Valuation of Biodiversity Benefits (OECD)

Developing ecosystem value indicesThe Basis of an Indicator SystemThe conceptual basis of the proposed indicator system is a widely used analytical tool calleda production function. 36This is a relationship that shows how the quantity and composition of theoutputs of a productive process are related to the quantity and composition of inputs that are used inthe process. Production functions are at the core of most economic studies related to industrial,agricultural, and manufacturing operations. They are also the source of many indicator systems thatare used to determine the risks and potential payoffs from corporate investment portfolios. Theavailability of inputs and the likely effects of controllable and uncontrollable risks on the availabilityof inputs are critical determinants of how reliable and how valuable a productive process is. Rules of“comparative advantage”, “marginal value product”, and “derived asset value” are all based on theconcept of the production function. 37Mathematical production functions are usually based on underlying engineeringrelationships, but many times they include uncontrollable relationships related to natural systems. Infisheries and agriculture, for example, many of the input categories that are used in productionfunctions are natural and uncontrollable and are frequently represented by indicators (e.g., soilproductivity, fish abundance, weather). 38Production functions that treat ecosystem services as anoutput and on-site and off-site indicators of resource conditions as inputs are not much different fromother forms of production functions. In the indicator system that is introduced here, on-site inputs areassumed to affect the capacity of the site to provide functions and certain offsite or landscape inputsdetermine the “rate of capacity utilization.” Other landscape indicators reflect the likelihood that thefunctions provided at the site will generate services, that the services will have value, and that the flowof services is sustainable.Types of IndicatorsAccepting the premise that the economic value of an ecosystem is derived from theeconomic value of the services it is expected to provide over time has some clear implications forvalue-based indicator development. It means that the effort should focus on forecasting, not on363738The concept of the production function as a general relationship between inputs and outputs isdescribed in all standard microeconomics texts (e.g., Samuelson and Nordhaus1995, elementary;Mankiw 1997, elementary; and Varian 1992, intermediate). Clark (1976) describes the use ofmathematical production functions in natural resource industries where the results of natural processesprovide a basis for developing indices of critical inputs.One production process is said to have a “comparative advantage” over another if it can provide thenecessary conditions for production at a lower cost. The “marginal value product” of an input (MVP)is the incremental increase in the output that results from an incremental increase in the use of theinput multiplied by the price of the output; inputs are usually purchased until the MVP declines to theinput price level. “Derived asset value” refers to the fact that the economic value of an asset can beestimated as the sum of the net economic value of the stream of services it is expected to provide overtime discounted to their present value.The production function used in fisheries, for example, is referred to as the classic catch equation(C=qEP) and includes three indices representing; fish abundance (P), the catchability of fish and thepower of fishing gear (q), and fishing effort (E). A description of bioeconomic production functionsand the characteristics of capital and resource indicators in them is provided in Clark (1976).132