Transcript Value - University of Hawaii

Part II. Environmental Valuation
A. Value
B. Environmental Decision Making
A. Value
Chapter 4
Intro
• How should we identify our environmental
objectives?
• One aspect of this process is the measurement of
both the value of environmental resources and the
value of changes in the level of environmental
quality.
• This is essential information when comparing the
benefits of environmental policy against the costs
of obtaining those benefits.
What is value?
• First, the economic view of “value” is
anthropocentric.
• This means value is determined by people and not
by either natural law or government.
• Second, value is determined by peoples’
willingness to make trade-offs.
• When an individual spends money on one good,
there is less available for other goods.
What is value?
• For market goods, the inverse demand curve
represents a marginal willingness to pay function.
• Each price on the curve represents a marginal
willingness to pay for a specific quantity of the
good.
• The area under the curve at each price/quantity
combination represents the total willingness to
pay.
Marginal WTP Function
Marginal Cost Function
• Marginal willingness to pay does not measure the
total benefit associated with producing a good.
• Resources used to produce the good could be used
to produce other goods that would benefit society,
these benefits must be subtracted from total value
to yield net value.
• Total resource costs can be examined with the aid
of the marginal cost function.
Marginal Cost Function
• The relevant resource cost associated with a
specific output level is given by the area
under the marginal cost function at that
output level.
• This area represents the opportunity cost of
these resources (the productivity of these
resources in their next most productive use).
Marginal Cost Function
Net value
• Net value for a market good is equal to the sum of
CS + PS.
• Consider the following example where the impact
of air pollution on the productivity of agriculture
causes less economic output per acre.
• This impact is represented by a leftward shift in
the MC function and a resulting change in net
value equal to area ABCD.
Net value for a market good
Net value for a market good
• The measurement process for determining
the change in net value is much more
complicated.
• In the previous example, farmers may elect
to plant a different crop or change quantity
of planted acreage in response to the
changing productivity.
• Economic models consider the connectivity
of markets when determining changes in net
value.
Value and Non-market Goods
• This process not as easy for non-market
goods (nutrient cycling, clean air, clean
water, biodiversity, etc.)
• We do not observe prices for non-market
goods, so hard to estimate supply/demand
functions
• Instead, look at WTP or willingness to make
tradeoffs to obtain non-market good
Value and Non-market Goods
• While money is one thing that people giveup or trade-off to obtain goods, it is not the
only thing.
• Time and other opportunities are sacrificed
in order to obtain both market and nonmarket goods.
• Examining these trade-offs can serve as a
basis for valuing non-market goods.
Direct use values
• Non-market goods may have both direct use
and indirect use values.
• Direct use values are associated with
tangible uses of environmental resources,
such as use in manufacturing processes,
recreational activities, or when
environmental quality affects human health.
Indirect use values
• Indirect use values are those associated with more
intangible uses of the environment, such as
aesthetic benefits or satisfaction derived from the
existence of environmental resources.
• Indirect use values are also called passive use and
nonuse values.
• Indirect use values include existence value,
bequest value, altruistic value, option value and
the value of ecological services.
Indirect Use Value –
Bequest Value
• Bequest value refers to the fact that an individual
values having an environmental resource or
general environmental quality available for his/her
children or grandchildren to experience.
• It is based on the desire to make current sacrifices
to raise the well-being of one’s descendents.
Indirect Use Value –
Existence Value
• Existence value refers to the fact that an
individual’s utility may be increased by the
knowledge of the existence of an environmental
resource even though the individual has no current
or potential direct use of the resource.
• An individual may never have opportunity to see a
whale but places value on preserving the species.
Indirect Use Value –
Altruistic Value
• Altruistic value occurs out of one
individual’s concern for another.
• A person values the environment not just
because that person benefits from the
environmental quality but because the
person values the opportunity for other
people to enjoy high environmental quality.
Not mutually exclusive
• A person who has a direct use value for
preserving old-growth forests (e.g.,
backpacker) may also have option, bequest,
altruistic, and existence values for oldgrowth forests.
Indirect Use Value –
The Value of Ecological Services
• Ecological services include nutrient cycling,
atmospheric processes, carbon cycling,
clean air, clean water, and biodiversity.
• Since people do not always understand the
link between ecological services and their
well-being, it makes the valuation process
more difficult.
Techniques for Measuring the
Value of Non-market Goods
• 3 major categories for measuring the value of nonmarket goods include:
• Revealed preference techniques, which look at
decisions people make in reaction to changes in
environmental quality.
• Stated preference techniques, which elicit values
directly through survey methods.
• Benefits-transferred techniques, which look at
existing studies for value of analogous
environmental change.
Revealed Preference Approaches1. Hedonic Pricing Technique
• Hedonic pricing techniques are based on the
theory of consumer behavior that suggests that
people value a good because they value the
characteristics of that good rather than the good
itself.
• An examination of how the price of the good
varies with change in the levels of these
characteristics can reveal the prices (value) of the
characteristics.
Hedonic Pricing Technique
• Assume that all the characteristics of houses and
neighborhoods are the same throughout the city.
• Houses with higher air quality would have higher
prices.
• This positive relationship can be represented by
the following equation:
– H = a + bQ,
– where H is housing price, Q is air quality and “b” tells
the researcher how many units H will increase with
each unit of air quality.
Hedonic Pricing Technique
• In reality prices of houses are dependent on many
different characteristics, all of which need to be
reflected in the calculation of the impact of air
quality on the price of housing.
• Regression analysis: Statistical process for fitting
a line through a set of data points. It gives the
intercept and slope(s) of the “best fitting” line.
Thus it tells how much one variable (the
dependent variable) will change when other
variables (the independent, or explanatory,
variables) change.
Hedonic Pricing Technique
• Two types of variables have traditionally been
included as explanatory variables in the hedonic
housing price functions.
– Characteristics of the house itself (number of
bedrooms, sq.ft., swimming pool, fireplace…)
– Characteristics of the neighborhood (quality of
schools, crime rate, average income, etc.)
• Control of non-environmental variables –
remaining differences in price attributed to
differences in env. quality
Hedonic Price Studies
Hedonic Wage Approach
• The hedonic wage approach is based on the idea
that an individual will choose the city in which he
or she resides in order to maximize his/her utility.
• The individual will consider wages and a host of
other positive (educational or recreation
opportunities) and negative (crime, pollution)
factors.
• Wages adjust to compensate people for different
city characteristics.
Hedonic Wage Studies
• Suppose a person has two job offers, one in a cold
weather city and the other in a warm weather city.
• Suppose each job offers the same salary.
• If the person chooses the warm weather job, and
others do too, the labor pool will increase in the
warm weather city and wages will fall.
• The reverse happens in the cold weather city.
Hedonic Wage Studies
• The difference between the wages in the
warm weather city and the cold weather city
compensates people for the disutility of
living in the cold weather.
• This compensating differential can be used
to look at value placed on environmental
amenities or risk.
Revealed Preference Approaches2. Travel Cost Model
• The travel cost model is a method for valuing
environmental resources associated with
recreational activity and was first proposed by
Harold Hotelling in 1947.
• The basic premise is that travel cost to a site can
be regarded as the price of access to the site.
• Multiple observations on travel cost and quantity
of visits can be used to estimate a demand curve.
Travel Cost Model
• Once a demand curve has been estimated, the
value of the site to an individual can be estimated
by computing consumer surplus for each
individual in the survey, calculating an average
consumer surplus and then multiplying by the
estimated number of recreationists.
• The travel cost demand curve is often expanded to
include other explanatory variables such as age,
income, family size, education level, and other
socioeconomic variables.
Travel Cost Model
Travel Cost Model
• In order to measure how the travel cost
demand curve shifts as environmental
quality shifts, the travel cost demand curve
must be estimated with quality as an
explanatory variable.
Travel Cost Model
• There are methodological issues which remain
unresolved concerning the appropriateness of the
travel cost model. These include:
– How to incorporate the opportunity cost of travel
time.
– How to properly account for substitutes (multiple
sites).
– How to account for a variety of sampling biases
(over-response by frequent visitors, under-response
by infrequent visitors)
– How to properly measure recreational quality and
relate this to environmental quality.
Stated Preference Techniques
• Stated preference techniques solicit values
directly by asking individuals hypothetical
questions.
• Contingent valuation is the most widely
used stated preference valuation technique.
• This method ascertains value by asking
people their WTP for a change in
environmental quality.
Stated Preference Techniques1. Contingent Valuation
• The questions used in contingent valuation can
take both open-ended and close-ended form.
• In open-ended questions, respondents are asked to
state their maximum WTP.
• In close-ended questions, respondents are asked to
say whether or not they would be WTP a
particular amount.
• The questions must also specify the mechanism by
which payment will be made.
• Consider the following:
Contingent Valuation
Contingent Valuation
• Information is provided about cause and
effect.
• The payment vehicle is clearly stated and is
appropriate to the particular problem.
• Care must be taken so that the contingent
valuation exercise does not become a
referendum on the payment vehicle, for
example the choice to raise taxes.
Contingent Valuation: WTP vs. WTA
• Which measure to use?
• If one believes people have right to clean
air, WTA compensation may make more
sense than WTP for improved air
• But, WTP – constrained by income, while
WTA potentially unconstrained
Contingent Valuation: problems
• Although the contingent valuation method
has been widely used for 2 decades, there is
considerable controversy over whether it
adequately measures people’s WTP.
• These arguments are based on informational
issues and on the fact that people may be
indicating their value of something other
than the particular environmental issue.
Contingent Valuation: problems
• The informational issue revolves around the fact
that people do not have practice valuing
environmental issues so they are not certain what
they are WTP.
• A 2nd issue revolves around the fact that the
expressed WTP may be biased because the
respondent wants to feel good, be thought of as a
good person, or signal importance of the issue but
not actual WTP.
Contingent Valuation: problems
• A different problem is the potential link the
respondent makes between the question and other
issues, for example WTP for improved visibility
(reduced air pollution) – respondent may also
factor in reduced health risks. This may result in
double counting.
• Finally, some researchers believe there is a
fundamental difference between hypothetical
decisions and actual decisions.
Stated Preference Techniques2. Conjoint Analysis
• Determining individual preferences across
different levels of characteristics of a multiattribute choice.
• Consumers are asked to state which of 2
hypothetical goods they prefer, each having a
stated level of different characteristics.
• These choices can be made in a pair-wise fashion
or by ranking a number of alternatives.
• Statistical techniques are used to establish a
relationship between characteristics and
preference.
Conjoint Analysis
• As long as one of the characteristics is price, it is
possible to use the preference function to derive
the WTP for changes in the levels of
characteristics.
• Conjoint analysis could be used to value forest
quality and the importance of various forest
characteristics by defining characteristics of age of
trees, diversity of trees, diversity of other
organisms, etc.
Conjoint Analysis
• Conjoint analysis can be used to directly value
alternative national environmental policies by
asking respondents to compare alternative
scenarios.
• One advantage of conjoint analysis over
contingent valuation is that it does not ask
respondents to make a trade-off between
environmental quality and money.
• It asks respondents to state a preference between 2
choices. This eliminates some of the biases
associated with contingent valuation.
Benefit Transfer Approaches
• The process of estimating values using
revealed preferences or stated preferences
approaches can be quite expensive.
• Taking values from studies that were
previously completed in other areas, and
applying them to the area where the new
decision must be made.
Benefit Transfer Approaches
• It is important to use a reference study that is
congruous.
• If many reference studies are available, the
process becomes much easier.
• The appropriate reference study can be chosen, or
a weighted average of the values can be employed,
where weights are chosen according to similarity
between the reference study and the problem at
hand.
Non-willingness to Pay Based
Value Measures
• Avoidance cost – the cost people incur to avoid the
negative consequences of an environmental
change.
• Replacement cost – the cost of recreating what
was lost to environmental change.
• Restoration cost – the cost of repairing the
environmental damage.
• Problems:
– Is the restored/replaced environment equivalent?
– Is the value lower because it is no longer authentic?
Case study –
Ko’olau forested watershed
• Values included:
–
–
–
–
Quantity groundwater
Water quality
In-stream uses
Species habitat
– Biodiversity
– Subsistence
–
–
–
–
–
Hunting
Aesthetic values
Commercial harvests
Ecotourism
Climate control
Estimated value of resource:
$7.44 – $14.03 billion
(1000 year time horizon)
(Kaiser et al. 1998)
Source: Kaiser et al. 1998
Summary
• Even though the economist’s definition of
value is not universally accepted, it can
make a substantial contribution to the
decision-making process.
• Revealed preference approaches can help
measure direct use values.
• Stated preference approaches can estimate
indirect use values.