The loss of biological diversity worldwide has attracted considerable attention in recent years. One of the concerns cited is that the genetic resources threatened by the extinction of species are potential sources of innovations that could directly benefit humanity when exploited for pharmaceutical, agricultural, or industrial innovations. By one estimate, one-quarter of all medical drugs used in the developed world were initially developed from plants (Pearce and Moran, 1994). The potential value of future discoveries has therefore been suggested as a source of funds for habitat conservation.

Accordingly, economists have turned some attention to the question of what companies may be willing to pay to preserve threatened genetic resources. A recent paper by Simpson, Sedjo and Reid (1996) argues that the commercial value of the "marginal species" is likely to be extremely small, thus leaving little incentive for companies to invest in habitat conservation. Their result is based on a static model that assumes the probability that any given species contains commercially valuable information is independent and identical across species. Rausser and Small (2000) challenge these findings by noting that firms focus their research efforts on the most promising species, and that auspicious leads command an information rent because of their role in lowering search costs. For the most promising ecosystems, they find that the value of preservation may be much more promising than suggested in the previous study.

In this paper, I develop a dynamic model of the commercial value of habitat conservation that accounts for two import factors missing from these previous studies. One is that the presence of commercially useful characteristics is not independently and identically distributed geographically, but rather exhibits positive spatial correlation. The correlation between the incidence of two species proving to both be beneficial can be expressed as a function of the geographic distance between them (this is a modification of Polasky and Solow, 1995). The expected marginal value of a unit of land in species-rich areas is shown to depend on this correlation. Second, this model incorporates the fact that any interest in preserving lands for bioprospecting is driven by ongoing habitat loss and species extinction. If the genetic resources of a region are secure, the value of conservation for bioprospecting is zero. Similarly, the value of preserving a unit of land in an area where habitat loss is progressing quickly is higher than in regions where losses are slower.

This model is then applied to eighteen biodiversity "hotspots," as identified by Myers (1988, 1990, and 2000). Using a series of numerical simulations, a range of estimates is calculated for different distribution and habitat loss scenarios in these areas. The inclusion of spatial correlation and habitat loss dynamics results in land conservation values that differ markedly from previous results, and are significantly higher than the findings suggested by Simpson et al.

References

Myers, Norman. "Threatened Biotas: 'Hot Spots' in Tropical Forests," Environmentalist 8 (1988): 187-208.

Myers, Norman. "The Biodiversity Challenge: Expanded Hot-Spots Analysis," Environmentalist 10 (1990): 243-256.

Myers, Norman, Russell A. Mittermeier, Cristina G. Mittermeier, Gustavo A.B. da Fonseca and Jennifer Kent. "Biodiversity Hotspots for Conservation Priorities," Nature 403 (February 2000): 853-858.

Pearce, David and Dominic Moran. The Economic Value of Biodiversity. London: IUCN - The World Conservation Union (1994).

Polasky, Stephen and Andrew R. Solow. "On the Value of a Collection of Species," Journal of Environmental Economics and Management 29 (1995): 298-303.

Rausser, Gordon C. and Arthur A. Small. "Valuing Research Leads: Bioprospecting and the Conservation of Genetic Resources," Journal of Political Economy 108 (2000): 173-206.

Simpson, R. David, Roger A. Sedjo and John W. Reid. "Valuing Biodiversity for Use in Pharmaceutical Research," Journal of Political Economy 104 (1996): 163-185.