Lecture 9 Valuing Environmental and Natural Resources

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Lecture 9Valuing Environmental and Natural
Resources

• AEDE/NR 531
• Spring Quarter, 2006

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Market and Non-market

• In a private market, marginal WTP for the last
  unit is the equilibrium price.
• Total surplus determines the value of the good.
• All benefits and costs are incorporated into the
  demand and supply equations.
• For non-market goods, a venue for exchange
  between producers and consumers does not exist.
• So, WTP is not captured.

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Measuring values for environmental goods

• Markets typically do not exist for many
  environmental goods.
• No price for environmental goods doesnt mean
  people dont value environmental goods.
• Which is worse, to put a dollar value on
  environmental goods or to not put a dollar value
  on environmental goods?
• Environmental Economists have developed methods
  for determining the value people have for
  environmental goods in the absence of markets.

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Types of Benefits

• Use Values (active values)
• People come into direct contact with the
  resource.
• Consumptive values
• Extractive resources values do have existing
  markets due to sale of resources in markets.
• Nonconsumptive values
• Resources are utilized but are not removed or
  diminished in quality.
• Bird watching, boating, hiking, etc.

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Types of Benefits

• Non-use values (passive values)
• People value a resource whether or not they will
  use it.
• Sources of non-use values
• Option value people want to preserve a resource
  because they want the option to use it in the
  future.
• Existence value willingness to pay to preserve
  the existence of a resource without any plans for
  using it in the future.
• Bequest value willingness to pay to preserve
  resource for use by future generations.

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Value Measuring Techniques

• Direct Market Methods
• Use changes in an existing market to measure
  changes in environmental quality.
• Examples
• Travel Cost Models
• Random Utility Models
• Hedonic Techniques

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Value Measuring Techniques

• Indirect Market Methods
• Hypothetical Market Ask people what the
  environment is worth to them.
• Contingent Valuation
• Exxon Valdez damage assessment.
• Ask How much would you be willing to pay for
  cleaner air.

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Travel Cost Method

• Use time spent traveling for recreational trips
  as an opportunity cost to derive a measure of
  value.
• Travel Cost actual expenditures for trip
  opportunity cost of time
• Going on a trip presents a labor-leisure
  tradeoff, so the wage rate can be used as a
  dollar measure of value.
• Using total cost, derive a demand curve for trips.

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Travel Cost Method

• TC 60 Trips
• Avg trip costs 30
• CS 450

TC
60
30
Trips
30
60
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Travel Cost Method
TC

• There is an improvement in environmental quality
  so
• TC 70 Trips
• CS 800

70
60
30
Trips
60
30
70
40
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Travel Cost Method

• Increase in consumer surplus from 450 to 800
  shows people are willing to pay 350 more per
  person.
• Interpretation as a result of improved
  environmental quality, travelers are willing to
  pay 350 more on average.

• Advantages to Travel cost
• Market situation
• Backdoor calculation
• Based on actual behavior

• Disadvantages to Travel cost
• Behavior has to observed
• Cant account for non-use values
• Statistics get complicated

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Travel Cost Data Needs

• Number of trips before and after change in
  environmental quality.
• Individual characteristics so results can be
  extrapolated to larger population.
• Travel Costs (typically involves generalizations).

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Hedonic Methods

• Measure changes in prices of market goods as a
  result of changes in environmental quality.
• Changes in housing prices due to proximity to
  superfund sites.
• Differences in wages according to injury risk of
  a job.
• Advantages
• Based on observed behavior
• Difficult to measure small changes in prices.
• Must control for all other factors that will
  impact prices.

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Contingent Valuation

• Ask people what they are willing to pay for
  improved environmental quality.
• Can be an open ended question
• How much would you be willing to pay to preserve
  the spotted owl?
• Problem too much strategic behavior
• Can be a dichotomous choice question
• Would you be willing to pay X to preserve the
  spotted owl?
• Problem less information since you only know
  more or less than X.

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Contingent Valuation

• Advantages
• Easy to get data
• Simple
• Measures use and non-use values
• Reliable when surveys are designed carefully
• Recently accepted by the courts

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Contingent Valuation

• Problems with CV
• Hypothetical Bias
• Answers are only hypothetical.
• Strategic Bias
• Respondent attempts to influence results instead
  of reveal their true WTP.
• Dichotomous choice better at controlling for
  this.

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Contingent Valuation

• Problems, contd
• Protest Responses
• Opposed to the method of payment rather than the
  good itself.
• I dont like taxes of any kind.
• Free-riding
• CV values public goods
• It would be great if I could get everyone else
  to pay and I can still use the good.