Economic Valuation

1
Economic Valuation

• Dr. Richard S.J. Tol
• Michael Otto Professor of Sustainability and
  Global Change
• Depts. GeoSciences Economics

2
Contact

• Room 008, ground floor, Bundesstrasse 55, 20146
  Hamburg Pavillion behind Geomatikum
• Tel [phone]
• Fax [phone]
• Email tol _at_ dkrz.de
• http// www.uni-hamburg.de / Wiss / FB / 15 /
  Sustainability
• The sheets are there as well

3
Economic Valuation, lecture 1

• Course aims and set-up
• Price and Value
• Total Economic Value
• Property Rights

4
The Course

• The theory and practice of the monetary valuation
  of environmental goods and services not traded on
  markets
• Prior knowledge micro, calculus
• Note This is serious
• Reader

5
The Lectures

• 12.4 Introduction The Nature of Value (Tol)
• 19.4 Demand theory (Tol)
• 26.4 Welfare (Tol)
• 3.5 Contingent valuation I (Rehdanz)
• 10.5 Contingent valuation II (Rehdanz)
• 17.5 Free
• 24.5 Production function methods (Rehdanz)
• 31.5 Hedonic pricing (Tol)
• 7.6 Econometric methods (Rehdanz)
• 14.6 Contingent choice (Tol)
• 21.6 Benefit transfer (Zandersen)
• 28.6 Ecological functions (Tol)
• 5.7 Rucksacks and footprints (Tol)

6
Price Value Greeks

• Xenophon (427-355 BC)
• the greater the number of superfluous dishes
  set before man, the sooner a feeling of repletion
  comes over him
• a flute is wealth to one who is competent to
  play it, but to an incompetent person it is no
  better than useless stones ... unless he sells
  it
• wealth is that from which a man can derive
  profit
• even land is not wealth if is makes us starve
  instead of supporting us

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Price Value Greeks -2

• Do you mean that the same things are both
  beautiful and ugly?
• Of course and both good and bad. For what is
  good for hunger is often bad for fever and what
  is good for fever is bad for hunger what is
  beautiful for running is often ugly for wrestling
  and what is beautiful for wrestling ugly for
  running. For all things are good and beautiful in
  relation to those purposes for which they are
  well adapted ...

8
Price Value Greeks -3

• Protagoras (480-411 BC)
• man is the measure of all things
• Aristotle (384-322 BC)
• Ethics rather than markets
• Incremental analysis
• Value in use versus value in exchange
• Trade only if surpluses exist
• Trade reflects subjective values
• Trade must be mutually beneficial
• what is rare is a greater good than what is
  plentiful

9
Price Value Medieval

• St. Augustine (354-407) confirmed the subjective
  nature of value
• There is ... a different value set upon each
  thing proportionate to its use ... Very
  frequently a horse is held more dear than a
  slave, or a jewel more precious than a maid.
  Since every man has the power of forming his own
  mind as he wishes, there is very little agreement
  between the choice of a man who through necessity
  stands in real need of an object and of one who
  hankers after a thing merely for pleasure

10
Price Value Medieval -2

• Albertus Magnus (1206-1280) introduced (labour)
  costs goods are measured in relation to labour
  value is determined by supply in relation to
  what is needed
• Gerald Odonis (1290-1349) introduced scarce and
  differentiated labour
• Thomas Aquinas (1225-1274) reaffirmed value in
  use versus value in exchange introduced demand
  and needs value is determined by demand in
  relation to what is available

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Price Value Medieval -3

• Henry of Freimar (1245-1340) was the first to
  look at aggregate (average) demands and scarcity,
  again without separating the two
• Jean Buridan (1295-1385) introduced effective
  demand (minus endowments), differentiating
  between consumers wants (luxuries, necessities),
  but recognizing that they operate in the same
  market
• Odonis focussed on scarcity and quality of human
  skills, including relative efficiencies and costs
  of education

12
Price Value Medieval -4

• John Crell (1590-1633) combined the supply theory
  of value (Odonis) with the demand theory of value
  (Buridan), or in Scholastic terms, scarcity in
  the face of need (raritas) with need in the face
  of scarcity (indigentia) but did not realise
  that the two were merely components of a single
  principle the labour theory and the utility
  theory of value continued to exist for a while
  longer

13
Price Value Early

• Sir William Petty (1623-1687) tried to unify land
  and labour in one value system recognised that
  money is the standard of value, medium of
  exchange, and store of value
• Richard Cantillon (1680-1734) distinguished
  between actual and intrinsic (equilibrium) prices
• Physiocrats (18th century) claimed that only
  agriculture can create surplus a supply theory
  of value, with land rather than labour

14
Price Value Classical

• Adam Smith (1723-1790)
• Value in use versus value in exchange
• Actual versus natural price
• Labour theory of value The value of any
  commodity ... not to use ... but to exchange ..
  is equal to the quantity of labour which it
  enables him to purchase or command. Labour is the
  real measure of the exchangeable value of all
  commodities
• For all Smiths genius, this is a reversal.

15
Price Value Classical -2

• David Ricardo (1772-1823) simplified and
  consolidated Smiths labour theory of value
• Thomas Malthus (1766-1834) argued for on
  supply-and-demand value
• Jeremy Bentham (1748-1832) introduced utility as
  a measure of a persons happiness and social
  welfare as the sum of individual utility
• William Nassau Senior (1790-1864) recognised that
  value depends on (1) relative utility, (2)
  relative scarcity, and (3) exchangeability

16
Price Value Neo-Classical

• William Stanley Jevons (1835-1882)
• Distinction between total and marginal utility
• Nature of marginal utility
• Equimarginal utility in decision and exchange
• Alfred Marshall (1842-1924)
• Theory of demand elasticity, substitution,
  input factors
• Consumer surplus

17
Neo-Classical Theory

• Value lost its central place, replaced by welfare
• Price just is it is determined by the equation
  of demand and supply
• Having a bit more brings just the same additional
  welfare as does reducing income by the price
• Selling a bit more brings just the same revenue
  as it costs to produce a bit more
• Price is marginal value, value is the area under
  the demand curve, value equals utility
• Note that utility is relative, changes only

18
Current Thinking

• Price is determined by the equation of demand and
  supply
• Having a bit more brings just the same additional
  well-being as does reducing income by the price
• Selling a bit more brings just the same revenue
  as it costs to produce a bit more
• Price is marginal value, value is the area under
  the demand curve, value equals utility
• Note that utility is relative, changes only

19
Recent developments

• Total economic value Use value Intrinsic
  value
• Use value Actual use value Option value
  Quasi-option value
• Option value Value in potential use by self
  Value in potential use by others Value in
  potential use by future individuals
• Quasi-option value Value of avoiding
  irreversibilities in the light of expected future
  knowledge
• Intrinsic value Existence value

20
Existence Value

• Existence value is unrelated to any actual or
  potential use
• Existence value may be related to sympathy, or
  stewardship as such, existence values do not fit
  into neo-classical economics
• Existence value may also be related to spiritual
  consumption, and then it does fit
• Existence value is not right-based, as rights are
  absolute, and values relatives

21
Grizzlies and Bighorns
22
Property Rights

• Property is
• The right to use
• The right to exclude
• The right to destroy
• Property rights are often attenuated
• Property rights can be
• Private
• Common
• Public
• Government
• Absent (open access)
• Environmental resources are seldom privately owned

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This course will ...

• Present techniques to measure the value, in the
  neo-classical sense, of commodities that are not
  traded in markets
• Present neo-classical techniques to measure
  existence values
• Discuss alternative techniques
• Show empirical examples