Environmental Economics Class 4

Valuing the Environment: Methods Methodologies available for quantifying benefits and costs. Valuation techniques available. The quantification of costs (including damages) and benefits with an emphasis on the complexity of monetizing nonmarket goods and services. Valuation methods “how-to” of benefit-cost analysis, including the treatment of risk

Putting a Monetary Value on Environmental Goods Is one value better than no value? Is some number better than no number?

Risk Assessment Risk assessment distinguishes between toxicity, hazard and risk. The purpose of risk assessment is to determine if a substance is harmful to a given population and at what degree of exposure or concentration. The most typical four components in risk assessment are:  1. Hazard identification: does human or ecological exposure cause harm?  2. Dose-response assessment: what is the relationship between the strength and duration of exposure and the detrimental health effect. Age, gender and lifestyle are factored in at this stage as well as information on animal exposure.  3. Exposure assessment: at what intensity is the population exposed to the agent and at what duration and frequency?  4. Risk characterization: what is the overall effect of an agent on a given population based on 1-3 above.

Valuing Benefits for Risk Management The difficulties in estimating physical damages If they can be estimated, the next step is to try to place a monetary value on them. The complexities of assigning monetary value

Types of Values 1. Use value 2. Option value 3. Non use value Total WTP

Use Value: Use value reflects the willingness to pay for direct use of the environmental resource. to use something simply requires one of the senses to be active (sight, sound, touch, taste or smell). Hearing noise pollution, seeing a grizzly bear, eating freshly caught fish, consuming water for drinking or swimming, taking in a vista while hiking and touching your feet to the trail, smelling flowers or smelling foul air. All of these constitute some kind of use of natural resources and the environment. Distinguishing between active use (consumptive) and passive use (nonconsumptive)

Option Value: Option value is the willingness to pay for the future ability to use the environment. This is the value people place on having the option to use or ensuring something exists for potential future use. Do you plan to go to Yellowstone National Park next summer? NO?? Would you ever like to go? Yes?? Place a value on the park to ensure it will still exist when one does want to go.

Nonuse Value: Nonuse value represents an individuals’ willingness to pay to preserve a resource that he or she will never use. These values are often called existence values. This is a very different category of value and, of course, represents the most problematic as well as controversial to monetize. These are less tangible values, but can be quite large.

Total Willingness to Pay (TWP): Total Willingness to Pay = Use Value + Option Value + Nonuse Value.

Classifying Valuation Methods Direct Revealed Preference Methods: Direct revealed preference methods are methods based on actual observable choices and/or goods that have market prices. Loss in value can be calculated easily if prices are directly observable. Direct Stated Preferences Methods: Direct stated preference methods use surveys to elicit willingness to pay. The contingent valuation method is a survey methodology in which respondents are asked what value they would place on some level of environmental change (such as a change in risk of illness or loss of habitat, etc.). Indirect Observable Methods: Indirect observable methods utilize surrogate markets to infer a value. These techniques utilize spending on other goods in other markets in order to extract out the environmental value of that good.

Travel-cost methods infer values of recreational resources by determining how much visitors spent getting to a site and then using this information to estimate a demand curve for that site. Hedonic property value and hedonic wage approaches use regression analysis to infer environmental values from spending on goods which include those values. For example, property values are typically lower in areas with higher levels of air or water pollution. Houses near open space or with nice views will likely be more expensive than similar houses without those amenities. Similarly, workers in high-risk occupations receive higher wages for taking on that risk. Averting or defensive expenditures are expenditures necessary to take action to reduce the damage caused by pollution. These expenditures can be used as a lower bound estimate of damages.

Issues with Valuation Methods Potential Biases with Contingent Valuation 1. Strategic bias is the tendency to overstate or understate WTP in order to affect policy. 2. Information bias occurs when respondents are forced to evaluate goods/attributes for which they have little or no experience. 3. Starting Point bias is the tendency for reference points for bidding games and payment card mechanisms to induce higher or lower responses. 4. Hypothetical bias is the tendency for hypothetical payments to differ from actual payments due to a difficulty in correctly picturing the situation. 5. Other biases (payment vehicle, interviewer, etc.) can be discussed if time and/or interest permits. A carefully designed survey could eliminate or reduce bias. The panel issued guidelines for determining whether a study was appropriate for the use of this method.

Valuing Human Life: This likely controversial subject focuses on calculating the change in the probability of death resulting from a reduction in some environmental risk and then placing a value on that change. The “implied value of human life” is calculated by dividing the amount each person is willing to pay for a certain reduction in the probability of death by the probability of the reduction. A 1996 survey found that most implied values of human life were between $3 million and $7 million.

Approaches to Cost Estimation Estimating cost is typically more straightforward than estimating some types of benefits. Difficulties involve estimating expected future costs and getting reliable cost information from firms. Some common approaches include the following: –The survey approach involves asking polluters about their control costs. –The engineering approach uses engineering information to estimate the technologies available and the costs of purchasing and using those technologies. –The combined approach uses both 1 and 2.

Treatment of Risk For many environmental issues, scientific uncertainty complicates benefit-cost analysis. Thus, identifying and quantifying risks and then deciding how much risk is acceptable is important.