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Publication Date

Spring 2-24-2024

Abstract

This paper links three threads in the environmental economics, management and regulatory literatures: (1) environmental externalities and their impact on the demand and supply for environmental amenities; (2) ecosystem services and methods used to quantify their values; and (3) the impact of payments for ecosystem services on corporate balance sheets.

A foundational concept of environmental economics is that when firms decide how much to produce, or consumers how much to consume, they respond to “prices.” Externalities – e.g., pollution – are negative byproducts of production or consumption that are not reflected in the market price. When goods such as clean air and clean water are underpriced, they tend to be overused. The competition among generations for non-renewable resources establishes a peculiar externality since the current generation is the only one present when the relevant decisions are taken.

We argue that the preservation of environmental functions, services and infrastructure is the solution to intergenerational environmental externality. The valuation of environmental externalities is constrained by the temporal and spatial range within which individuals act. Corporations, however, are legal fictions whose scope of action can be global, and not bounded by the temporal constraints of individuals. When corporations determine how ecosystem services can be accurately accounted for on their balance sheets, the temporal and spatial range of their activities must be taken into account.

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