I’m getting ready for my first class of Introduction to Economics, and coming up with creative ways to teach the fundamental concept of ‘opportunity cost’. For those of you needing an Econ101 refresher, opportunity cost is defined as 'the cost of an alternative that must be forgone in order to pursue a certain action'. For example, right now I’m spending an hour writing this blog. If I wasn’t writing this blog, I’d be building a financial plan or doing some research for a client. Since my fee amounts to $150 per hour, the opportunity cost for me to write this blog is $150.
Economists use opportunity cost to properly weigh decisions, in order to make smart decisions and get the biggest bang for our buck. It helps us prioritize actions and our use of scarce resources (like money and time). So how come economists are so blind to the opportunity cost of destroying an ecosystem?
When a natural resource becomes ready for development, maybe exploration turns up a new mineral deposit or the logging rights for a forest become available for the first time, accountants use a process called ‘price discovery’. Basically, they assign a financial value to the resource based on market price and risk. It goes from being worth $0 to being worth something. A tree isn’t worth anything until it gets cut down and becomes lumber. A fish is worthless in the ocean, but becomes valuable once it is dead and is sold in the market. Strangely, economists don’t seem to account for the opportunity costs of letting that ecosystem thrive. In the case of renewable resources (fish, forests, etc) the opportunity cost is the value in letting the resource grow and reproduce. In the case of non-renewable resources (oil, metals, etc) the opportunity cost is the value of the ecosystems that will be harmed throughout the lifecycle of the raw material (extraction, processing, use, disposal).
Groups like The Economics of Ecosystems and Biodiversity (TEEB) are doing a great job at putting a dollar figure on ecosystem services. They recognize that living ecosystems provide human benefits, and that exploiting these ecosystems comes with a price. The next step is for decision-makers (read: companies and governments) to start weighing these opportunity costs next to the economic benefits of resource developments. Economists need to weigh the financial opportunity alongside the ecosystem cost. Only then will we be making optimal decisions and finding the right balance between the competing priorities of economic growth and environmental protection.
