Thursday 2 June 2011

The value of nature and the cost of smoking

For some reason, the BBC has given a reworded press release from the Royal Society for the Protection of Birds (RSPB) a prominent position on its website today. The headline is a monument to meaningless:

Nature 'is worth billions' to UK

I can't argue with that, but I do have a problem when campaigners try to put a price on assets that defy monetary classification, which is what the RSPB is doing here.

Some figures emerge with precision, such as the £430m that pollinating insects are calculated to be worth, or the £1.5bn pricetag on inland wetlands, valued so high because they help to produce clean water.

I like the idea that we can calculate the value of pollination with such "precision" that we don't even have to round it up to the nearest hundred billion. I think there might be a bit more to it than that. Without pollinating insects the entire eco-system would collapse so the price is incalculable and any effort to put a dollar sign on it is fatuous.

It gets worse...

The health benefits of merely living close to a green space are worth up to £300 per person per year, it concludes.

This figure combines two factors which cannot be quantified. It first assumes that we can realistically estimate the health benefits of living near "green space"—which is asking a lot—and then assumes that we can translate health into a cash equivalent—which we really can't.

The only wisdom to come out of the whole exercise comes from the economist involved:

Ian Bateman, an economist from the University of East Anglia who played a principal role in the analysis, said that putting a single price on nature overall was not sensible.

"Without the environment, we're all dead - so the total value is infinite," he said.

Well, quite.

Obviously, the RSPB is trying to preserve forests and hedgerows and woodlands and so forth, and that's fine. But the whole exercise is curiously uninformative because there's no indication of how we can optimise our natural resources. Would it be better put take land that is currently being used to produce crops and turn them into inland wetlands? Would this somehow make us wealthier?

Would it be more financially beneficial to maintain a field or build an airport? Probably the latter, but the RSPB would want to maintain the field because that's what they're interested in. Again, fine. We understand that. But that being the case, just come out and say it and stop pretending that this is an issue of economics.

It is invariably the case that whenever a figure of x billion appears in a newspaper as being the value or cost of anything that is not readily quantifiable, it is (a) a made-up figure, and (b) is policy-driven. When you dig around in the figures, you will usually find that what at first appears to be a monetary cost, is actually just someone's opinion of what it is worth.

A good example of this was brought up in the comments to a recent post regarding this quote from the Australian press:

"About 17 per cent of Australians smoke, and a ban would cost the government about $6 billion a year in lost revenue. This would be offset by health savings, as the annual smoking-related medical burden tops $31 billion."

[nb. The Australian dollar is currently on a par with the US dollar at about £0.60]

Let's first consider that there are believed to be 15,000 smoking related deaths in Australia every year. If the "medical burden" is $31 billion a year, this means that each person receives over $2,000,000 of treatment. This sounds just a little bit implausible and should have seemed so to the journalist as she typed it out.

And of course it turns out that is not the medical burden. The study that came up that figure accepted—totally contrary to what the hapless hack said—that tobacco taxes exceed the cost to the taxpayerof treating smoking-related diseases:

"Tobacco tax revenue in 2004/05 exceeded tobacco-attributable costs borne by the public sector by over $3.5 billion. Of this surplus $2.7 billion accrued to the Commonwealth and around $800 million to state governments." (p. 72)

This same study did indeed come up with a figure of $31 billion, but it did so by including 'costs' that no reasonable person would consider to be costs. Lost productivity both at work and at home gave them an extra $8 billion (p. 64). Aside from the obvious problem of coming up with a suitable cash equivalent for domestic work, all lost productivity figures are questionable because they rely on an assumption that an individual is capable of a set amount of work in a lifetime and that he/she has a duty to fulfill that quota, otherwise they are somehow costing other people money. It's as if someone dies and you have to go round and clean their house for the next ten years. It's a nonsense.

Still more dubious is the remaining $19.5 billion which is made up of 'intangible' costs (p. 65). This relies on the entirely arbitrary valuation of a life at $2 million, or a loss of one year's living of $53,267. This kind of psychological evaluation is practically meaningless and has no place in economics. You might as well say that the value of life is priceless and, therefore, the costs of smoking (or alcohol, or drugs) is infinite.

And in a way it is infinite, just as the value of nature is infinite. So stop trying to put a cash value on things and say what you mean.


westcoast2 said...

When it became obvious that people who smoke were net contributers, the rules had to be changed to show the opposite.

People believe smoking 'costs' and so anti-smoking groups feed into that.

In comments sections you see this fallacy brought up again and again.

It seems the latest is that tobacco taxes do not go directly to the NHS, they are part of the 'pot of money' taken in taxation. Yet Chancelors have said that additional tobacco tax is 'ring fenced' for the NHS.

It is sure to come up again. All to show the 'burden' placed on society by tobacco.

Anonymous said...

So the health benefits of living next to a green space don't exceed £300 a year (That's what they said). That doesn't surprise me, as NHS spending per person per year is £1500 pounds, disproportionately spent on the old. If looking at trees, being woken by cockerels and bitten by midges prevented dementia, I might have to reconsider.

nisakiman said...

Oscar Wilde's quip about someone "knowing the cost of everything, and the value of nothing" springs to mind.

Really, who in their right mind would pay someone to come up with such utter tosh?

Anonymous said...

"This sounds just a little bit implausible and should have seemed so to the journalist as she typed it out."

Too kind. "Journalists" these days don't type things out - they simply copy and paste, copy and paste, copy and paste - whatever the hell is handed to them and especially anything anti-smoking - no questions asked.

They know better. They want to keep their jobs.

Carl V Phillips said...

The dollars per statistical life number is actually quite meaningful and critically useful for policy making, though, as you note, it is being completely misused in this particular context. The use of a numeraire (i.e., "putting a price on it") to measure the value of natural goods is rather more difficult and less robust, particularly for sweeping totals. But it too has a point.

I would be happy to explain if you ask (I have worked in both of those areas), but will refrain if not. Refrain, that is, except for pointing out the key motivating point: If a life or environmental amenity has infinite value, then we should give up an entire airport (or whatever) to save it, and indeed, to increase the chance of saving it by 1% or .001%. That obviously does not work. But if we use zero, we have an equally absurd problem in the other direction. So we implicitly use some finite value, and thus the only question is will we be explicit about that value and thus make rational policy, or will it be pure politics and ad hoc in every case.

After all that, I will get to what I was really motivated to comment about: "It's as if someone dies and you have to go round and clean their house for the next ten years." Hilarious! LOL. And a very good analytic point too.

Mark Wadsworth said...

Agreed on the smoking figures, but the 'value of nature' figures are very relevant, as quite clearly there is a value to us human beings and land use is a very important topic - it's a question of

a) getting the balance right i.e. we'd be better off building more and bigger houses, even if this is at the expense of using up one per cent of our agricultural land, but in urban areas it's important to set aside up to a fifth of the surface area for parks, playgrounds, cenotaphs and the like

b) accepting that the value of any plot is a function of what happens in the surrounding area, and that this value was not particularly created by and hence cannot belong to the owner of any individual plot.

As ever, replacing as many taxes as possible with Land Value Tax would sort all this out.

Dick Puddlecote said...

More to the point, the costs attributed to smoking invariably ignore the financial benefits. If just living by a plot of green space is worth hundreds of pounds of pleasure, then surely the pleasant experiences of smokers should have a monetary value too.

Economics teaches us that individuals make a conscious choice as to how much value they will get for their 'buck' when purchasing any product. If their enjoyment wasn't worth the price, they just wouldn't buy. Therefore a 20 a day smoker's life is enhanced to the tune of £7 per day just by buying a pack. Multiply that by 365 days a year and by 12 million people and you have a shitload of added value.

Around £30bn by my reckoning.

Makes the health costs look a bit prissy by comparison.

Christopher Snowdon said...

Carl, please don't refrain. I am very interested indeed.

Mark, I don't argue for a second think that these things have no value. On the contrary, I think they're very important. What I find regrettable is that the RSPB thinks we can only appreciate the value of nature if it is put into cash terms.

Perhaps this is what happens when the desire for evidence-based policy goes too far. As much as I think that we should trust the evidence when it exists, many of the best things cannot be rated on a spreadsheet and never will be.

Carl V Phillips said...

Ok, Chris, thanks for the invitation.
I will go ahead and respond a bit more, then. It seems easiest for me to do it at EP-ology. I just added a bit (though not quite on the point I wrote the comment about): I will try to talk more about that valuing the priceless point in a few days.

Eric Crampton said...

I'm expecting that your Australian smoking costs number comes from the Collins & Lapsley study, right? That study's pretty bad. My critique of their take on alcohol costs is here.