Transcript Economia Politica dell'Ambiente

Facoltà di Economia “G. Fuà”
Università Politecnica delle Marche
Elements of Environmental Economics
 1. Welfare economics: public goods and
externalities
Review of basic concepts
Property rights and Coase Theorem
 2. The Economic value of environmental
goods and its components
Components of the economic value of environmental
goods
Willingness to pay and demand for an environmental good
 3. Methods for measuring the economic
value of environmental goods
Direct and indirect methods
Case studies: the Exxon Valdez oil spill
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Public goods and externalities:
basic concepts - 1
 Economics is the discipline dealing with the optimal allocation of
scarce resources: alternative uses, limited availability
 Environmental-natural resources are economic resources: they
can be exploited in alternative uses but they are also limited
(finite)
 Scarcity can be absolute (stock): exhaustible (non-renewable)
resources
 Scarcity can be relative (flows-cycles): renewable resources
 The optimal allocation (use) of environmental resources is the
socially efficient one (Pareto Optimality or Efficiency)
 Social efficient means that maximizes the Social Net Welfare (the
sum of net welfare of single individuals) though eventually
redistributable
2
Public goods and externalities:
basic concepts - 2
 Who or what makes this optimal allocation of resources be
achieved? Why environmental-natural resources should
behave differently?
 Voluntary exchange (trade) among agents guarantees
that efficiency is achieved, therefore the market is the
appropriate institutional mechanism (2 Theorems of
Welfare Economics)
 Voluntary exchange, however, does not lead to social
efficiency whenever it concerns public goods instead of
private goods, that is:
 Non-rival goods (several agents can simultaneously use the
good without negative effect on utility: non-competition on
the good)
 Non-excludable goods (no one can exclude another from the
good: free access to the good)
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Public goods and externalities:
basic concepts - 2
DEFINITION OF PUBLIC GOOD
Low
High
Low
(Pure) Public
Goods
Pool or Common
Goods
(Commons)
High
Excludability
Rivalry
Club
Goods
(Pure) Private
Goods
 The use (production) of a public good implies social
costs (or benefits) that can not be traded (paid)
(Externalities)
 In this case, voluntary exchange can become efficient
only if the public good is “privatized”, that is, exclusive
property rights are assigned on it (Coase Theorem)
4
An example: the polluted vs.
the polluter - 1
We have a society made of two individuals: a polluter and a polluted
 Let’s consider an environmental (=non-tradable) good (good E),
for instance quality of air/water of the polluted (e.g., inhabitants of
a town)
 The polluter produces a private (=tradable) polluting good (good
Q) i.e. it provokes a decrease of air/water quality (decrease of E).
E decreases as production of Q increases.
 The polluter aims at producing quantity Q that maximizes his/her
profit. The private net benefit function B(Q) is the polluter
profit. Function B(Q) increases as Q increases but increases
less with the increase of Q i.e., B’(Q)=d B(Q) / d Q >0 and
B’’(Q)=d2 B(Q) / d2 Q <0) due to decreasing marginal return
and/or reduction of Q market price. .
 How much is the optimal Q production? The optimal level of Q,
i.e. that maximizes B(Q), is found when B’(Q)=d B(Q) / d Q =
Bm(Q)=0.
 Bm(Q) is the Marginal Net Private Benefit
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An example: the polluted vs.
the polluter - 2
Total Net Benefit
Bm(Q)
QP
Quantity of private good (Q)
Quantity of environmental good (E)
Efficient quantity from a private perspective. What about from the social perspective? 6
An example: the polluter vs.
the polluted – 3
 For the polluted, the reduction of air/water quality (i.e, E) implies
a damage (therefore, an explicit or implicit cost) C(Q)
 The additional damage (cost) will be higher as Q increases; in
other words, the marginal cost Cm(Q) is increasing in Q
 The social optimal solution is the level of Q that makes the net
social benefit [B(Q) - C(Q)] maximum
Bm(Q)
Cm(Q)
Quantity of environmental
good (E)
QS
QP
ES
EP
Quantity of private good (Q)
Efficient quantity from a social perspective
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Coase Theorem - 1
 The socially efficient level of Q, QS<QP, identifies at once also the
socially optimal level of “consumption” of the environmental (public)
good E. This optimality occurs when:
MaxQ SB(Q) B(Q)  C(Q)  Bm(Q) Cm(Q)
How to achieve it?
 The polluter uses the public good generating a cost that it does not bear
(pay) (negative externality) as such good is neither rival nor excludable,
therefore there is no market (trade) that forces the polluter to pay for it.
 The Coase Theorem stresses the relation occurring between the
allocative role of the market and the assignment of exclusive property
rights on public goods
 It states that (R. Coase, The problem of social cost, 1960): once
exclusive property rights on a public good are assigned, the market as
the place where these rights are negotiated and traded (without
transaction costs) is able to restore the socially optimal use of the
public good itself independently on initial allocation of rights.
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Coase Theorem - 2
 Firstly, assume that property rights on good E are assigned to the polluted. Initially we will
observe Q=0 and we will have Q>0 only if the polluter is willing to purchase part of the rights
on E and the polluted is willing to accept this payment.
 From this perspective, function Cm(Q) represents the lowest price the polluted is willing to
accept to sell the rights on the respective quantity of E; therefore, it is a “pollution” supply
function. Function Bm(Q) represents the maximum price the polluter is willing to pay to have
access (rights) to the respective quantity of E; therefore, it is a “pollution” demand function.
Costo sociale marginale Cm(Q)
Beneficio netto marginale Bm(Q)
 We will actually observe a trade of rights on E when Bm(Q) = Cm(Q) as in any other case it is
possible to find another trade solution that makes both agents better off: QS identifies the
equilibrium in this market, that is, identifies the exchanged quantity and the market equilibrium
price (P*).
Bm(Q)
Cm(Q)
P*
Q=0
QS
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Coase Theorem - 3
 Secondly, assume that property rights on good E are assigned to the polluter.
Initially we will observe Q=QP and we will have Q<QP only if the polluted is willing to
purchase part of the rights on E and the polluter is willing to accept this payment
thus to reduce production of Q.
 Rights’ trade occurs with the same final and efficient result
(equilibrium) independently on how property rights on E
are initially allocated (attributed). There are no overall
welfare (allocative) implications upon rights’ assignment.
Nonetheless, the distribution of these benefits is evidently
different over the two cases: the distributional
implications of initial assignment remains relevant.
Costo sociale marginale Cm(Q)
Beneficio netto marginale Bm(Q)
 From this perspective, function Cm(Q) now represents the highest price the polluted
is willing to pay to purchase the rights on the respective quantity of E; therefore, it is
a “de-pollution” demand function. Function Bm(Q) now represents the minimum
price the polluter is willing to accept to sell the rights on the respective quantity of E;
therefore, it is a “de-pollution” supply function. We will still observe a trade of
rights on E when Bm(Q) = Cm(Q) as in any other case it is possible to find another
trade solution that makes both agents better off: Even in this second case QS (and
P*) identifies the equilibrium in this market, that is, identifies the exchanged quantity
and the market equilibrium price.
Bm(Q)
Cm(Q)
P*
Q=0
QS
QP
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Problems with the Coase Theorem
Some complications interfere with the concrete application of the
Coase Theorem :
 We can not exclude income effects (movements of B(Q) e C(Q) as a
consequence of the different allocation of property rights). Such income
effects still allow for the social efficiency to be achieved but this is no more
independent on initial rights allocation (the efficient level changes under
different initial allocation).
 The Theorem excludes transaction costs and says nothing on how
negotiation and trade should actually occur to make these transactions
costs really negligible. As trade concerns public goods it also neglects the
problem of free-riding that may always arise whenever more than two
agents are involved.
 The Theorem says nothing on how we should in practice measure the
value of the environmental good E (in particular the cost associated to its
reduction borne by the polluted). E being a public good we have no explicit
market price suggesting how large this value may be (it is the problem of
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measuring the economic value of environmental-natural goods).
The economic value of environmental
goods and its components
 While B(Q) may be easily computed from market values (of Q, for
instance), how can we know C(Q), that is, the cost associated to the
reduction of one unit of E? In other words, which is the economic value
of one unit of the environmental-natural good E?
 A correct definition and identification of such economic value is
evidently needed to make the Coase Theorem working, therefore to
identify the socially efficient level of use of E, as well as the transactions
needed to achieve such level.
 We deal with to the “economic value” as we are interested in the value
of environmental goods expressed in monetary terms and, therefore,
comparable to other values (for instance B(Q)). Such monetary value in
fact expresses the welfare (utility) loss or gain of individuals and,
therefore, expresses individuals' preferences.
 Environmental goods may be evaluated also on a multicriterial basis (in
which the monetary value is just one criterion) as in methods like the
Environmental Impact Evaluation (EIE or VIA) and the Environmental
Strategic Evaluation (ESE or VAS)
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A taxonomy for economic values of
environmental goods
 The economic value associated to an environmental-natural good is the sum of
different components. First of all we distinguish between the use value and the
intrinsic value (or existence value, or non-use value, or passive use value)
 The use value expresses the utility that an individual can obtain from using that
good. We can distinguish further between:
 DIRECT USE VALUE: it expresses the utility from an actual/current use of that good
(for instance, the value of a park when we actually visit it)
 INDIRECT USE VALUE : it expresses the utility from a potential/future use of that
good (e.g., the value of park when we are willing to visit it)
 Option value: the value given by an individual to maintain the option of using the
good in terms of current use of other individuals, future use of individual him/herself,
use of future generations
 Quasi-Option value : the value given by an individual to maintain the options above
while in presence of uncertainty and irreversibility about the future state of the good
 Existence (or Passive Use) Value is the acknowledgement that the good has an
intrinsic value, in other words a value that is not dependent on any kind of current
or future use and also independent on the existence of the individual him/herself
expressing that kind of preference (for instance, the value associated to rare species
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under risk of extinction)
Total Economic Value (TEV)
Direct
Use Value
Total
Option Value
Use Value
Quasi-option
Value
Existence
Value
TEV
Existence
Value
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Measuring the TEV
 A correct measure of the economic value of an
environmental good should take into account all the
components of the TEV
 The indirect use value and the existence value, however,
are hardly measureable and methods proposed so far
are controversial and problematic
 In any case, the general principle underlying economic
evaluation is looking for some expression of individuals’
preferences for that environmental good, that is, utility
they obtain from that good in whatever form (actual use or
existence)
 According to conventional consumer theory, such
preferences reveal themselves in the form of demand (or
willingness to pay) for that environmental good. The
relation occurring between demand and economic value,
however, is not so trivial.
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Demand for an environmental good
and its economic evaluation - 1
Price (P)
 If we want to express the economic value of a generic
good E (private or public) in terms of individuals’
preferences, the more intuitive way (at least according to
the conventional consumer theory) is to reconstruct the
aggregate demand for that good P = f(E); such function
expresses the Willingness to Pay (WtP) for a given
quantity of good E:
 For a given available quantity
of good E*, under the
hypothesis that a market exists,
the demand function indicates
that the market price would be P*
P*. Is this the WtP that
establishes the value of E*?
E*
Quantity (E) 16
Demand for an environmental good
and its economic evaluation - 2
Price (P)
Prezzo
(P)
WtP = total consumers’ utility
 The WtP, in fact, is not only given by the total expenditure
for hypothetically purchasing the quantity E* but it also
includes what consumers would be willing to pay for lower
quantity of that good. The economic value (the WtP) of E*,
therefore, is the sum of actual expenditure and consumer
surplus
CONSUMER
SURPLUS
P*
TOTAL
HYPOTHETICAL
EXPENDITURE
E*
Quantità (E)
(E)
Quantity
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To pay or to compensate?
 Theoretically, for a rational agent (consumer), given an initial endowment
E*, to pay for one more unit of E (WtP) or to be compensated
(Willingness to Accept compensation, WtA) for one less unit of E
should be exactly equivalent (WtP=WtA)
 At least under certain conditions this is what economic theory would
suggest. In empirical analysis, however, this equivalence is often
violated and relevant differences between WtP and WtA may be
observed: usually WtA>WtP.
 If we exclude income effects, the only explanation for this evidence
would rely on non-rational behaviours, at least from the strictly economic
perspective, though fully logical from a psychological perspective.
 Cognitive dissonance does indentify this different perception of the
same choice problem depending on the perspective on which an
individual is initially positioned: in the former case (WtP), the individual
finds him/herself in the buyer perspective, therefore he/she is cautious
in attributing a value (a price) often underestimating it; in the latter case
(WtA) a compensation (revindicative) perspective prevails and therefore
individuals tend to exaggerate the value (price) of the good.
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Methods for measuring the economic
value of environmental goods
 Beside what we are really interested in (WtP, WtA…), the problem
remains how to measure it since no market (therefore, market values)
exists for such goods where the demand behaviour can be really
observed and, consequently, the demand function estimated
 In practice, the basic idea to achieve this evaluation is to reconstruct
this unobservable (or latent) demand. To do this we need in fact to
reconstruct a non-existent (latent) market. There are two different
approaches to reconstruct a market value for non-traded or nontradable goods.
 Observing existent markets (surrogated markets)
 Creating an hypothetical market
 Consequently, methods are usually classified as follows:
 INDIRECT EVALUATION METHODS: the value of the environmental
good is obtained through real markets of private goods whose value is
somehow linked to the presence of the environmental good itself.
 DIRECT EVALUATION METHODS : the value of the environmental
good is obtained by letting the potential consumer really express his/her
preferences on an hypothetical market of that good
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Indirect e direct methods
DEFENSIVE EXPENDITURE (COST) METHOD
INDIRECT METHODS
(based on assigned or
revealed preferences)
HEDONIC PRICE METHOD
TRAVEL COST METHOD
DIRECT METHODS
(based on declared
preferences)
CONTIGENT VALUATION METHOD (CVM)
EXPERIMENTAL METHODS
(experimental auctions, artificail markets…)
 Indirect methods are able to measure only the direct use value while direct
methods (in principle) are able to reconstruct the whole TEV. We will skip
the defensive expenditure method (the value is the cost borne to protect the
environmental good from a damage or restore/surrogate it after a damage)
and the experimental methods (just in the initial stages of application)
HOWEVER:
 An increasing number of evaluations are based on the so-called secondary
studies, that is on methods using evaluations directly obtained in previous
studies (primary studies) adapted through appropriate methodology (Benefit
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Transfer Method)
Hedonic Price Method - 1
 It is based on the fact that in some real markets the value of a (private)
good depends, among other things, on the presence of the environmental
good. Typical cases concern the house market (and house prices) and
wages for jobs under particular environmental condition (for instance,
exposition to emissions). Let’s consider the house market as the driving
example.
 Suppose that we observe a set of prices in the house market. These
prices actually refer to transactions made on heterogeneous goods,
namely houses. In other words prices depend on a set of intrinsic
characteristics of houses themselves (size, position, age, etc.) among
which we may also find the presence/absence of the environmental good
(for instance, noise). This is the idea of hedonic price that typically
concerns markets where goods of different quality are traded. The
hedonic price allows us to derive the value individuals assign to the
presence/absence of the environmental good
 The method proceeds in two phases:
 Estimation of the relation between observed market prices and the presence
of environmental good E
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 Derivation of the WtP for E and of the consequent demand function
Hedonic Price Method - 2
 The first problem is to establish a functional relation between
house prices P, its qualitative characteristics X and the
presence of E (e.g. exposition to noise, in decibel): P = f (X, E)
 The second problem is to separate and “isolate” the effect of E
on P, that is, how P varies as E varies with all other
characteristics X remaining constant (ceteris paribus). In
mathematical terms it means to calculate the partial derivative
P/ E which is, graphically, the slope of this curve:
 As P indicates the price really paid
for a given house, this slope
indicates the revealed WtP for a
additional unit of E. If, as in the
figure, such slope is decreasing in
E, the WtP for E is negatively
correlated with quantity of E, which
is exactly how a demand function
should behave.
P
P/ E
E
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Hedonic Price Method - 3
 P/  E
 As the slope of P=f(X,E) with respect to E measures the WtP
for different levels of E, the function relating such slope with
E is, in fact, the demand curve for E from which the value of
the given environmental good can be easily computed (just
integrate the curve…) :
WtP
Curve for E)
DaP ( (Demand
Curva di Domanda)
E
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Travel Cost Method – 1
 This method is particularly (say,
exclusively) suited for environmental
goods with a touristic-recreationalleisure value (utility). For instance,
C
natural parks, tropical islands, species
of great attractiveness etc.
 The hypothesis underlying the method
is that visiting such goods implies a
cost, namely a travel cost (let’s call it
a “ticket”) and that the number of visits
of a single individual (or of a group of
individuals) is negatively correlated
with the travel cost (ticket price)
according to this function: Q = f (C),
where Q is the number of visits and C
is the travel cost (the ticket price).
Therefore, such cost does make the
WtP for that good explicit (revealed)
and the function looks like a demand
function:
Q
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Travel Cost Method – 2
 In practice, we observe individual travel choices and for any
individual is usually not possible to observe how the number of
visits varies as C varies. Therefore, through surveys made on
visitors at the entrance of the site, we need to collect information
about:
 Number and provenience of the visitors
 Costs borne for the visit
 As the travel cost usually
depend on the distance, we
have to firstly cluster visitors
according to zone of
provenience and then compute
the respective frequency of visit
and the cost of the visit.
ZONE 1
ZONE 2
ZONE 3
ZONE 4
Frequency rate per 1000 inhabitants
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Travel Cost Method – 3
 The WtP and, therefore, the demand curve for good (site) E can
be then reconstructed on the base of a high-enough number of
regions (zones) of provenience:
C
 The whole area below the
demand curve expresses
the WtP, therefore the value
attributed to E by a
representative consumer.
The total demand, and the
total value, can be obtained
by aggregating this
individual demand over all
visitors.
ZONE 1
ZONE 2
ZONE 3
ZONE 4
Frequency rate per 1000 inhabitants
 As visits are usually registered over a limited period of time (an
year, a season, etc.) the actual use value of good E has to be
computed by the capitalizing the WtP (the value) measured over
one single period (year).
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Contingent Valuation Method
(CVM) - 1
 The Contingent Valuation Method (CVM) aims at making the
individuals’ preferences on the environmental E good explicit.
This is obtained through the creation of an hypothetical
market, that is where transactions are hypothetical (≠artificial
market)
 The method, therefore, does not only involve those individuals
that actually use the good but also those that may assign a
value to it. For this reason it allows for the measure of the
whole TEV and not only of the use value. It is also much more
flexible than indirect methods as can be applied to many
different environmental goods provided that the survey and the
hypothetical market design is adapted accordingly.
 It may separately measure and compare the WtP and WtA
 In practice, the method consists in asking a sample of
individuals to express their WtP or WtA with interviews or
surveys.
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Contingent Valuation Method
(CVM) - 2
 The method consists in three logical phases (which usually are
different parts of the interview or questionnaire, as well):
 Establishing and characterizing the sample (stratification) in
terms of age, gender, income, ecc.
 Creating the hypothetic market (contingent market):
 DESCRIPTION OF THE CURRENT STATE OF THE GOOD
 DESCRIPTION OF THE HYPOTHEITCAL CHANGE OF THE STATUS OF
THE GOOD
 FIX MODALITIES OF FRUITION AND OF PAYMENT OF THE GOOD
 Request of WtP (or WtA)
 Direct indication of a value
 open-ended question (free value)
 payment card (choice among alternative values)
 bidding game (choice on the base of a bid game between the interviewer
and the interviewed)
 Statistical elaboration on a dichotomous choice (closed-ended
question: yes/no)
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Contingent Valuation Method
(CVM) - 3
 Which kind of value is actually requested (WtP or WtA) depends
on the kind of interview-survey, on the kind of environmental
good, on the degree of sophistication of the measure we are
aiming at.
 By aggregating individuals
WtP (or WtA) it is possible
to directly compute the
value of the environmental
good in relation to its
passage from the current
status (E* or E1) to the
modification (E1 or E*) , that
is the contingent transaction
under evaluation
Price
(P)
Prezzo(P)
 Once all answers are collected, the anomalous ones (outliers)
have to be eliminated as they indicate: strategic behaviour (freeriding), irrational behaviour, misunderstanding on the
transactions, etc. All these aspect would undermine the correct
measure of the value
P*
P1
E*
E1
(E) 29
Quantità (E)
Quantity
A case-study: the Exxon Valdez oil
spill (1)
 Carson et al., 2003: Contingent Valuation and lost passive use: damage
from the Exxon Valdez oil spill. Environmental and Resource
Economics, 25, 257-286.
 On the night of 24/03/89 the oil tanker Exxon Valdez left the port of
Valdez (Alaska) carrying approximately 53 million gallons of crude oil. In
reaching the open sea out of the Valdez Bay (through Prince William
Sound) it crashed into the rocks. Within few days it had spilled almost
11 million gallons of oil into the Prince William Sound. Perhaps the
largest environmental disaster in US history (250000 seabirds and 22
whales killed, for instance, but no human victims)
 This ambitious and complex study aimed at calculating the loss of
existence value (or lost passive use) due to the incident, that is, its
economic damage.
 Before the Exxon Valdez case, the CVM (and existence value itself)
was considered (at least in the US) as an extreme solution in damage
evaluation. However, in the law suit brought by the State of Alaska
against Exxon, these experts were asked to specifically evaluate the
damage in terms of lost passive use to establish the appropriate
compensation claimed to the Court: it is an unprecedented case.
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A case-study: the Exxon Valdez oil
spill (2)
 The method adopted is a pretty classic application of CV:
sample+suervey+value estimation
 SAMPLE:
 1600 families across US (not only Alaska); 75% of questionnaires
returned
 SURVEY (Questionnaire):
 Description of the area and of the damage (information+pictures)
 Request of WtP (in the form of a tax) to fund a state programme
preventing from similar incidents (coastal guard escorting oil tankers out
of the Sound)
 Dichotomous choice+bidding game
 Value estimation
 The median WtP is estimated at 48$ per family
 Total value: between 3 e 7 billions $
 Conclusions:
 Damage valuation is very high (but also very volatile)
 The State of Alaska firstly received a compensation of 1 billions $
 Exxon also spent 2 billons $ for “defensive expenditure”
 Total compensation: about 6,8 billions $
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Comparative analysis
(pros and cons)
 The cons of indirect methods:
 They can be applied only to some specific and limited
contexts and environmental goods, those whose value affects
other market values or are somehow related to travel costs
 They only measure the direct use value not the whole TEV
 More generally they do not take into account preferences of
individuals not participating to the observed markets
 The cons of CVM
 It is a costly and complex method
 Results strongly depend on apparently technical details: how
the survey is carried out, how the transaction is presented,
which payment forms are considered…
 Results are still “hypothetical” as they do not concern real
revealed preferences
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Where are we? Our map:
from Environmental Economics
to Environmental Policies
Externalities
Public Goods
Direct Methods
Property Rights
Socially efficient use (allocation) of
Assignment
environmental-natural goods
Indirect Methods
Coming Soon:
Measurement Method
Environmental Policies
Demand Function
Consumer Welfare
Consumer Theory
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