The role of natural capital in supporting national income and social welfare

ABSTRACT

Using life satisfaction as a proxy for social welfare, this study contributes to the extant literature by empirically demonstrating that natural capital contributes to social welfare, functioning in part through increasing national income and in part through its direct effect on life satisfaction; the direct effect is approximately 40% greater than the indirect effect. This suggests that the true welfare benefits of natural capital may not be adequately reflected in conventional economic data and, therefore, studies seeking to evaluate the contribution of natural capital to human well-being should consider employing data sets that capture subjective elements of welfare. The magnitudes of the reported marginal effects of natural capital on social welfare, however, are small. This is perhaps due to the fact that (1) there are shortcomings in the measure of natural capital; (2) life satisfaction effects are unlikely to reflect the poorly understood benefits that natural capital provides; and (3) keystone species (such as mosquitoes) and integral ecosystems (such as wetlands) may be negatively associated with life satisfaction, even though such components of natural capital are vitally important to sustaining ecosystems and human life

KEYWORDS:

• Happiness
• life satisfaction
• natural capital
• social welfare

JEL CLASSIFICATION:

• I31
• Q56
• Q57

Acknowledgements

An earlier draft was presented at the 2015 Western Economic Association International Conference, Honolulu. We thank participants for their instructive and insightful comments. All errors and omission remain our own.