Ecological interaction as a source of economic irreversibility.

• Author: Kahn, James R.

1. Introduction

   In a series of articles during the 1970s, Arrow, Fisher, and Krutilla (Arrow and Fisher 1974; Krutilla and Fisher 1975) discussed the importance of environmental irreversibility. Some economic actions, such as damming a river, producing nuclear waste, emitting C[O.sub.2] into the atmosphere, or releasing heavy metals, cause damage that simply cannot be repaired by the ecosystem. In addition, ecological interactions may amplify the damage and transform seemingly reversible economic action into irreversible alterations. For example, competitive interactions may prevent a valuable wildlife population from recovering, even after the damaging economic activity ceases.

   These effects are generated because the direct impacts of economic activity can cause indirect nonlinear changes in ecological, social, and physical systems. Nordhaus (1994), for example, suggests that irreversible thresholds will determine the socioeconomic effects of global climate change. In fact, it may be that ". . . low probability catastrophic events . . . should be our main concern" (IPCC 1996, p. 209). Thus, commonplace nonlinear interactions have important implications for economic activity and economic policy. This paper argues that economic irreversibility is much more common than typically discussed in the economics literature. The source of the problem is the inherent complexity of ecological relationships. Uncertainty regarding irreversibility complicates the decision-making process and generates the need for greater prudence in policy (Weisbrod 1964; Arrow and Fisher 1974; Krutilla and Fisher 1975; Dixit and Pindyk 1994).

2. Economic Analysis of Environmental Change

   The economics literature has shown a relatively narrow focus when measuring the changes in social welfare associated with improvements or declines in environmental quality. Most of the literature has focused on either direct-use values or existence values.(1) Other important values associated with environmental change include the value of changes in ecological services. Ecological services include attributes and outputs of ecosystems, including nutrient cycling, hydrological cycling, maintenance of atmospheric chemistry and global climate, biodiversity, soil formation, and primary productivity. Although these ecological services generally do not directly enter utility functions in a fashion that is perceivable by the individual, they do contribute greatly to utility either directly through their life support functions or indirectly through their effect on production and consumption activities.

   The early contingent valuation studies (such as Knetsch and Davis 1966) and the early travel cost studies (such as Clawson 1959) focused on measuring the recreational benefits associated with environmental resources. The focus of the valuation literature expanded to include aesthetic benefits of environmental change, such as visibility benefits or air pollution reductions (Randall, Ives, and Eastman 1974), and the morbidity and mortality benefits of environmental change (see Berger et al. 1987). In fact, both the Clean Air Act and the Clean Water Act specifically discuss human health benefits as the primary benefit of environmental improvement. In addition, valuation studies have tended to focus on existence values, measuring the willingness to pay to protect individual endangered species, environmental quality in natural parks, and unique natural environments such as the Grand Canyon or Chesapeake Bay. It is interesting to note that the studies that come the closest to measuring the value of ecological services have really only focused on existence values or direct-use values. For example, the study by Rubin, Helfand, and Loomis (1991) looks at the willingness to pay to preserve the presence of an indicator species, the spotted owl, rather than the value of the ecological services of the spotted owl's habitat, the ancient growth forests of the Pacific Northwest. In fact, the public debate on the question of harvesting wood in ancient growth forests tends to focus on the prevention of the extinction of the spotted owl, rather than the total value of the ecological services which are provided by these forests. Similarly, studies of the value of biodiversity, such as the study by Simpson, Sedjo, and Reid (1996), focus on the value of potential medicinal uses of the species, rather than the total ecological and social benefit provided by the biodiversity.

   If one has a relatively narrow perspective on what constitutes the benefits associated with environmental quality, then one will have a correspondingly limited perspective on what constitutes the optimal level of pollution, which constitutes the basis for environmental policy goals. The purpose of this paper is to attempt to broaden economists' viewpoints on the benefits of environmental improvement, to focus on the value of ecological services, and to show the potential interruption (and diminution) of these ecological services through irreversible environmental change. This paper also contributes to our understanding of environmental change by extending the concept of irreversibility to examine indirect irreversibilities, which are introduced and defined in the following section.

3. Nonlinearities and Irreversibilities

   Irreversibility can be either physical or economic. For example, the extinction of a species is physically irreversible. On the other hand, contamination of lake-bottom sediments by mercury is not physically irreversible (the mercury and/or sediments can be physically removed), but the cost is so high that it can be said to be economically irreversible.

   Figure 1 presents a schematic of a damage function, which constitutes a functional relationship between the anthropogenic activity that modifies both the ecological and socioeconomic systems and the resulting change in social welfare. Irreversibilities can occur at any stage of the process. For example, slash and burn clearing of tropical forests may result in irreversible (depending on soil type) loss of forests. Emissions of heavy metals into the environment are irreversible because no natural processes exist to decompose the heavy metals. Carbon dioxide, once emitted into the atmosphere has a residence time of approximately 500 years.

   These types of irreversibilities can be characterized as direct irreversibilities because the original environmental modification (the direct result of the anthropogenic activity) cannot be reversed. This is the type of irreversibility that has generally been examined by the environmental economics literature. For example, Krutilla and Fisher (1975) focused on land use decisions and the irreversible decision to allow development in wilderness areas.

   Although direct irreversibility is important, this paper focuses on what can be termed indirect irreversibility. Indirect irreversibility does not occur through a direct effect, but through a behavioral response to a direct effect. In other words, direct irreversibility refers to the irreversibility of the processes modeled in the small boxes of Figure 1. Indirect irreversibilities occur as a result of the effect of these processes on behavioral relationships within the ecologic or economic system. These ecological and social responses are generated and exacerbated by the complexity and nonlinearity of behavioral relationships.

   Our objective in this paper is to demonstrate that this type of indirect irreversibility is pervasive in both ecological and social systems. This implies that irreversibility is inherently more common than implied by the direct irreversibility discussed in Arrow and Fisher (1974), Krutilla and Fisher (1975), and Porter (1982), which would imply that environmental policy should be correspondingly more cautious.

   Ecological systems are fundamentally nonlinear and display complex behaviors in response to disturbance. Ecosystems...