policy prescriptions is widely accepted. This think about the "system" that they study
is not true in the realm of environmental and leads to a general perception that eco
policy. In fact, some environmental statutes nomics is about markets and flows of money,
explicitly prohibit the use of economic anal- However, the framework embodied in the
ysis as a basis for policy-related decisions traditional circular flow diagram is woefully
(Hahn, Olmstead, and Stavins 2003). Sim- inadequate (incomplete) for studying many
ilarly, despite repeated recommendations economic problems, especially those stud
ied by environmental economists but often
even those studied by colleagues in other
Kathleen Segerson is in the Department of Economics, Univer- fields. An alternative circular flow diagram,

Sity^eCrthorCUthanks James Vercammen for very nsefnl depicted in figure 2, highlights the fact that
comments that helped improve this address. the human System, of which the economy

Amer. J. Agr. Econ. 97(2): 374-389; doi: 10.1093/ajae/aaul04

Published online December 3, 2014
©) The
The Author
Author2014.
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Segerson The Role of Economics in Interdisciplinary Environmental Policy Debates 375

Goods and services . .Goods andservices

Goods and services
Goods andi services^^^^^^^
services^^^^*"®!
MarketsMarkets
for goods
for goods

/P*
and services

B B Money Money 1

Ecosystem Impacts
Households Firms
Services

Money Money M B

Markets for
factors 1^/ Factors

Figure 2. Alternative circular flow diagram

Figure 1. The standard circular flow diagram
and reductions in biodiversity. The need
to understand and address these problems
is one part, is linked to the natural system, has led to calls for more closely integrat
with the two sub-systems comprising an over- ing natural and social sciences, particularly
arching "coupled natural-human (CNH)" ecology and economics, as part of an effort
or "socio-ecological" system (Berkes and to ensure the continued flow of ecosystem
Folke 2000; Liu et al. 2007). Just about all services needed to sustain the well-being of
production and consumption decisions made present and future generations (National
within the human system, that is, the econ- Research Council 2005; Carpenter et al. 2006;
omy, have implications for the natural system, Liu et al. 2007; Polasky and Segerson 2009).
and clearly conditions or changes in the nat- Many ecologists now see work on ecosystem
ural system have implications for the human services as a means of putting ecosystem pro
system. Importantly, the flows depicted in tection on a more equal footing with other
this alternative circular flow diagram are (mainly commercial) interests, and hence
not exchanges involving money, but rather have embraced it as a means of justifying
impacts and flows of goods and services that ecosystem protection not just for its own
often occur outside of markets. sake but also for its contributions to human
Note that this perspective extends beyond welfare. This has provided an opportunity for
simply recognizing that environmental exter- collaboration between economists and ecol
nalities exist and people demand (and are ogists, not only in understanding the coupled
willing to pay for) environmental quality, human-natural system but also in advocat
two long-time pillars of the field of environ- ing policies to protect it (Naidoo et al. 2006;
mental economics. The CNH perspective is a Polasky and Segerson 2009; Bateman et al.
systems approach that is inherently long run 2011; Ten Brink 2011).
and dynamic, and recognizes the importance Opportunities to work in an interdis
of time lags, feedback loops, and thresholds ciplinary setting and participate in policy
(Liu et al. 2007). It builds on the concept of discussions are increasingly available to
ecosystem services, defined as the benefits environmental economists who seek them,
that ecosystems provide to humans (Daily However, even when opportunities arise,
1997). The concept of ecosystem services efforts to inject economic reasoning and
emerged in response to the growing appreci- analysis into environmental policy debates
ation of the important role that ecosystems face challenges that must be overcome if eco
play in providing goods and services that nomics is to play a prominent role in those
contribute to human well-being, as well discussions. Here I reflect on what I see as
as a growing awareness of the scale of the some of the opportunities for such efforts, as
impact of human actions on ecosystems and well as some key challenges they face,
the flow of these services (e.g., Daily 1997;
Millennium Ecosystem Assessment 2005).
Concerns about reductions in the flow of
services include not only traditional envi- Opportunities: What Economics Brings to
ronmental problems such as air and water the Table
pollution (sulfur dioxide emissions, ground
level ozone, and eutrophication), but also Environmental policy is, of course, about
climate change, global changes in the nitro- protecting the environment, which requires
gen cycle, deforestation, loss of wetlands, an understanding of the natural/biophysical

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376 March 2015
system, for example, how ecosystems func
tion and how the biosphere interacts with
the atmosphere and the hydrosphere (Folke
1999). It is this perspective that permeates
most scientific debates about environmen
tal protection and discussions within, for
example, the Science Advisory Board at the
EPA. This is not surprising, given the EPA's
mission "to protect human health and the
environment. " Where does economics fit
within this mission?
While focused on environmental protec
tion, the EPA's mission clearly reflects a
coupled natural-human systems perspective
that recognizes the links between environ
mental protection and people. As such, this
mission cannot be met by relying solely on
information from the biophysical sciences. It
must also consider how the environment is
impacted by human activity, and how changes
in environmental quality affect humans. In
fact, several of the program areas within
the EPA Office of Research and Develop
ment include an emphasis on sustainability,1
suggesting a clear role for economics.
While detailed economic studies can pro
vide quantitative estimates of both sides of
the relationship between humans and nature
depicted in figure 2, much can also be gained
simply by injecting an economic perspective
based on some very fundamental economic
principles/concepts into policy discussions.
This requires not only an understanding of
these principles/concepts, but also an appre
ciation for their relevance to environmental
policy, something that is generally not obvi
ous when taught in standard economics
courses. Particularly important are the fol
lowing four basic economic concepts, familiar
to all economists:
Scarcity/Opportunity Costs/Tradeoffs. The
concept of scarcity and opportunity cost is
fundamental to all economic approaches. It
reflects both technology/production possibil
ities and resource availability. It recognizes
that, although "win-win" opportunities can
sometimes be found (e.g., from reductions
in waste or improvements in energy effi
ciency), in general protecting human health
and the environment will come at the cost of
giving up something else. Sometimes those
1 These six program areas are as follows: Air, Climate and
Energy; Chemical Safety for Sustainability; Safe and Sustainable
Water Resources; Human Health Risk Assessment; Home
land Security; and Sustainable and Healthy Communities. See
U.S. Environmental Protection Agency (2012a).
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Amer. J. Agr. Econ.
costs will be explicit monetary out-of-pocket
costs (such as the cost of adding a catalytic
converter to a car, or the additional cost of
a hybrid vehicle), while in other cases they
can be non-monetary, such as the reductions
in convenience or comfort from adjusting
thermostats to reduce energy use. In addition,
protecting one aspect of the environment,
such as the population of a predator species,
can come at the expense of another aspect,
such as its prey. Recognizing and explicitly
acknowledging the potential for tradeoffs and
the need to evaluate policy choices in terms
of those tradeoffs is a critical perspective that
economics brings to policy debates.
Preferences/Substitutability. A key to
evaluating tradeoffs is, of course, compar
ing tradeoffs that would have to be made
to the tradeoffs that people are willing to
make, which depend on their preferences,
particularly the extent to which they view
different goods and services as substitutable.
The tradeoffs people are willing to make
between environmental services and other
goods and services, or across different envi
ronmental services, relate directly to the
welfare changes that result from environ
mental changes, and hence to the link from
the natural to the human system depicted
in figure 2. However, assessing the tradeoffs
people are willing to make goes beyond sim
ply recognizing that nature affects people,
and explicitly acknowledges that people care
not only about environmental protection
but also about the provision of other goods
and services that provide utility. In addi
tion, it recognizes that the extent to which
individuals are willing to trade one for the
other will vary with individual preferences
and circumstances. Thus, if scientists advo
cate for policy based on their own personal
preferences, that is, based on the tradeoffs
that they would be willing to make, the result
ing decisions will not necessarily reflect the
preferences of others. Agreeing on tradeoffs
across generations, as reflected in the choice
of a (utility) discount rate, is particularly
challenging.
Choice/Behavioral Responses/Incentives.
Whether intentionally or not, policies create
incentives for self-interested individuals to
change their behavior in ways that enhance
their own utility. Recognizing these behav
ioral responses is critical to effective policy
design. As documented in the popular book
Freakonomics (Levitt and Dubner 2005),
examples abound across many contexts of
Segerson The Role of Economics in Interdisciplinary Environmental Policy Debates 377
cases where failure to anticipate a behavioral
response led to a policy that had unintended
consequences and/or was ineffective. Antic
ipating behavioral responses can reduce the
likelihood of such outcomes. In addition, it
broadens the range of policy options that
can be used to achieve a given goal, by rec
ognizing that incentive-based policies might
be a preferred alternative to, for example,
technology mandates or other "command
and-control" policies, since they can provide
incentives to reduce the overall costs of
meeting environmental targets.
Spillover Effects. Spillover effects can
result either from interactions through mar
kets (e.g., general equilibrium effects) or
from interactions through utility or produc
tion functions (e.g., externalities or public
goods). Both have implications for how a
decision or policy targeted at one group can
affect others. In addition, the latter have
implications for the efficiency of market
transactions, or, more generally, private deci
sions. As with behavioral responses, policies
that fail to anticipate spillover effects can
be ineffective or even counter-productive.
The standard circular flow diagram in figure
1 is helpful for thinking about market inter
actions, but is not sufficient for identifying
the role and implications of externalities and
public goods.
The above four concepts are familiar to
all economists, and, in fact, we probably take
them for granted. Most of us are so used to
thinking in these terms and talking to other
economists who think in these terms that
we fail to recognize how unique this way of
thinking is; we also fail to realize that people
with other disciplinary backgrounds do not
view the world from this same perspective.
This should not be too surprising, since we
undoubtedly are not familiar with the basic
principles that define other disciplines or
the way that other disciplines think about
the world. To see this, it is interesting to
contrast the above basic principles with a
list of fundamental principles from ecology.
Scheiner and Willig (2008) list the following
seven concepts/principles that define a gen
eral theory of ecology: (1) heterogeneous
distribution of organisms across space and
time; (2) interactions of organisms with their
environment; (3) contingencies determine
distributions; (4) environmental hetero
geneity across space and time; (5) finite and
heterogeneous resources; (6) mortality of
organisms; and (7) evolutionary cause of
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ecological properties. While there are clearly
some parallels—for example, regarding the
finiteness of resources—these principles are
quite distinct from those that characterize an
economic perspective.2
The Role of Economics in Environmental
Policymaking
Broadly speaking, economics and the fun
damental principles outlined above can
play an important role in environmental
policymaking in two key contexts: (1) esti
mating benefits and costs (i.e., quantifying
tradeoffs people would have or be willing to
make), and (2) designing effective policies
that recognize the importance of behavioral
responses and spillovers.
With regard to the first context, there
is, of course, a long history regarding the
estimation of benefits and costs in environ
mental and natural resource economics,
both in theory and practice, and I do not
attempt to summarize that literature here.3
Rather, I simply note that, for federal envi
ronmental statutes the signal about the role
of economics, in particular the quantifica
tion and monetization of tradeoffs, is mixed.
Some statutes, such as the Clean Air Act
and the Endangered Species Act, generally
prohibit the consideration of costs in set
ting regulations, while others, such as the
Toxic Substance Control Act and the Federal
Insecticide, Fungicide, and Rodenticide Act
allow it (Hahn, Olmstead, and Stavins 2003).
More explicit guidance on the consideration
of tradeoffs appears in a series of Execu
tive Orders, starting with Executive Order
12291 issued by President Reagan in 1981,
up through Executive Order 13563, issued
by President Obama in 2011 (see textbox 1).
This order applies to all "major" federal
regulations. Unlike the original Executive
Order 12291, subsequent Executive Orders,
including the latest one, do not require a
strict benefit-cost test, under which a regu
lation would not be adopted unless it was
determined that benefits exceed costs. Rather,
the requirement is simply that benefits and
costs are taken into account (considered) and
2 See Tilman, Polasky, and Lehman (2005), and Polasky and
Segerson (2009) for further discussion.
* See, for example, Just, Hueth, and Schmitz (2004), and
Freeman, Herriges, and Kling (2014).
378 March 2015
that, for any regulation that is adopted, ben
efits justify costs. It is clear in statement 3 in
textbox 1 that the concept of "benefits" being
invoked here is not the welfare-theoretic
concept of compensating or equivalent vari
ation used by economists, but a broader
(looser) concept that includes consideration
of distributional impacts and equity (presum
ably not in a formulaic way). Interestingly,
consistent with economic prescriptions, the
Executive Order also advocates the use of
performance standards over design standards
and incentives over direct regulation.
Given that a requirement to consider
benefits and costs for proposed major reg
ulations, including major environmental
regulations, has been in place for over 30
years, an important question is whether it
has had an impact in increasing the role that
economics plays in environmental policy
making. A paper by Hahn and Dudley (2007)
examined a sample of EPA Regulatory
Impact Analyses (RIAs) from 1982-1999,
and used a scorecard method to rate those
analyses based on the extent to which they
included basic economic information. These
authors found that, while all Regulatory
Impact Analyses monetized at least some
costs, only about 50% monetized at least
some benefits, with only about 30% pre
senting some measure of net benefits. Hahn
and Dudley concluded that, based on what
was included/missing, the quality of the
Regulatory Impact Analyses was gener
ally quite low, with no clear trend toward
improvement. They interpret this as sug
gesting non-compliance with the Executive
Orders. Nonetheless, Hahn and Dudley are
guardedly optimistic about the future use of
benefit-cost analysis in Regulatory Impact
Analyses.
A recent example provides some support
for this guarded optimism. In 2012 the EPA
conducted a Regulatory Impact Analysis for
regulations it was issuing under the Clean Air
Act that set fleet-wide average carbon diox
ide emission standards (expressed in terms
of grams/mile) for cars and light trucks (U.S.
Environmental Protection Agency 2012b).
These standards were issued in conjunction
with new Corporate Average Fuel Economy
standards issued by the Department of Trans
portation. If the EPA's emissions standards
are met entirely through improvements in
fuel efficiency, the EPA estimates that they
would correspond to a projected average fuel
efficiency for cars and light trucks of 54.5
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Amer. J. Agr. Econ.
miles per gallon for model year 2025. The
Regulatory Impact Analysis for the emissions
standards presented lifetime present values
and annualized values for costs, benefits,
and net benefits (under alternative discount
rates), which showed that the benefits of the
regulation exceed the costs. More impor
tantly for the discussion here, the analysis
considered a wide range of impacts affecting
benefits and costs, including those related to
climate change, energy security, particulate
matter, refueling time, and rebound effects
(in terms of both the benefits of additional
driving and the cost of additional congestion,
noise, and accidents). Thus, this Regulatory
Impact Analysis is clearly much more com
prehensive than many of the earlier ones
examined by Hahn and Dudley (2007) and
would presumably rank very high on their
scorecard.
The above discussion suggests that the
Executive Orders related to benefit-cost anal
ysis provide a prominent role for economics
in the evaluation of major environmental
regulations, and there is at least some evi
dence that as a result agencies are generating
quite comprehensive information about the
associated benefits and costs. In fact, in a
recent commentary entitled "The Stunning
Triumph for Cost-Benefit Analysis," Cass
Sunstein (2012), the former Administrator
of the White House Office of Information
and Regulatory Affairs, states: "Endorsed
for more than three decades and by five
presidents, cost-benefit analysis is here to
stay." Of course, generating comprehensive
information about benefits and costs does
not guarantee that this information will be
considered in final policy decisions, but at
least the information is available as an input
into those decisions.4
In addition to the requirement to consider
benefits and costs, the Executive Orders also
call for greater use of performance standards
and economic incentives. Much progress
has been made here as well. For example,
although environmental taxes are not com
mon in the United States,5 tradable permits
have been successfully used in a number of
places to reduce pollution (Goulder 2013),
allocate development rights for farmland
4 In general, the quality of information can vary considerably,
and it is often difficult for policy makers to distinguish high-quality
from low-quality information.
5 Environmental taxes are more commonly used in Europe.
See, for example, Prasad (2009).
Segerson The Role of Economics in Interdisciplinary Environmental Policy Debates 379

Textbox 1. Excerpt from Executive Order 13563

Our regulatory system must... take into account benefits and costs, both quantitative and qualitative.
[T]o the extent permitted by law, each agency must:

1. Propose or adopt a regulation only upon a reasoned determination that its benefits justify its
costs (recognizing that some benefits and costs are difficult to quantify);
2. Tailor its regulations to impose the least burden on society, consistent with obtaining regulatory
objectives;
3. Select... approaches that maximize net benefits (including potential economic, environmental,
public health and safety, and other advantages; distributive impacts; and equity);
4. To the extent feasible, specify performance objectives ...
5. Identify and assess available alternatives to direct regulation, including providing economic
incentives to encourage desired behavior, such as user fees or marketable permits, or providing
information

Source: http://www.whitehouse.gov/the-press-office/2011/01/18/improving-regulation-and-regulatory-review-executive-order (accessed on November 11,

2014).

preservation (Tan and Beckmann 2010), and
allocate fishing quotas (Costello, Gaines,
and Lynham 2008). Challenges remain,
particularly in the context of agricultural
water pollution (Fisher-Vanden and Olm
stead 2013), but the potential for economic
incentives to be more cost-effective than
traditional regulatory approaches has clearly
been recognized by policymakers. Nonethe
less, environmental policy continues to rely
heavily on regulations and standards. The
new corporate average fuel economy stan
dards are an example. Standard welfare
analysis implies that, in a neoclassical world,
energy taxes are a more efficient way to
achieve energy conservation than energy
efficiency standards, due at least in part to
the rebound effect (Parry, Evans, and Oates
2014). Interestingly, some recent work in
behavioral economics suggests this conclu
sion might not hold if the standard rationale
choice assumption embodied in neoclassical
models is relaxed (Gillingham and Palmer
2014; Tsvetanov and Segerson 2014). While
this work might imply the need to re-think
(or at least temper) the standard policy pre
scriptions regarding taxes versus standards,
it clearly has not played a key role in the
historical and continued reliance on the use
of regulation and standards rather than eco
nomic incentives to achieve environmental
(and other natural resource management)
goals.
environmental policy table, economics and
economists still play a limited role in envi
ronmental policy arenas. For example, of
the approximately 18,000 EPA employees,
relatively few are economists. The EPA's
National Center for Environmental Eco
nomics employs about 30 economists,6 and
some economists work in the EPA's pro
gram offices or in the Office of Research
and Development (ORD). However, only
1.57% of the ORD science staff, which totals
approximately 1,200 employees, are social
scientists.7 The EPA Science Advisory Board
has repeatedly recognized the need for
more social scientists (including economists)
to help the EPA meet its mission to pro
tect human health and the environment.
For example, in a recent letter to the EPA
Administrator, the Science Advisory Board
stated: "Investment in social and behavioral
sciences is needed to complement ORD's
investments in ecological and human health
research," (U.S. Environmental Protection
Agency 2012a). The challenge, however, is
not just to increase investment in social sci
ence research but also to integrate insights
from economics and other social sciences
(i.e., an economics/social science perspective)
into policy discussions dominated by bio
physical scientists. This integration is clearly
needed (e.g., National Research Council
2005; Carpenter et al. 2006; Polasky and
Segerson 2009) but often not easy. Numerous
challenges exist.

Challenges
6 See http://yosemite.epa.gov/ee/epa/eed.nsf/webpages/Staff.
html (accessed on November 11, 2014).
Despite the progress that has been made 7 Personal communication with Angela Nugent, EPA Science
in bringing an economic perspective to the Advisory Board Staff Office, July 18, 2014.

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380 March 2015 Amer. J. Agr. Econ.
Concepts and Terminology interdisciplinary setting without a clear exp
. . . . . lanation can lead to confusion.
A critical challenge in interacting across dis- These are two exampies where the same
"Pjrs .1S simply communication (Proops word js usec[ differently by various disciplines,
1999), including establishing a common but a p0tcntial confusion can in principle
understanding of commonly used concepts be resolved b dearl defini how a term
and terminology. As noted above there are is used In other cases_ however, underly
parallel structures across some disciplines, ing fundamental philosophical differences
such as economics and ecology (Tilman, Qr perSpectiVes exist that cannot be easily
Polasky, and Lehman 2005; Polasky and resolved, and hence make collaboration and
Segerson -009)· F°r example, although the integration across disciplines difficult. Three
contexts are different, both disciplines recog- areas where such differences often arise are:
mze the finiteness of resources and study the (1) what it means to «value„ something; (2)
behavior of interacting agents. When parallels what it means for something to be «opti.
such as these exist, the 'translation of con- mal„ that is> what criteria should be used for
cepts from one discipline to another can be ranking alternatives; and (3) how to handle
relatively easy. distributional issues.
However, sometimes the same word
means something very different in differ
ent disciplines, reflecting more fundamental The Concept of Value
differences in perspectives. An example is the
concept of an equilibrium. Economists define Standard economic theory defines value
an equilibrium in terms of market clearing in terms of the tradeoffs that individu
and "an economic balance at which no indi- als are willing to make, as reflected in the
vidual would be better off doing something concepts of compensating and equiva
different" (Krugman and Wells 2006). In con- lent variations (willingness-to-pay and
trast, in ecology an equilibrium is a dynamic willingness-to-accept). This presumes that,
concept defined in terms of a biophysical for any reduction in the quantity of some
steady state (DeAngelis and Waterhouse good or service, there is an increase in the
1987). The economic definition of an equilib- quantity of some other good or service that
rium under which supply is equal to demand would leave the individual at the same level
and individual actors have no incentive to of utility as before. These values need not be
change does not ensure that the system as expressed in monetary terms. For example,
a whole is in a dynamic ecological equilib- the economic value of reducing one type
rium. The Millennium Ecosystem Assessment of risk (such as fatality risk from natural
(2005) documents the ecosystem dégrada- disasters) can be expressed in terms of the
tion that is occurring across the planet as a increase in another type of risk (such as
result of production and consumption (past fatality risk from traffic accidents) that the
and present). If a market equilibrium is individual would be willing to accept (Vis
degrading critical ecosystems on which the cusi 2009). However, in practice economists
associated production/consumption activi- typically "monetize" values, which allows for
ties depend, that market equilibrium is a simple means of aggregating values across
not an equilibrium for the system as a individuals and comparing them to costs,
whole. Monetizing values can lead to two sources
Similarly, the concept of efficiency has a of confusion over terminology. First, non
very specific meaning in economics (defined economists typically assume that monetized
by Pareto efficiency) that differs from values are synonymous with "commercial"
the meaning of the term as used in other values. Second, economists refer to mone
disciplines, where it often refers to minimiz- tized values as "benefits," while in everyday
ing some form of input/output ratio (e.g., language the word "benefit" is broadly used
Patterson 1996). This latter condition does to refer to something beneficial (e.g., a ben
not ensure economic efficiency. For exam- efit of improved air quality is reduced infant
pie, maximizing fuel efficiency does not mortality), as reflected in Executive Order
necessarily yield Pareto efficiency. Most indi- 13563. Both of these can create considerable
viduals in other disciplines are not familiar confusion over the use of these terms, but in
with the specific way in which economists principle this can be resolved through clearly
use this term. Thus, using the term in an defining the terms.

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Segerson The Role of Economics in Interdisciplinary Environmental Policy Debates 381
Confusion over terminology, however,
is not the crux of the issue regarding the
concept of value. More importantly, while
well-accepted within neoclassical economics,
even when the economic concept of value is
clear to others, it is not universally accepted
outside of economics. Different disciplines
define and/or measure values differently
(Brown 1984; Rolston 1991; Dietz, Fitzgerald,
and Shwom 2005; Spash 2006). Key areas of
divergence in views about defining values
relate to the following questions:8
• Should values be defined in anthro
pocentric terms? Some people believe
that the natural world has value apart
from how it contributes to human wel
fare. Under this biocentric or ecocentric
view, all species may have intrinsic value,
or the condition of the ecosystem as
a whole (health, integrity, resilience)
may have intrinsic value. Examples of
alternative definitions of value that are
not explicitly based on human prefer
ences include values defined in terms
of energy content or contributions to a
pre-specified conservation goal such as
preserving biodiversity or sustainability.
• Should values be defined in utilitarian or
deontological terms? Even with agree
ment on an anthropocentric approach
to value, the notion of defining values in
terms of contributions to human welfare
and substitutability, rather than rights
or moral obligations, is not universally
accepted. Deontological rights-based
approaches do not embody principles of
substitutability and tradeoffs.
• Who should determine value when the
public does not have full information?
Consumer sovereignty assumes that
individuals are the best judges of what is
in their own best interest, and that their
preferences are valid regardless of how
they are viewed by others. However,
when the public does not understand or
"appreciate" the contributions of ecosys
tems, some suggest that expert judgment,
rather than public values, should be the
basis for policy decisions.
• Are the preferences that underlie values
well-defined or constructed? A founda
tional assumption of economics is that
8 For more details and related references, see Polasky and
Segerson (2009).
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individuals have well-defined prefer
ences, which they reveal consistently in a
number of ways (e.g., through behavior
or surveys). An alternative view is that
preferences are constructed through a
cognitive process, particularly for com
plex and unfamiliar goods, and hence
cannot be elicited through standard eco
nomic valuation methods.
Are values associated only with changes
in goods and/or services? In economics,
the concept of a change is fundamental
to defining economic values. However,
some view values as a set of principles,
concepts, or beliefs that guide decisions
and evaluations or seek to assign value
to an entire ecosystem or even the set
of ecosystems in some geographical
domain.
What is the relevant baseline? Although
economic values are defined in terms
of a change from some current or alter
native level, they do not embody any
judgment about whether that level is
"good" or "bad," or how it was arrived
at (in particular, whether it is higher or
lower than some other reference level).
However, when an ecosystem is already
degraded, some might advocate a base
line defined in terms of some alternative
"desired" level.
Optimality/Normative Evaluation Criteria.
The debates surrounding the above issues
reflect different views about the sources and
nature of value. These views often give rise to
different views about the normative criteria
that should be used to evaluate policy options
to determine which option is "best." Within
economics, the standard criteria are: (1) cost
effectiveness (does it achieve the goal in the
least cost way?), and (2) efficiency (does the
policy maximize net benefits?). A large body
of literature has used benefit-cost analysis to
evaluate policy options based on integrated
ecological-economic models.9 Despite this
growing body of literature and its acceptance
by economists and some others, using eco
nomic efficiency to define optimality and
drive policy decisions is controversial. Out
side of economics, other objectives are often
See Polasky and Segerson (2009) for related references.
382 March 2015 Amer. J. Agr. Econ.
advocated. For example, the mission of con Distributional Issues
servation biology is to conserve the Earth's
Related to the issue of normative criteria
biological diversity, and, as a result, conser
vation biologists often rank policy outcomes
is the question of how to evaluate tradeoffs
across individuals. When the same individuals
based on how well they achieve this goal
(or groups) bear both benefits and costs, the
(Polasky 2012). Because of the complexity
of joint ecological-economic systems, some rationale for basing choices on net benefits
seems much stronger (and less controversial)
natural scientists prefer to think about system
resilience rather than any deliberate attempt
since the choice would ensure Pareto superi
ority. However, when the costs and benefits
to maximize expected net benefits (e.g.,
Perrings 2006). While not an explicit norma are borne by different individuals, either
tive criterion, under the resilience approach
intra-temporally or inter-temporally (e.g.,
different generations), then, absent compen
actions are desirable if they increase an
sation, a means of evaluating tradeoffs across
ecological system's ability to tolerate distur
individuals is needed.10
bances or promote flexible human responses
through learning or adaptation. Similarly, A standard approach to addressing intra
temporal distribution is to present estimates
some advocate using sustainability as a broad
of aggregate benefits and costs (or net bene
normative goal (Ayres 2008). While the spe
fits) accompanied by information about how
cific interpretation of this goal can vary (e.g.,
those benefits and costs are distributed across
Pezzey and Toman 2002), sustainability is
often viewed as an alternative to standard different groups of interest (e.g., Arrow
economic efficiency as a normative goal et al. 1996) or to use welfare weights when
aggregating benefits and costs across groups
(e.g., Ayres 2008). Viewing sustainability as
(Pearce, Atkinson, and Mourato 2006). For
efficiency subject to constraints (see Zil
berman 2014) implies a tradeoff between inter-temporal distributions, weighting is
just being efficient and being sustainable. typically used, where the weights are based
on a chosen or assumed discount rate. While
However, under certain conditions, efficient
paths are also sustainable paths. For exam many economists would eschew the use of
welfare weights in aggregating intra-temporal
ple, Heal (1998) derived sustainability as
an efficient outcome when society places benefits and costs, most accept discounting
in some form as a means of weighting and
a positive value on the very long run and
aggregating inter-temporally (Frederick,
people intrinsically value environmental
assets. Including environmental stocks in the
Loewenstein, and O'Donoghue 2002).
Outside of economics, however, discount
utility function can also yield a sustainable
solution to an otherwise standard model of ing has long been and continues to be quite
the efficient use of an exhaustible resource controversial, especially in environmental
contexts involving the very long run (such
(Krautkraemer 1985). As these works show,
as climate change or nuclear waste disposal)
a potentially fruitful approach is to charac
terize cases in which efficient paths are also
(e.g., Ackerman and Heinzerling 2004). In
sustainable. my view, this stems at least in part from a
confusion over the underlying rationale for
Despite the differing principles or philoso
discounting, and, in particular, the distinc
phies that can underlie various normative
tion between utility discounting (the rate at
criteria, the different rules can lead to policy
which society would trade utility in the future
prescriptions regarding environmental pro
tection that are similar, at least qualitatively
for utility in the present) and consumption
discounting (the rate at which society would
(e.g., Eichner and Pethig 2006; Polasky 2012).
trade consumption in the future for consump
Thus, in practice there may be little difference
tion in the present).11 While dating back to
in terms of decision-making from different
the work of Ramsey (1928), this distinction
perspectives on appropriate normative crite
has been emphasized only fairly recently,
ria. Nonetheless, getting to a common policy
most notably in the debates over policy
prescription can be challenging when the
debate focuses not on the commonality of
the final policy prescription, but rather on 10 Of course, the difficulty of making such intra-personal utility
the ideological differences underlying the comparisons is well-recognized within economics. See Kaldor
different normative criteria that are being (1939).
11 These are, of course, social discount rates. Comparable def
explicitly or implicitly applied (Polasky and initions apply to private discount rates, which may differ from
Segerson 2009). their social counterparts.

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Segerson The Role of Economics in Interdisciplinary Environmental Policy Debates 383

responses to climate change (e.g., Heal 2009). problem motivating recent interest in valuing
This highlights the fact that a positive (con- ecosystem services is a push to more fully
sumption) discount rate does not necessarily incorporate the value of ecosystem services
imply giving less weight to the utility of future into benefit-cost analyses and policy decisions
generations relative to current generations. (Daily et al. 2009; ten Brink 2011). Many
Instead, discounting could simply reflect an ecologists have endorsed it for that reason,
expectation that consumption levels (wealth) and economic valuation is playing an increas
will increase over time, and a belief that the ingly important role in highlighting the
marginal utility of consumption is decreasing, contributions of ecosystem services to human
welfare (see, for example, Bateman et al.
2011). Yet, the use of economic valuation to
_ quantify the benefits of ecosystem protection
ο LxamPles is controversial (Goulder and Kennedy 1997;
Chee 2004; Norton and Noonar 2007; Sagoff
Many examples can be used to illustrate the 2011). Underlying the economic estimation
opportunities and challenges discussed above. Gf benefits is an anthropocentric perspective
The following briefly discusses two notable tbat focuses on the services that ecosystems
contexts in which they have arisen. provide to humans, a perspective that is
not universally accepted. In fact, the title of
Valuing and Protecting Ecosystem Services a major EPA report (U.S. Environmental
Protection Agency 2009), "Valuing the
As noted above, there is a growing interest Protection of Ecological Systems and Ser
in valuing and protecting/restoring ecosys- vices," was explicitly chosen to be sufficiently
tem services (e.g., Ninan 2014), a term that broad to allow for valuing systems inde
is broadly defined to include provisioning pendently of the services they provide to
services (such as food, fuelwood, and fresh humans.
water), regulating services (such as flood in addition, even with an anthropocen
protection, climate regulation, pollination, trie focus on services, valuing those services
and pest control), cultural services (such requires the adoption and application of a
as aesthetic and spiritual roles), and sup- specific concept of value. As noted above,
porting services (such as soil formation, different scales or means of expressing values
nutrient cycling, and primary productiv- exist (Brown 1984), and there are different
ity) (Millennium Ecosystem Assessment views on the importance of the factors that
2005). This broad definition includes not only influence those values, which tend to vary
direct benefits, but also indirect benefits that across scholarly disciplines. For example,
result from the use of ecosystems or "natu- economists generally emphasize the impor
ral assets" as inputs into the production of tance of (fixed) preferences and income,
other final goods and services that are valued, while psychologists and sociologists focus
such as agricultural products (Barbier 2008). on other internal and external factors such
Economists tend to focus on services that as perceptions, social/cultural influences,
directly enter utility or production functions, and framing effects. As a result, different
while, not surprisingly, ecologists generally disciplines tend to view the valuation of
focus on the ecological functions and pro- ecosystem services differently, employ differ
cesses that contribute to the provision of ent methods for eliciting values, and express
these services. This difference in focus pro- those values using different measures or
vides modeling challenges (e.g., ensuring scales (Dietz, Fitzgerald, and Shwom 2005;
that outputs from ecological models can be U.S. Environmental Protection Agency 2009).
used as inputs into economic models), but These differences can generate debates about
in principle the two disciplinary perspec- the appropriateness of different valuation
tives can be integrated, thereby facilitating concepts and methods and create significant
collaborative work related to defining and challenges for reaching interdisciplinary
quantifying changes in service flows (see, e.g., consensus. They have led to calls for other
National Research Council 2005; Carpenter approaches, such as expressing tradeoffs
et al. 2006; U.S. Environmental Protection in non-monetary terms (Daily et al. 2009),
Agency 2009). using other, non-economic valuation methods
However, reaching consensus on valuing (U.S. Environmental Protection Agency
those changes is more difficult. A critical 2009), and employing more participatory,

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384 March 2015
discourse-based approaches to valuation
(Wilson and Howarth 2002; Chee 2004).
Without espousing economic valuation,
economic insights about behavioral responses
and spillover effects can still play a key
role in designing effective policies and pro
grams to increase the provision of ecosystem
services (regardless of why an increase is
desired). For example, programs or mar
kets that provide "payments for ecosystem
services" (PES) have received considerable
attention in recent policy debates (Heal
2000; Bulte et al. 2008; Jack, Kousby, and
Sims 2008), and economists have much to
contribute to understanding and design
ing PES programs. Key program design
issues include: practice vs. performance
based payments; heterogeneity and targeting;
imperfect information; multiple inter-related
services; scale effects; additionality and slip
page; and enforcement (Zilberman and
Segerson 2012). Understanding program
impacts, and hence improving program des
ign, requires an understanding of both indi
vidual and market responses, as well as the
biophysical relationships that govern the pro
vision of inter-related environmental services.
Thus, despite potentially different views on
the reason(s) to protect ecosystems, there
are significant opportunities for interdisci
plinary collaboration in designing effective
programs to enhance the flow of services they
provide.
Endangered Species Protection
A specific example related to ecosystem
services where both opportunities and
challenges in bringing economics into envi
ronmental policy debates exist is the imple
mentation of the Endangered Species Act
(ESA). The ESA seeks to protect endan
gered or threatened species by prohibiting
actions that are harmful to these species.
Implementation of the Act has been the basis
for numerous regulatory actions, including
fishery closures designed to reduce bycatch
of threatened or endangered marine species.
For example, the National Marine Fish
eries Service has closed portions of the
west coast drift gillnet swordfish fishery in
an effort to reduce bycatch of leatherback
sea turtles, which are listed as endangered
under the act.12 Similarly, regulators closed
12 See http://www.pcouncil.org/highly-migratory-species/stock
assessment-and-fishery-evaluation-safe-documents/current-hms
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Amer. J. Agr. Econ.
the Hawaii shallow set longline swordfish
fishery between 2001-2004 to protect sea
turtles.13 The Endangered Species Act man
dates species protection regardless of cost,
although economic considerations sometimes
play an implicit or explicit role in decisions
regarding what actions may be taken (Brown
and Shogren 1998; Sinden 2004).
In light of limited resources and budgets,
benefit-cost analysis clearly has the poten
tial to provide useful input into decisions
regarding the protection of species. However,
using benefit-cost analysis in this context has
been and remains controversial. For exam
ple, Sinden (2004, p. 210) states: "In practice,
cost-benefit analysis flattens our most deeply
held emotions, beliefs, and values—our awe
at the profundity of extinction, our rever
ence for life, and our wonder in the face of
the magnificence of biodiversity—into the
monochromatic dull gray of the monetary
metric."
Given such opposition, economists clearly
have an uphill battle in convincing some
outside of economics of the usefulness of
measuring the benefits and costs of species
protection using economic methods. This is
not necessarily because they do not think
that species protection enhances human
well-being. Rather, it stems from at least
two concerns: (1) measuring benefits in
monetary terms, that is, monetizing changes
in levels of protection, and (2) comparing
benefits and costs to determine appropri
ate actions, thereby invoking an economic
efficiency objective for policy choice. Both
of these are objectionable to some people
and create a challenge to expanding the
use of economics as a normative tool in this
context.
However, even short of monetizing benefits
or endorsing efficiency as a social choice rule,
as with the provision of ecosystem services
more generally, economics can contribute
to ensuring that policies designed to protect
species are actually effective in doing so
(and hopefully cost-effective as well). Unfor
tunately, sometimes they are not and can
actually be counter-productive, that is, harm
ful to the species due to behavioral responses
or spillover effects. A classic example, of
course, is the "shoot, shovel, and shut-up"
safe-document/commercial-fisheries-descriptions/ (accessed on
November 11, 2014).
13 See http://wpcouncil.org/press/2006Marl4_PRESSREL
EASE_CM131st_Final.pdf (accessed on November 11, 2014).
Segerson The Role of Economics in Interdisciplinary Environmental Policy Debates 385

response of landowners who fear that the dis- about ourselves, and serve as a reminder
covery of a threatened or endangered species to all economists, whether they study envi
on their land will trigger restrictions on land ronmental economics, labor economics, or
use that will be detrimental to them (Brown macroeconomics, that production, consump
and Shogren 1998). However, even absent tion, and ultimately human well-being all
illicit behavioral responses like this, standard affect and ultimately depend on the con
market effects can lead to counter-productive dition of the natural system. Second, and
results. For example, there is strong evi- equally importantly, it would change how
dence that fishery closures to protect sea non-economists view the field of economics,
turtles have actually led to increased sea Instead of being viewed as simply the study
turtle bycatch, as the associated reductions of the money flows depicted in the traditional
in swordfish production in the closed fish- circular flow diagram, economics would be
eries has been largely replaced by increased viewed as including, or at least recogniz
harvesting in other areas of the world where ing, the interdependence of the human and
sea turtle bycatch rates are higher, thereby natural systems. This would also help link
increasing overall bycatch (e.g., Rausser et al. economics to the sometimes vague notion of
2009; Chan and Pan 2012). These market sustainability and sustainable development
responses could have been anticipated with (Zilberman 2014).
greater input from economics in the policy Skepticism about economics is also fueled
decisions. by a perception that economists revere unfet
tered markets. However, adopting a coupled
natural-human systems perspective could
also have implications for the interpreta
Moving Forward tion of the Second Fundamental Theorem
of Welfare Economics. The standard inter
The discussion above suggests that, despite pretation is that the markets depicted in the
some successes, the role of economics in standard circular flow diagram generally lead
environmental policy debates continues to be to efficient allocations, except when there is
limited, for at least two reasons: (1) a misun- market failure (from, e.g., an environmental
derstanding about the field of economics and externality). In contrast, the interpretation
what it has to contribute, reflecting a wide- arising from a coupled natural-human sys
spread belief that economics is primarily terns perspective might be that these markets
about the study of markets and money (and often do not lead to efficient allocations, at
that economists revere unfettered markets); least in a dynamic sense, because environ
and (2) skepticism/controversy about the mental externalities are pervasive. To restore
application of normative welfare economics the standard interpretation, one would need
(including formal benefit-cost analysis) to markets that not only cover the exchanges in
environmental policy decisions. Given this, the traditional circular flow, but also include
how might we move forward to increase our all of the ways that human activities by one
role? group affect the well-being of others (current
To begin with, economics could adopt a and future) through the links with the natural
coupled natural-human systems perspective system.
as an over-arching framework. Instead of Second, we could more clearly emphasize
depicting the field of economics using the the distinction between the use of eco
traditional circular flow diagram in figure 1, nomics for positive analysis (understanding
in our introductory principles of economics preferences, behavior, markets, etc.) versus
classes we could start with the alternative its use for normative analysis (ranking policy
circular flow diagram in figure 2. Doing so options). In interdisciplinary discussions of
would signal that economics is about more environmental policy, most objections to the
than markets, that is, it is about the coupled use of economics stem from concerns about
natural-human system, with the traditional its normative use, in particular its attempt to
circular flows being one part of the sys- monetize environmental changes and then
tern (embedded in the human component), compare the monetized benefits to estimates
Describing the field of economics, starting in of costs as a basis for making policy decisions,
principles courses, using the coupled natural- Rather than seeking to monetize as much
human systems perspective would have two as possible in order to evaluate tradeoffs
effects. First, it would change how we think using benefit-cost analysis, we could simply

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386 March 2015 Amer. J. Agr. Econ.
focus on increasing awareness of tradeoffs,
and quantifying them in terms that are most
useful to policy makers charged with balanc
ing competing interests and considerations.
As Hahn and Sunstein (2002, p. 1493) state,
"Cost-benefit analysis is not an effort to
reduce all human goods to numbers, but to
increase the likelihood that regulation will
actually produce human goods." While many
environmental economists have long advo
cated using benefit-cost analysis as an input
into decisions rather than a normative deci
sion rule (e.g., Arrow et al. 1996), there is a
clear need to emphasize this more.
Finally, economists should acknowledge
and work within the realm of the funda
mental differences in perspectives across
disciplines that give rise to controversies
over the use of economics in this context.
Different objective functions can often
lead to similar environmental protection
goals. Focusing on shared goals rather
than ideological differences (differences
in motivation) can increase the prospects for
collaboration. Similarly, regardless of how
environmental targets/goals are set, we could
emphasize the contributions that economics
can make to ensuring that those goals are
actually met, that is, that a given approach
will be effective, and will reduce the cost
of meeting the goal, that is, increasing cost
effectiveness. Understanding and anticipating
behavioral responses and spillovers can con
tribute to meeting goals more effectively
and efficiently, even when there are differing
views on the appropriate normative criteria
for setting those goals.
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