Question

Use economic analysis to explain why some species of animals have been endangered as a result of hunting and fishing. What type of market failure is involved in this situation?

Answer 1

J

The protection of rare species is of paramount public interest because they are integral to ecological systems. Those systems, in turn, are invaluable both intrinsically and to human life, with intricate webs of linkages to food, health, recreation, and physical and spiritual welfare. Despite these values, species around the globe are threatened as the size and integrity of their habitats decline. According to a recent United Nations assessment, extinction threatens more than one fifth of plant species. Populations of wild vertebrates have declined, on average, by nearly one third since 1970, with amphibians suffering the greatest threat of extinction.

If we humans value species, why are so many threatened? Economists note that few of these values are priced in markets. Private actors control much of the habitats required to support biodiversity. Yet, because they cannot capture the value of endangered species to society, private actors lack incentives to maintain these habitats. Landowners may preserve or convert natural environments to economic uses, make investments that enhance or degrade habitat values, or provide or withhold information about species on their property that can be invaluable in determining its best use. In poor countries, the motivation of rural people to convert wildlife habitat involves the necessities of life. There is thus a public interest in molding private incentives to account for social benefits of species protection.

Incentives in the United States

Roughly 90 percent of U.S. plant and animal species listed as endangered or threatened are on private property, and more than half of these listed species have 80 percent or more of their habitat on private land. The Endangered Species Act mandates conservation but does not require that landowners be compensated. Theory suggests such a policy might backfire, creating incentives for early land development that destroys habitat, and regulatory preemption has indeed been observed. In 1999, Tucson-area landowners preemptively developed property that they anticipated would be designated as critical habitat for a rare owl. And the prospects for habitation by the endangered red-cockaded woodpecker accelerated timber harvesting in the Southeast in the mid-1990s.

The risk of losing the right to develop property also deters landowners from collecting and reporting valuable information about the status of species and their habitat conditions, and it can even prompt a “shoot, shovel, and shut up” response. That is, a landowner who discovers an endangered species on her land might kill individuals of that population to prevent the government from declaring the property critical habitat and constraining use of it.

Better government strategies would give landowners positive conservation incentives— compensation for regulatory “takings” of their property to protect species, voluntary conservation agreements with no-surprise clauses (which require the government to compensate the owner for any departures from the contractual conservation target), and rewards for self-reporting of species on private lands—backed by the threat of sanctions for bad behavior. In short, endangered species protection could be more effective if programs employed more carrots, than simply relying on the economic sticks that characterize present U.S. endangered species laws.

Incentives in Developing Countries

Population growth, poverty, and property rights are at the heart of incentives for environmental exploitation by rural residents of poor countries. Although forestland may provide watershed benefits, ecotourism revenues, or other national public goods, local residents do not capture these benefits. Rather, local people face a marginal opportunity cost of not converting the land to pasture or crop production.

Deforestation tends to increase with population growth and poverty. Yet some studies find that the rapacious rich are at least equally to blame for the overexploitation of natural resources. Overall, the literature indicates the importance of health and education policies that improve health outcomes and educational achievement, thereby alleviating poverty and reducing incentives for population growth, both of which can reduce incentives for forest exploitation on the frontier.

Insecure property rights appear to reduce incentives for soil conservation and intensive cultivation in tropical areas, encouraging land clearing instead. Likewise, tenurial insecurity reduces expected returns from sustainable use of forest resources. In some countries, settlers can most readily gain legal title to frontier land by clearing it, and thus their attempt to secure property rights accelerates habitat conversion. Just strengthening property rights will not necessarily protect habitat, however. Rather, protecting biologically valuable land by denying property rights to those who clear it and penalizing those who clear or poach on it can promote protection.

In terms of establishing biological reserves, conservation incentives may be particularly important. Often, local inhabitants have not been compensated when their customary land is placed in a preserve and they are excluded from using its products; this “fences and fines” approach raises equity concerns and entails significant enforcement costs. Seeking to maximize the number and diversity of species protected, conservation biologists and nongovernmental organizations often propose establishing biological reserves in biodiversity hot spots without consideration of the opportunity cost to local residents. Accounting for the differences in opportunity costs when considering different sites for preservation could greatly increase the biodiversity preserved per dollar spent and thus the cost-effectiveness of a biological reserve program.

To protect forestland while vesting the rural poor with an economic stake in its preservation, aid agencies have turned to integrated conservation and development programs (ICDPs), which give local people the right to use some nontimber forest products and profit from ecotourism. The idea is to combine conservation with rural development. Job opportunities near a protected area, however, can draw migrants and increase the population pressure on the reserve. Moreover, poor households may not necessarily cease land clearing once they reach some income target; in fact, they may invest the additional income into expanding their agricultural activities. Similarly, ecotourism can create more demand for food and thus give people incentive to convert the forest to agriculture.

Such problems suggest the importance of designing ICDPs carefully. Some studies even indicate that paying for habitat preservation directly may be significantly more cost-effective than indirect approaches like ICDPs and ecotourism.

A Role for Economics

Economics can help inform policymakers about the benefits and costs of species protection. Using nonmarket valuation techniques, economists have found that per household, annual willingness-to-pay to protect individual species ranges from $5 to $100 per species. Even for the most expensive species protection efforts, willingness-to-pay far exceeds protection costs. Even if benefits exceed costs, costs still matter. Private landholders often incur the bulk of protection costs, while others capture much of the benefits. Economics can help highlight this critical equity issue, which complicates species protection, and can also illustrate trade-offs between costs and benefits. For example, some have estimated the cost to improve the odds of Northern Spotted Owl survival from 91 percent to 92 percent to be $3.8 billion.

Additionally, economists have been instrumental in highlighting how species protection policies can have unintended negative consequences. Private landholders may engage in preemptive development or withhold valuable biological information. Economics can provide important insights about better design of conservation incentives. By targeting areas based on opportunity costs of land as well as species benefits, it is possible to protect more species per dollar spent. Some 170 countries have adopted plans to develop and expand protected areas. Greater cost-effective design of such areas can be important in developing countries with severe budget constraints.

The current path of biodiversity loss remains worrisome. Extinction rates are much higher than historical rates and populations of many threatened species continue to decline. Yet conservation policies have had some success. By some estimates, more than 30 species of birds would have become extinct in the past century, absent conservation efforts. Populations of vertebrate species in temperate zones have grown since the 1970s and North American bird populations appear on the rise. A key to successful biodiversity conservation will be accounting for private conservation incentives along with social conservation benefits.