Joe Katzman has a long, thoughtful post on the economics of common resources, notably water.
Perhaps it's also time to factor these eco-services into a variant of GNP, so their depletion and restoration would both show on a national balance sheet. This move would highlight the depletion of economically valuable natural capital, and also reward efforts like South Korea's tree planting and U.S. subsidies that encourage sequestration of marginal farmland by showing them as the investments that they are.
...As a conservative, I believe in economics and free markets. Hayek's point about a distributed market's superior intelligence and ability to respond to signals remains as true today as it was when he wrote The Road to Serfdom.
In order to work properly, however, our market signals have to tell us more of the truth.
The idea of a natural environment that provides us with potential products that can be sold, and existing services that should be accounted for, strikes me as a better and more honest way of managing our resources.
The points Katzman makes are logically valid. However, as Alex Tabarrok implies, governments have fewer incentives to conserve natural resources than do private owners. Some of the worst environmental abuses have come from Communist countries and projects funded by the World Bank.
If property rights are well defined, the Coase theorem says that the right economic signals will be sent. For example, if deforestation causes flooding, then the owner of a property that is going to be flooded would pay the owner of the forest to refrain from cutting the trees. (Alternatively, the forest-owner would pay the flood-plain property owner not to sue for damages from floods.) This assumes that coalitions of property owners can be formed, if necessary.
For Discussion. Katzman argues that scarcity of fresh water is likely to be a major issue going forward. Bjorn Lomborg, author of The Skeptical Environmentalist, believes that it is a distribution issue, not a scarcity issue. What are the policies that could ward off a water shortage, and will such policies be followed?