Physical accounting, Microeconomics

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Physical Accounting

This approach is to improve the conventional economic accounts is to supplement the conventional accounts with physical information about the natural environment and its status. We provide information on physical indicators for forests like the area under dense forests, open forests, volume of stock of timber, area disturbed by fire etc. Also we can account for the quality of air in terms of CO2, emissions, suspended particulate matter, nitrogen oxide emissions, etc. Similarly, the quality of water using physical indicators like dissolved oxygen. BOD, COD and pH factor call be indicated. These types of information can also be arranged in conventional input-output type of matrices. For example, Netherlands has used such a complete input-output matrix system in their National Accounting Matrix including Environmental Accounts (NAMEA). The system fully integrates economic and physical environmental information. Development of such physical accounts is important as it can provide inputs for the construction of various environmental indicators and can thus be used for score keeping purposes'.

However, it is very difficult to use these physical accounts for policy purposes for various reasons such as:

(a) The choice of appropriate physical units of measure is not obvious;

(b) There is incomparability of units;

(c) Difficulty in getting condensed description as the units is not similar;

(d) Involves development of huge data sets due to different quality indicators for forests, air, land and water without reaching general conclusions on their (economic and non-economic) significance; and

(e) The potential severity of the environmental problem is not reflected and hence the decision-makers will not be able to set relative environmental priorities while taking various investment decisions.

The difficulties in using the physical accounts can be illustrated by an example, say forests. As you know, forests can be measured in terms of its area, volume of timber, number of species of flora and fauna, etc. Even the units of measuring forests are different. For instance, area is measured in hectares, volume in cubic meters and the species in number. Thus there is no common unit, which can be used to indicate all the three. Another choice that has to be made is which physical measure to choose. This once again depends on the policy objective in mind, i.e., should the forests be used for timber management or provision of firewood or preserving biodiversity. This results in developing huge data sets without reaching any conclusion for the policy. For instance, if a policy maker is faced with the dilemma of preserving hundred hectares of forest, which is a rich source of biodiversity, versus developing multipurpose project, which provides numerous quantifiable benefits, the latter is favoured against the former as they cannot get the value of the benefits of preserving the forests.


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