Can payments solve the problem of undersupply of ecosystem services?

Abstract

Profits from forest management generally originate from harvested wood products or hunting leases. Other joint services such as biodiversity protection or landscape beauty are rarely paid for and are insufficiently provided. Payment schemes are designed to reduce this undersupply. In this paper, we analyze how paying for the additional provision of some services might affect the production of joint services. Payments should at least compensate for the loss of revenue resulting from providing more services. These opportunity costs can be estimated using a production possibility frontier in which the maximum profit from currently marketed outputs is a function of the externalities. We show that payment for a single service can threaten other services if there are diseconomies of scope. If at least two services are considered, then payments can either be made independently for each of them (stacking) or simultaneously in a bundle. In the case of bundling, the minimum payment amount corresponds the total opportunity cost whatever the interactions between services. In the case of stacking, if there are diseconomies of scope and if the amount paid for increasing each service equals the individual opportunity cost, then the total payment would not compensate for the total cost. Some services might remain undersupplied. On the contrary, if there are economies of scope then the total stacked amount will be greater than the total opportunity cost. Hence, it is critical to analyze interactions between ecosystem services because they are likely to change the profitability or the opportunity costs related to increasing the production of the ecosystem services and so the schemes of payments.