Valuing the Environment

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Valuing the Environment

• What exactly do economists mean when they talk
  about valuing the environment in monetary terms?

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Introduction

• All or nothing versus marginal decision
• Willingness to pay (as measured by demand price)
  is the standard measuring stick of benefit
  (value) in economics.
• Decision making based on willingness to pay must
  reflect individuals preferences for the good in
  question.

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The Demand for Environmental Quality

• As discussed before, the marginal damage cost
  depicts the amount society is willing to pay to
  avoid damage or improve the quality of the
  environment at the margin. That is, it represents
  the demand curve for environmental quality.
  Demonstrate this using graph

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• However, discovering the demand (damage) function
  for environmental assets is not an easy matter.
  As discussed earlier, it requires assessing the
  benefits (in monetary terms) of avoided
  environmental damages or improved enviornmental
  quality, such as, aesthetic preservation,
  improved human health as identified in terms of
  increased .

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• ...mortality and morbidity, and sustenance of
  ecological diversity.
• In addition, it is important to note that
  environmental damages are externalities, hence,
  lack observable market prices.
• What could economists do to elicit willingness to
  pay for environmental goods that have no
  observable market prices?

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• Before going any further, however, it is
  important to note that when economists attempt to
  measure the benefits from improved environmental
  quality, what they are measuring is not the value
  of the environment at all. Instead the
  preferences of people for an environmental good
  or environmental bad. Examples, value of life
  or intrinsic value of the environment

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Alternative Methods for Valuing the Environment

• Direct information on (or elicitation of)
  willingness to pay
• Based on Observed Behavior
• Market values of environmental commodities
• increased productivity
• replacement values
• Based on Hypothetical Market Situation
• Contingent methods-direct survey

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• Based on the elicitation of willingness to pay
  that must be inferred from indirect data (market
  information)
• Hedonic property values
• Avertive expenditures
• Travel cost

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The Market Pricing Approach

• This approach is used when the environmental
  improvement under consideration causes an
  increase or decrease in real outputs and/or
  inputs.
• Example a decrease in timber harvest and/or
  extraction of minerals from a legislative
  enactment that effectively expands the acreage
  set aside as a wilderness area.
• Measured by incremental gains in consumers and
  producers surpluses.

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Replacement cost Approach

• This technique is used as a measure of benefit
  when the damage that has been avoided as a result
  of improved environmental conditions can be
  approximated by the market value of what it cost
  to restore or replace the damage in question.
• This technique should be used with some care
  since in several instances the replicas would
  probably be of little worth compared to the
  original.

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House Hold Production Function or Avertive
Expenditures

• In this approach, benefits from improvement in
  environmental quality are measured by looking at
  households expenditures on goods and/or services
  that are substitutes or complements for the
  purpose of avoiding environmental damages.
• Example installing soundproof walling to reduce
  noise purchasing radon-monitoring equipment to
  protect oneself from radon gas exposure, etc.

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Travel Cost Methods

• This method measures the benefit (willingness to
  pay) stemming from a recreational experience, by
  looking at the households expenditures on the
  cost of travel to a desired recreational site.
• Note this technique is a variation of the
  household production function approach, but
  strictly used to measure benefits arising from
  environmental services arising from recreational
  sites, such as national park.

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Hedonic Price Approach

• In this approach an attempt is made to estimate
  an implicit price for environmental attributes by
  looking at real markets in which those
  characteristics are effectively traded. For
  example, clean air and peace and quiet are
  effectively traded in the property market since
  purchases of houses and land do consider these
  environmental dimensions as characteristics of
  property.

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• Similarly, the attribute of risk is traded in
  the labor market (miners are paid more than a
  hotel custodian.)
• The key issue in hedonic price approach is the
  effect of the environmental quality on the prices
  of some goods and services.

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Contingent Valuation Method

• This technique represents the general approach
  economists use to elicit willingness to pay for
  total value of environmental assets.
• Total Value Use Value Nonuse value

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• None Use Value Option value Bequest value
  Existence value.
• Option value refers to a sort of insurance
  premium individuals may be willing to pay to
  retain the option of possible future use.

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• Bequest value refers to the satisfaction that
  people gain from the knowledge that a natural
  resource endowment is being preserved for future
  generations.
• Existence value refers to the satisfaction that
  some people derive from the preservation of
  natural resources so that there remains a habitat
  for fish, plants, wildlife and so on.

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Critical Assessment of the Economist Approach

• Environmental values should not be reducible to a
  single one-dimensional standard that is
  ultimately expressed only in monetary terms. (the
  existence of intangible values)
• High levels of uncertainty make the measurement
  and the very concept of total value meaningless
  (Krutilla, and the precautionary principle).

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• Survey techniques used to elicit willingness to
  pay confuse preference with beliefs (Sagoff).
  People preference for environmental resources may
  include aspects of their feeling that are not
  purely economics.
• Important ecological connections may be missed
  when valuing components of asystem separtately.