Will environmental values change David Ricardo's comparative advantage?

by Eugene Pek, 15 October 2008, UTAR Sg Long

Back to where ‘you’ belong

The idea of planting crops only in their country of origin may be worth pondering. Famous street trees in Pretoria and Johannesburg named the ‘jacarandas’ are under threat as they are either to be felled or prevented from regenerating. Why bother about street trees? It has been claimed by some ecologists that jacarandas are invasive and would harm the biodiversity of the surroundings they inhibit. These trees are not domestically-originated, akin ‘white-immigrant’ from tropical and subtropical regions of South and Central America, Mexico, and the Caribbean, and hence they will draw more ecological resources to grow than the other native tree species. The continuation of planting jacarandas will lead to environmental resource inefficiency which is deteriorating to other local tree genus.

Extended comparative advantage

The ecological inefficiency caused by the jacarandas may shed some lights in broadening our thought in reassessing the concept of comparative advantage by David Ricardo. The principle of comparative advantage rests on the opportunity cost of production rather than the absolute cost. The opportunity cost of production of a good can be measured in terms of the production unit of another good need to be reduced to increase production by one more unit.

The principle of comparative advantage shows that even if a country has no absolute advantage in any product (i.e. cost of productions are higher in all goods as compared to the other country), the country can still specialized and export the product for which she has the lower opportunity cost of production. However, in comparative advantage, only financial costs are considered. The non-financial costs, more known as non-market values, are left out.

With the call for sustainable development and advancement of non-market valuation methodologies, it is timely that the environmental impacts of specializing and producing a good or service be reflected in the total cost of production. The valuation of these non-financial values of ecosystems can be estimated using valuation techniques like the contingent valuation and choice model. The incorporation of these environmental values change the total cost of production and possibly alters the specialization of goods that a country should produce.