VALUATION OF ENVIRONMENT ITS USE VALUE AND NON USE VALUE.

. Abstract: Development of economy depends upon its growth in production in differ ent sectors agriculture, industry, transportation, infrastructural development e tc. The growth in production in these sectors is mechanized after suitable plann ing so that such products can rapidly enhance the economic development and satis fy the need of people. In this process along with growth of desired products, th ere is generation of products which are very much undesirable since these cause adverse effect upon human beings, environment, sustainability of natural resourc es etc. Economists and accountants are very much conversant over calculation of the valu e of the desired products and find out the profit or loss generated thereof thro ugh market return. But what is the value of environment damage caused in this pr ocess? What value the society pay and what the Government pays over the passive social loss remain unaccounted. The environmental loss because of pollution crea ted from cement plant or chimney exhaust of thermal power plant need to be calcu lated, because one is to pay for this either the residents of surrounding enviro nment in the form of medical expenditure or Government by making alternative com pensatory arrangements. Here an exhaustive work has been done in this area and methods for calculation o f environmental losses has been tried to be found out. This area of social loss because of environmental factors, generated out in the process of societal devel opment, need to be taken for consideration. Key Word: Environmental damage, social loss, pollution, economic development.

VALUATION OF ENVIRONMENT - ITS USE VALUE AND NO NUSE VALUE 1. Introduction: Growth and development of economy of a country in particul ar and overall development in general depend upon what the mechanism for growth of economy e.g. agriculture, industry, infrastructural development system etc. g et from the environment. In its normal situation, as in India, environment contr ibutes to production of output by supplying input such as raw material (mineral, crude oil, coal, forest product and many others), genetic resources, oxygen and water. Also along with this environment keeps control over climatic condition t hrough monitoring carbon di oxide in the atmospheric level and also solar energy , atmospheric moisture level, soil fertility and erosion are factors in this pro cess. Also environment provides opportunities for several other activities like

tourism, recreation, pleasure and comfort. Environment absorbs the wastages gene rated during the production as well as consumption of goods as a sink foe efflue nts and emissions. In course of time there has been significant amount of deplet ion of natural resources and degradation of environment and these have adversely affected quality of life. Although the intensity of this adverse effect differs across geographical regions and depends upon the level of economic and cultural factors, the problem of environmental degradation is the fact that we presume m any environmental functions to be freely available to us and thus assign zero ec onomic value. A proper understanding of the value of environment would help in c reation of awareness among stakeholders and allocation of adequate resources tow ards improvement in the quality of environment. In production process of goods manufactured either in public sector or private s ector, along with products desired to be consumed by public, public bad also eme rges in the form of solid, liquid, gas or any other form of pollution like noise etc. For example, in the cement manufacturing plant, there is emission of dust and harmful chemical in the atmosphere. Neoclassical theory with its emphasis on market mechanism takes care of the production of cement but ignores the managem ent (production, pricing and control) of air pollution arising out of cement pro duction. Public bad is produced not only during production activities but also i n course of consumption. For example, when we burn fuel, we leave hazardous wast es like carbon di oxide in environment. In hospital we use radioactive process f or diagnosis and treatment and after this we leave radioactive elements in the s ociety, which become cause of increasing radioactivity level in society. The main areas behind environmental problem are market failure. Market failure i n case of environmental problem arise mainly due to lack of i) well defined pro perty rights and ii) proper valuation of public bad. Here in this work an effort has been made to identify and elaborate issues related to valuation of environme ntal resources related to environmental good and bad. 2. Need for Valuation of Environment: Different types of capital stocks that contribute to economic development are ma n-made capital, human capital, social capital and natural capital. In traditiona l parlance, the input capital is meant to be man-made capital (also called physi cal capital). It requires finding out the contribution of social capital which is anthropogenic, and natural capital, which is available from natural resources, t o economic development. Human capital is utilized to convert natural capital to manufactured capital and in this process human capital utilizes the skill, knowledge, labor and experien ces of available human resources. However, the substitution between physical cap ital and natural capital is limited since man-made capital can not be created an d sustained without the help of energy and natural resources. Environment retains the capacity to regenerate itself in certain aspects and to some extent. If the use of resources from the environment is below the regenerat ion capacity, depletion of stock of natural capital can be avoided. Excessive de forestation would result in a decline in supply of forest resources since regene ration capacity will be less than rate of deforestation. On the contrary, if def orestation is less than the regeneration capacity, in such case quality of fores t and area under forest will not be adversely affected. Depletion in the stock o f natural capital in general would adversely affect flow of environmental servic es. Over exploitation of environment takes place because stake holders take into acc ount only private costs and benefits for the existing or concerned period in the process of decision making. They do not care for conservation of environment ne cessary for long term aspects. In situations like this market forces can not tak e care of environmental conservation because costs and benefits of environmental degradation are not under same custody. To illustrate, a steel rolling mill in order to reduce process cost, does not install pollution control technology as r equired to be done and leaves its effluents through its chimney in form of exhau st containing different harmful material like unburnt carbon, sulphur di oxide e

tc, and pollute the environment. Hence, the benefit is enjoyed by the owner of t he rolling mill and cost of pollution is born by the people staying in the local ity in terms of increased medical expenditure caused by the polluted environment . Beneficiaries of environment, households and firms, have a short term parochial interest where private costs and benefits are taken into account. Thus valuation of environment in a social and long term perspective would help policy formulat ion to make the beneficiaries pay for the cost. Thus it would help international ization of externalities. 3. Environment and its Economic Value: Bulk amount of functions generated from environment is not marketed and this is not considered in decision making. Many of the resources do not enter into forma l market, these are considered to have no price or, if at all, of little price. Oxygen received from air help to maintain the breathing system and thus leading to sustainability of human beings and animals and equally provide oxygen for ind ustrial use. In such cases there are no buyers and sellers and we need not pay f or the air we consume. People have very little choice for the air they consume f rom quality of air. The reason of such a situation is the non excludability feat ure of air. Air once available in atmosphere, no one can be restricted from usin g it or breathing it. The quality of air deteriorates because it gets polluted b y effluents, mostly gaseous being emitted from industries and automobiles etc. T he quality of air concerns us as there is a cost associated with the deteriorati on in its quality such as loss of productivity due to because of this, increase in health expenditure and frequent sickness because of ill health. Air pollution is not an externality wastes as then cost of to production process in an indust ry or running a vehicle or dumping of house hold wastes as the cost of pollutio n is not born by the pollution creator. Pure air providing pure oxygen has numer ous important functions and out of all these one important function is human bei ngs using air stay fit. How the valuation of pure air is to be done is a very im portant aspect. An indirect method may be used for ascertaining the value of quality fresh air. This indirect method may be considered to be the expenditure involved in loss of productivity and health expenditure. The total economic value of environment arises primarily because of its use value s and non use values. The use values are related with different uses to which envir onment is subjected to. Non use value relates to the psychological and ethical a spects associated with the environment. The use values are of three types: direc t us value, indirect use value and option value. The direct use value of environ ment is sub-divided into two groups- i) consumptive or extractive use value (com mercial and domestic good available from environment) and ii) non- consumptive u se value (recreation, science, education). The distinction between the three cat egories- direct use, indirect use and option values may be explained by taking f orest as an example. From forest for direct economic use value available is timb er, seed, leaves etc. Accordingly it is easy to correlate certain environmental functions with economic activities, typically in the case of these, pertaining t o indirect use values. Here exists a definite relation between environmental fun ction and economic activity. Considering the same example of forest, it can be f urther commented that the forest help in maintaining ecological balance and carb on cycle in the surrounding atmosphere and this is not having any direct use. The third category of use values, that is, option values of environment pertain to the possible use value of resources in future. Environment posses very big pr ospects of use value in future several environmental resources are of no-use tod ay, but it is expected to be of significant value in course time along with deve lopment in research and development work in this field. Bequest value and existence value are the two categories of non-use value of env ironment. The environment should be passed on to coming generations and the futu re generations are in a position to derive enjoy its use values and non use valu es from environment indicates the bequest values of environment. It is important

since many ecological changes taking place due to technological progress and ec onomical development are irreversible. The second category that is existence val ues depict the fact that individuals assign importance to the existence of natur al beauty even though it may not be of any economic use to them. The very existe nce of forests, water streams, sea coasts etc. are very important to individuals even though they may never use it in their lifetime. Environment is undervalued as we usually take into account those functions of en vironment which enter into formal markets such as raw materials. This results in gross under- estimation of the values of environment. It requires identifying a nd appreciating the indirect use values, option values and non use values althou gh intangible in nature, are also important. 4. Commonly Used Valuation Tools: Identification of appropriate valuation tools for purpose of valuation of variou s environmental functions need to be done. Some very commonly used valuation too ls are i) Efficiency or Shadowed Price ii) Market Price iii) Production Function Method iv) Travel Cost Method v) Constructed Market Techniques vi) Related Good s Approach vii) Cost Based Valuation Approach Table-1: Relevant Valuation Tools Related with Forest Function Use Value Non Use Value 1.Direct use value 2.Indirect use value Existence value Wood product (timber, fuel) Option value Bequest value

Non wood products(food, medicine, genetic material) Educational, recreational and cultural uses. Human habitant Water shed protection Nutrient cycling Air pollution reduction Micro climate regulation Carbon storage Possible future uses of goods and services mentioned in 1&2 (use values) by actual stake holders. Possible future uses of goods and servic es mentioned in 1&2 (use value) by the offspring of actual stakeholders. Bio diversity. Culture Heritage Benefit to stake holders of only knowing of the existence of goods and services without using them Valuation Tools Marketing analysis Related goods approach Travel cost method Contingent valuation method

Hedonic pricing Restoration cost Preventive expenditure Production function approach Replacement cost Contingent valuation method nt valuation method Contingent valuation method Continge

Source: Lette and de Boo 2002 : Babier 1991 4.1 Efficiency or Shaded Prices: Market prices do not represent true economic value of a product because of failu re of both market and policy. Inability of market mechanism in some circumstance s to reflect the value of environmental goods and services correctly is market f ailure. When a government policy causes an undesirable side effect or inadequate resource uses it is called policy failure. In market prices, though the cost of production of the goods and services to the individuals are taken care, it does not take into account the social cost. In c ement industry, the pricing of cement takes into account the production cost to producer only. But it does not consider the increased health cost of the residen ts around the factory. Use of shadow prices rectifies the shortfall by taking in to account the societal impact of the production of the commodity or service. However, shadow price method may be subjected to biasness because of imperfect e stimation procedure. 4.2 Market Price Method: The valuation at market price method can be done for natural resources which can be marketed. Market price can be fixed for a product or commodity when demand e quals to supply. This method is also acceptable to people as the value of a prod uct. In some cases there is distortion in the market price and in such cases the actual price is not available since the market is not an equilibrium one. The distortions, in cases it exists in market price system, does not reflect the act ual value of the market commodities and thus allocation of resources on the basi s of market price does not represent economic efficiency in utilization of resou rces. Different subsidies, discounts, taxes etc are causes of distortions. 4.3 Production function Approach: Production function approach is a measure to find out indirect use value of envi ronment. It is consisted of two steps: i)To establish a relationship between the environmental input and output. ii) To establish the monetary value of environmental functions. As a result of emission of sulphur di oxide from industrial exhaust, acid rain i s created. This causes adverse effect upon crop production, fish existence, anim al lives in oceans, lakes, rivers etc. and also upon pure drinking water taken f rom these resources. The cost of acid rain can be estimated by estimating the lo ss of crop production and loss because of shortages of water born plants and ani mals like fish etc. 4.4 Travel Cost Method: This method assumes that consumer is willing to undertake expenditure in terms o f money or time, to procure or enjoy environmental goods or services. In advance d countries, the efforts have been made to estimate the value recreational facil

ities. The value of environmental service is equal to the opportunity cost of ti me spent and travel cost undertaken by visitors. 4.5 Construct Market Technique: When environmental goods and services do not enter formal market, for the purpos e of valuation of valuation of environmental function a hypothetical market is c onstructed. Followings are methods of valuation under this technique: i)Contingent Valuation Method: A hypothetical market for a particular environmental function is considered and respondents are questioned over their willingness to pay in monetary value for t his environmental function. Respondents are proposed to be compensated in case o f any change in the environmental services. ii)Contingent Ranking Method: This is also an interview based method and in this method respondents, instead o f responding in terms of monetary valuation of an environmental function, are as ked to rank the amenities offered. Of these amenities, one is viewed as benchmar k one and on the basis of this others are compared. 4.6 Related Goods Approach; In this process the price of a non -marketed environmental good or service is es timated. The following processes are used in such price determination: i)Barter Exchange Approach: Some of the forest products are not sold in formal markets. Some of these goods can be exchanged for goods on non-commercial basis which are sold in the market. Hence an exchange relation in terms of money value may be found out between the product not found in the market in the process of exchange of this non-marketab le product with the marketable product. For example, some wild product may be us ed in exchange of potato. The market price of potato in this case can be used to find the value of this wild product. ii)Direct Substitutive Approach: The value of similar goods can be used for valuation of natural resources. Value of fuel wood collected by villagers from nearby forest can be calculated by val ue of fuel wood or charcoal brought from market because these two will be equiva lent to the fuel wood brought from market. The valuation process will be more ac curate, more identical or similar the natural resource and marketed products are . iii) Indirect Substitutive Approach: When direct substitution is found to be difficult, production function approach is combined with direct substitute approach. First, a direct substitute of the e nvironmental function is selected. Then the value of this direct substitute is f ound through the production approach. Accordingly the value of environmental fun ction is found out indirectly through the production approach. 4.7 Cost Based Valuation Approach: There are different types of cost based valuation methods:

I) Indirect Opportunity Cost: Industrial labour is required for collecting natural resources. Though capital r equirement for such job like collecting wild product (vegetable, wood, honey etc .} is much less, the opportunity cost of such time spent can be considered as th e value of environmental resources under consideration. However, in accordance w ith this process, there is no scope for taking into consideration the cost of pr oduction. II) Restoration Cost: In this process the cost of recreating the ecosystem is taken into consideration . In case of deforestation, in accordance with restoration cost method, the valu e of a forestation function is its restoration or recreation cost. III) Replacement Cost: This method takes the value of ecological functions as the recreation cost of th ese ecological functions through man-made production process. It assumes that th e benefits provided by an ecosystem can be measured and there are alternatives a vailable to provide such benefits. IV) Relocation Cost: This method is applicable in situations where natural environment in a particula r area is put to some alternative use. In case of the cost of establishing a new protected forest area, the flow of ecological functions is maintained as in res toration cost and replacement cost techniques. V) Preventive Expenditure: In this method environment cost is calculated by calculating the cost to recover the benefits to overcome the adverse effects of environmental damage. Because o f deforestation i) rainfall is reducing and ii) there is rise of environmental t emperature and these are overcome respectively by i) utilizing water available from irrigation in case of agriculture etc. and by ii) using artificial cooling systems like refrigerating, air cooling etc. The cost involved in this process m ay be considered as the value of environmental degradation. 5. EXTERNALITY AND PIGOUVIAN TAX: Environmental policies are taken observing the adverse role of externalities. Pr oblem of externality are actually unintended and uncompensated side effect of a persons or firms activity upon others. Environment externalities occur when consum ption and production choices of one person or firm puts effect upon utility or p roduction function of another without necessary consent or compensation. Problem of externality develops over many government policies having spill over effects . For generation of hydel power, water is stored in rivers by making dams etc. I n case of lean monsoon because of this storing, scarcity is developed in lean se ason causing navigability and irrigation for agriculture etc. difficult. For nav igation other costlier means are used and for irrigation under-ground water is p umped to agricultural fields. Both these are having problems of externalities- u sing alternative means of transportation is at the cost of scarce fuel or elect ricity and using underground water is also at the cost reduced availability of u nderground water and depletion of water level. This can be explained with the help of cost curves as shown in figure -1 below. Figure-1: Problems of Marginal Cost-Demand Externalities Curve.

As shown here Mcs is social marginal cost and Mcs is private marginal cost of pr oduction of good. With increase in output, Mcs increase with level of production . Demand for goods creating pollution in its is shown by curve DD. As per market mechanism, equilibrium output is q and price is p where Mcp =MR. Socially optimum level of output is q* and price is p*, where Mcs =MR. If the producer were made to pay for social cost also, equilibrium output would have been at the level q*. It is observed from Figure-1, that the difference Mcs and Mcp at socially optim um level output is ac.

6. CONCLUSION: Greening the national accounts are useful both economic and environmental policy , especially for developing countries. Developing countries are generally natura l resource based economics and are characterized by high population growth and d epend much on natural resources. Neoclassical economics mainly deals with efficient allocation of resources throu gh market mechanism. In the production process, in addition to the private (or p ublic) good, public bad also emerges in the form of solid, liquid, gas or noise po llution. Neoclassical theory with its emphasis on market mechanism takes care of the production of the product taken for producing but ignores the management (p roduction, pricing, control) of products produced in this process having adverse effect over environment chimney exhaust as in the case of thermal power generat ion, dust and harmful chemicals in case of production in a cement plant or oil r efinery respectively. The management of public bad is beyond the scope of the neoclassical analysis an d therefore is usually ignored. Failure to evaluate environmental problem arise mainly due to lack of proper valuation of public bad. In this work, efforts has be en made to concentrate on the issue of the divergence between social and private costs and to develop mechanisms through which social cost of pollution will be borne by polluters.

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