Chapter 3 Valuing the Environment: Methods

Chapter 3Valuing the Environment: Methods Environmental Economics and Policy Sixth Edition By Tom Tietenberg and Lynne Lewis

Risk Assessment (Human-centered) • Purpose is to determine if a substance is harmful and at what degree of exposure or concentration • Distinguishes between toxicity, hazard and risk • Hazard identification; dose-response assessment; exposure assessment; finally, overall risk characterization

Valuing benefits and costs from pollution/pollution control Types of Values: • Use Value • Option Value • Nonuse Value

Use Value • reflects willingness to pay for direct use of the environmental resource • can be active use (consumptive) or passive use (nonconsumptive) • requires one of the senses

Option Value • willingness to pay for the future ability to use the environment • value people place on having the option to use or ensuring something exists for potential future use

Nonuse values • willingness to pay to preserve a resource that one will never directly use • pure nonuse values are called existencevalues • less tangible, but can be quite large

TABLE 3.1 Economic Methods for Measuring Environmental and Resource Values

Direct Revealed Preference 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 • uses surveys to elicit willingness to pay • contingent valuation:respondentsare asked what value they would place on some level of environmental change

Indirect Observable Methods: utilize surrogate markets • Travel-cost methods infer values of resources by determining how much visitors spend getting to a site • Hedonic property value & hedonic wage approachesinfer environmental values from spending on goods that include those values • Avoidance or defensive expendituresinfer values from expenditures necessary to take action to reduce damage

Indirect Hypothetical Methods • typically give respondents a set of hypothetical situations to rank order • Contingent ranking: respondents evaluate bundles of goods with different environmental amenities • Conjoint analysis& choice experiments present respondents with bundles of attributes from which to choose

TABLE 3.2Attributes in the Maine Forest Harvesting Conjoint Analysis

TABLE 3.3 A Sample Conjoint Analysis Survey Question

TABLE 3.4 The Cost of Risk-Reducing Regulations

Valuing Human Life • focuses on calculating changes in the probability of death resulting from a reduction in some environmental risk and then placing a value on that • “implied value of human life” • divide the amount each person is willing to pay for a certain reduction in the probability of death by the probability of the reduction

Example • willing to pay $500,000 for a 10% reduction in probability of death • implied value of life: $500,000 / 0.10 = $5,000,000

Value of Life Estimates • 1996 survey found values $3 to $7 M, or $4.5 to $10.4 in 2013 dollars • Q: If this survey were done in Haiti, what would the value be? • Discuss the implications of this mental exercise.

Choosing the Discount Rate for CBA (Cost-Benefit Analysis) • Seen as the social opportunity cost of capital, with two components: the risk free rate, and the risk premium • Rate on long-term government bonds is a common choice • Based on high degree of pure uncertainty: is it legitimate to make important environmental decisions in this manner?

Variations in Discount Rate • will depend on the nature and expected lifetime of the project, who is doing the financing and the level of risk • power of the discount rate to sway a decision one way or another is considerable • sensitivity analysis can be performed

Cost-Effectiveness Analysis • alternative used when CBA is impossible or infeasible • involves minimization of costs of achieving a policy target (such as an emissions standard) • minimum-cost solution: equalization of the marginal costs of all possible alternatives (second equimarginal principle)

Impact Analysis • Environmental or economic (or both) impact statements attempt to quantify consequences of an action • Can be used to present info and data when CBA and Cost-Effectiveness Analysis (CEA) unavailable • Sometimes include CBA or CEA

Chapter 3 Valuing the Environment: Methods