Environmental Economics and Management, lecture 3

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Environmental Economics and Management, lecture 3

• Meaning and use of value
• Willingness to pay and willingness of accept
  compensation
• Total economic value, actual use value, option
  value, existence value
• Empirical measures
• Next week Valuation methods

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• Economists have the reputation of being
  unimaginative bean-counters, doggedly claiming to
  quantify the unquantifiable ... and
  personifying Oscar Wildes definition of a cynic
  as someone who knows the price of everything and
  the value of nothing. ... It is true that they
  would give a lot for a rough quantitative answer
  but that only reflects the fact that any policy
  can be pushed harder or less hard, further or
  less far, and that a useful evaluation has to
  suggest how hard and how far. The beans have to
  be counted, if only approximately those gentle
  souls who merely ooh and ah over them are
  arguably part of the problem, not part of the
  solution.
• Robert M. Solow

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Meaning of Valuation

• Regulation can either seek optimum or not
• If an optimum is sought, the marginal external
  cost function must be estimated, and expressed in
  money
• Money is not the objective
• Money is the measure of
• Preferences
• Trade-offs

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Uses of Economic Valuation

• Find optimum Marginal benefit equals marginal
  cost
• Ex ante, e.g., Pigou tax
• Ex post, e.g., evaluation of policy
• Demonstrate value of environment
• Extend national accounts

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Pollution Damage(billions of US)
Damage avoided
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Value

• Neo-classical revolution Value is relative,
  value measures demand versus supply, value is
  based on consumption and production
• Basis of valuation Peoples preferences, what
  people want
• Present people with a choice, see how much they
  are willing to pay for a good or service
• Consider demand curve, price P
• Gross WTP Market price consumer surplus

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WTP, WTAC

• Consider price fall P ? P
• Willingness to pay (WTP) to secure price fall is
  known as compensation variation
• Willingness to accept compensation (WTAC) to
  forego price fall is known as equivalent
  variation
• CV lt ?CS lt EV, because of income effect
• CV WTP, EV WTAC

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WTP v WTAC

• There are gains and loss, so four measures
• WTP to secure a gain
• WTAC to forego a gain
• WTP to prevent a loss
• WTAC to tolerate a loss
• People view gains and losses differently
• Confirmed by empirical studies, but not
  uncontested
• Implies that surveys, policies need to be
  carefully designed

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Total economic value

• Total user value Actual use value Option
  value
• Option value Value in potential use by self
  Value in potential use by others Value in
  potential use by future individuals
• Intrinsic value Existence value
• Total economic value Actual use value Option
  value Intrinsic value
• This partioning is not unique, uncontested

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Economic Value

• Values depend on context
• Supply, demand
• Irreversibility Something that cannot be
  resurrected is worth more
• Uncertainty Something that is uncertain is worth
  less, an uncertain loss is worth more
• Uniqueness Something that is unique is worth more

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Option Value

• Option price Expected consumer surplus Option
  value Quasi-option value
• OP E(CS) OV QOV
• E(CS) Expected current and future consumer
  surplus
• However, people are risk averse, prefer to err on
  the cautious side ? OP
• Future knowledge, technological progress will
  bring new uses ? QOP
• Altruism
• Bequest Caring for posterity
• Gift Caring for friends and relatives

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Existence Value

• Existence value is unrelated to any actual or
  potential use
• Existence value may be related to sympathy, or
  stewardship
• Existence value is not right-based, as rights are
  absolute, and values relatives

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Grizzlies and Bighorns