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Chapter 3

Chapter 3. Valuing The Environment: Methods. 1. Introduction. Main Contents: Examine the valuation methods Identify and discuss the various valuation techniques that are used to value environmental resources.

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Chapter 3

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  1. Chapter 3 Valuing The Environment: Methods

  2. 1. Introduction • Main Contents: • Examine the valuation methods • Identify and discuss the various valuation techniques that are used to value environmental resources. • Discuss the strategies that exist for using economics to protect the environment when valuation information cannot reliably be obtained.

  3. 2. Valuing Benefits • 2.1 Types of Values • 2.2 Classifying Valuation Methods • 2.3 Valuing Human Life • 2.4 Issues in Benefit Estimation • 2.5 Approaches to Cost Estimation • 2.6 A Critical Appraisal

  4. 2.1 Types of Values • Economists have decomposed the total economic value conferred by resources into three main components: • Use value • Option value • Nonuse value

  5. 2.1 Types of Values • Use value reflects the direct use of the environmental resource. • Fish harvested from the sea • Timber harvested from the forest • Water extracted from a stream for irrigation • Scenic beauty conferred by a natural vista Pollution can cause a loss of use value.

  6. 2.1 Types of Values • Option value reflects the value people place on a future ability to use the environment. • Option value reflects the willingness to preserve an option to use the environment in the future even if one is not currently using it. • Whereas use value reflects the value derive from current use, option value reflects the desire to preserve a potential for possible future use.

  7. 2.1 Types of Values • Nonuse value reflects the common observation that people are more than willing to pay for improving or preserving resources that they will never use.

  8. 2.1 Types of Values • These categories of value can be combined to produce the Total Willingness to Pay(TWP): TWP=Use Value+Option Value+Nonuse Value

  9. 2.2 Classifying Valuation Methods

  10. 2.2 Classifying Valuation Methods • Direct observation methods are those which are based on actual observable choices and from which actual resource values can be directly inferred. • Direct hypothetical methods might be used when the value is not directly observable.This approach is called contingent valuation which merely asks respondents what value they would place on an environmental change or on preserving the resource in its current state.

  11. 2.2 Classifying Valuation Methods • Four types of potential bias for using the contingent valuation method: • Strategic bias • Information bias • Starting point bias • Hypothetical bias

  12. 2.2 Classifying Valuation Methods • Strategic bias arises when the respondent provides a biased answer in order to influence a particular outcome. • Information bias may arise whenever respondents are forced to value attributes with which they have little or no experience.

  13. 2.2 Classifying Valuation Methods • Starting-point bias may arise in those survey instruments in which a respondent is asked to check off his or her answers from a predefined range of possibilities. • Hypothetical bias can enter the picture because the respondent is being confronted by a contrived rather than an actual, set of choices.

  14. 2.2 Classifying Valuation Methods • Indirect observable methods are “observable”because they involve actual (as opposed to hypothetical) behavior, and “indirect”because they infer a value rather than estimate it directly. • Travel-cost methods • Hedonic wage approaches • Hedonic property value • Averting or defensive expenditures

  15. 2.2 Classifying Valuation Methods • Travel-cost methods may infer the value of a recreational resource by using information on how much the visitors spent in getting to the site to construct a demand curve for willingness to pay for a “visitor day.” • Hedonic property value studies attempt to decompose the various attributes of value in property into their component parts.

  16. 2.2 Classifying Valuation Methods • Hedonic wage value approaches are similar except that they attempt to isolate the component of wages which serves to compensate workers in risky occupations for taking on the risk. • Averting expenditures are those designed to reduce the damage caused by pollution by taking some kind of averting or defensive action.

  17. 2.2 Classifying Valuation Methods • Indirect hypothetical methods are illustrated by a technique known as contingent ranking which means that respondents are given a set of hypothetical situations that differ in terms of the environmental amenity available and other characteristics the respondents are presumed to care about, and are asked to rank these situations in terms of their desirability.

  18. 2.3 Valuing Human Life • The economic approach to valuing lifesaving reductions in environmental risk is to calculate the change in the probability of death resulting from the reduction in environmental risk and to place a value on the change.

  19. 2.4 Issues in Benefit Estimation • Primary versus secondary effects • Are the secondary benefits to be counted? • Tangible versus intangible benefits • Tangible benefits are those which can reasonably be assigned a monetary value. • Intangible benefits are those which cannot be assigned a monetary value. • How are intangible benefits to be handled?

  20. 2.5 Approaches to Cost Estimation • The survey approach • The engineering approach • The combined approach • The survey approach collects information on possible technologies, as well as special circumstances facing the firm • Engineering approaches are used to derive the actual costs of those technologies, given the special circumstances.

  21. 2.6 A Critical Appraisal • On the positive side, benefit cost analysis is frequently a very useful part of the policy process. • On the negative side, benefit cost analysis has been attacked as seeming to promise more than can actually be delivered,particularly in the absence of solid benefit information.

  22. 3. Cost-Effectiveness Analysis • Cost-effectiveness analysis frequently involves an optimization procedure. • An optimization procedure is merely a systematic method for finding the lowest cost means of accomplishing the objective. • This procedure does not produce an efficient allocation because the predetermined objective may not be efficient.

  23. 3. Cost-Effectiveness Analysis • Second Equimarginal Principle ( The Cost-Effectiveness Equimarginal Principle): The least-cost means of achieving an environmental target will have been achieved when the marginal costs of all possible means of achievement are equal.

  24. 4. Impact Analysis • What can be done when the information needed to perform a benefit-cost analysis or a cost-effectiveness analysis is not available? • The analytical technique designed to deal with this problems is called impact analysis.

  25. 4. Impact Analysis • An impact analysis regardless of whether it focus on economic impact or environmental impact or both, attempts to quantify the consequences of various actions.

  26. 4. Impact Analysis • In contrast to benefit-cost analysis, a pure impact analysis makes no attempt to convert all these consequences into a one-dimensional measure, such as dollars, to ensure comparability. • In contrast to both benefit cost analysis and cost-effectiveness analysis, impact analysis does not necessarily attempt to optimize.

  27. Further reading: • L. Tyrväinen, Economic valuation of urban forest benefits in Finland, Journal of Environmental Management (2001) 62, 75–92 • L. Tyrväinen , Antti Miettinen, Property Prices and Urban Forest Amenities, Journal of Environmental Economics and Management 39, 205-223 (2000) • Liisa Tyrväinen , The amenity value of the urban forest: an application of the hedonic pricing method, Landscape and Urban Planning 37 (1997) 21 l-222 • Liisa Tyrväinen , Hannu Väänänen, The economic value of urban forest amenities: an application of the contingent valuation +method, Landscape and Urban Planning 43(1998) 105-118 • A •迈克里 •弗里曼，环境与资源价值评估—理论与方法，中国人民大学出版社，2002

  28. Objectives & Requirements: • Understand and grasp the types of values • Understand the methods for valuing benefits and costs of environment • Understand the three different methods for environmental decision

  29. Problem: • In Mark A. Cohen, “The costs and benefits of oil spill prevention and enforcement”, Journal of Environmental Economics and Management 13, an attempt was made to quantify the marginal benefits and marginal costs of U.S. Coast Guard enforcement activity in the area of oil spill prevention. His analysis suggests that the marginal per-gallon benefit from the current level of enforcement activity is $7.50 while the marginal per-gallon cost is $5.50. Assuming these numbers are correct, would you recommend that the Coast Guard increase, decrease, or hold at the current level their enforcement activity? Why?

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