Transcript TM_Ag_Eco_Course_Sust_Dev_Course_SlideShow_68

FAO Criteria for SARD
• Meeting the basic nutritional requirements of present and future
generations, qualitatively and quantitatively while providing a number of
other agricultural products
• Providing durable employment, sufficient income, and decent living and
working conditions for all those engaged in agricultural production
• Maintaining and, where possible, enhancing the productive capacity of the
natural resource base as a whole, and the regenerative capacity of
renewable resources, without disrupting the functioning of basic ecological
cycles and natural balances, destroying the socio-cultural attributes of
rural communities, or causing contamination of the environment
• Reducing the vulnerability of the agricultural sector to adverse natural and
socio-economic factors and other risks, and strengthening self-reliance
Macro Policies and the Environment
Table 6.1. Macro-environmental linkages
Macroeconomic policies
and objectives
Likely environmental impacts
Conditions and policy
interventions to facilitate
positive environmental impacts
Monetary Policy:
 Stabilization of inflation
and interest rate
alignment
+ More sustainable use of NR due
to lower inflation and reduced investments
- Pressure on NR as a result of
increased export competitiveness
Proper regulation of property
rights, royalties, well
structured concessions,
command and control
regulation, zoning
Macro Policies and the Environment
Table 6.1. Macro-environmental linkages
Macroeconomic policies
and objectives
Likely environmental impacts
Conditions and policy
interventions to facilitate
positive environmental impacts
Fiscal Policy:
Public expenditure
reduction; increased
transparency/tax reform
+ Pressure for higher cost recovery
in services, improved collection
of rents
- Reduction of expenditures on
environmental infrastructure, NR
protection, and enforcement
Price reforms and
subsidy red-uction on
agro-inputs, energy, and
water
+ More efficient use of NR, pollution reduction
- Increased pollution due to
substi-tution of dirty fuels
Regulatory and institutional
conditions and the proper
application of user charges,
fees, and rents
Protection of critical social and
environmental expenditures
Full subsidy removal and
introduction of prices
reflecting economic costs
Protection of the poor
Macro Policies and the Environment
Table 6.1. Macro-environmental linkages
Macroeconomic policies
and objectives
Likely environmental impacts
Conditions and policy
interventions to facilitate
positive environmental impacts
Exchange Rate Policy:
Trade balance
improvement
+ Increased price of imported
inputs (fertilizers, pesticides,
etc.)
- Pressure on NR as a result of
increased export competitiveness
Proper regulation of property
rights, royalties, well
structured concessions,
command and control
regulation, zoning
Macro Policies and the Environment
Table 6.1. Macro-environmental linkages
Macroeconomic policies
and objectives
Likely environmental impacts
Conditions and policy
interventions to facilitate
positive environmental impacts
Trade Policy:
Elimination of export
taxes, import quotas, and
other trade barrier
+ Improved efficiency, application
of cleaner technologies, and
better environ-mental
management
- Increased depletion of NR
Appropriate regulation and
implementation of property
rights, rents, concessions
Macro Policies and the Environment
Table 6.1. Macro-environmental linkages
Macroeconomic policies
and objectives
Likely environmental impacts
Conditions and policy
interventions to facilitate
positive environmental impacts
Institutional Reform:
Privatization,
liberalization,
restructuring, and
deregulation
+ Improved efficiency,
management, and response to
incentives, increased investments
in cleaner technologies and
processes
Effective environmental
regulation and enforcement
Macro Policies and the Environment
Common Roots of Economic and Environmental Problems
Policy failures
Financial sector problems
• growth without safeguards
• lack of proper sector policies
• excessive exposure to risk
• weak portfolio
• unsustainable business
practices
Market failures
• monopolies
• imperfect information
• externalities
Governance failures
• lack of monitoring and control
• weak management
• lack of transparency
• collusion
Environmental problems
• excessive pollution
• excessive NR depletion
• unsustainable industrial,
agricultural, and NR
management practices
Macro Policies and the Environment
Conclusions:
• if one traces the impacts of a macroeconomic policy change, one can find
effects across many sectors, not always self-evident
• the environmental impacts of economic policies will depend critically on
the economic institutions that are in place and that govern the use of
the resource base and the environmental sinks of the economy
• where there are market imperfections of one kind or another, and where
these cannot be resolved at source, it is desirable to use economic
instruments specifically to address the environmental issues
Some Introductory Concepts
What is economics about?
• scarcity, allocation, and trade-offs
• values: total economic value:
- market vs. non-market
- use vs. non-use
• positive vs. normative economics
• environmental vs. natural resource economics
• neoclassical vs. ecological economics
Some Introductory Concepts
World with income X
NR Economics
Human
Utility and
Consumption
Natural assets
Technology
Capital
Labor
Pollution
Some Introductory Concepts
World with income 10X
Natural
assets
Technology
Capital
Labor
Human
Utility and
Consumption
Pollution
Environmental Economics
Neoclassical Economics
• sustainable growth
– natural resource can be substituted for capital
– technical progress will relax the limits to growth
– maximum sustainable yield
– recycling
• sustainability of economic development
– golden rule: resource growth potential  discount rate - rate of
exogenous technical progress
– irreversibilities
Ecological Economics
• sustainable growth
– the substitution of capital for natural resources is limited
– technical progress will relax the limits to growth
– functions of the environment are essentially intertwined 
additional restriction on economic growth
– full recycling of energy is not possible
• sustainability of economic development
– continuous co-evolutionary feedback between economy and
environment
– the economy has to adapt itself
– economy + natural environment + culture + technology +
political system + population = ecological complex
Recalling Some Basics
Price (P)
Demand:
• downward sloping
• willingness to pay (WTP)
• reservation price: max WTP
• marginal benefits
P1
P2
P*
1 2 3 4 5 6 7 Q*
Quantity (Q)
Recalling Some Basics
Consumer Surplus:
P
• gross total benefits
• total purchasing costs
• net total benefits
P0
CS
P*
A
Q*
Q
Recalling Some Basics
Marginal Costs:
TC
• costs of each additional Q
• MC are rising
• why?
• MC and supply curve
TC(10)
TC(9)
TC(8)
TC(7)
TC(6)
TC(5)
TC(4)
TC(3)
TC(2)
TC(1)
1
2
3
4
5
6
7
8
9
10 Q
Recalling Some Basics
Firm equilibrium:
• max p  MC = MR
• competitive market 
MR = P*
• why?
• willingness to accept (WTA)
MC
P*= MC(8)
Missed profits if
producing only 7
units
7
Lost profits if
producing 9
units
8
9
Q
Recalling Some Basics
P
Market supply:
MC1
• horizontal sum of all firm
supply curves
MC2
MCT= MC1+ MC2
P*
Q1
Q2
QT
Q
Recalling Some Basics
Producer Surplus:
P
• gross total benefits (revenue)
• total production costs: cost of
the goods sold
• net total benefits
Supply = MC
P*
PS
Cost of
goods sold
Q*= 8
Q
Recalling Some Basics
Market equilibrium:
P
• market vs. individual curves
• price that clears the market
• why?
• equilibrium price
• equilibrium quantity
• decentralized mechanism
S
P*
D
Q*
Q
Recalling Some Basics
Welfare:
P
• why to exchange?
• benefits of exchanging
• costs of exchanging
• net social benefits
• NSB = CS + PS
• optimality
• economic efficiency
• at the equilibrium:
- P = MC
- WTP = MC
- MB = MC
S
Consumer surplus
P*
Producer surplus
Cost of
goods sold
D
Q*
Q
Recalling Some Basics
Max NSB:
P
• max CS + PS
• a competitive equilibrium is a
social optimum
• Pareto optimality
• FTWE: “under a set of specific assumptions, any competitive equilibrium is Pareto
optimal”
S = MC
Consumer surplus
A
P*
Producer surplus
D = MB
Cost of
goods sold
Q*
Q*+1
Q
Recalling Some Basics
Market failures:
• market power: e.g. monopoly
• externalities: uncompensated effect on a third party, e.g.
pollution, protection from floods
• ill-defined property rights: e.g. pollution, open access
• public goods: non excludability + non rivalry, e.g.
landscape, knowledge
• imperfect information: incompleteness or asymmetries,
e.g. decisions under uncertainty, contract design (moral
hazard, adverse selection)
Recalling Some Basics
Government failures :
• Government intervenes to:
- correct for market failures
- achieve non-efficiency objectives
• trade-off between efficiency and equity: e.g. price ceiling
intervention
• two kinds of policy failure:
- underpricing natural resources: e.g., timber or water subsidies
- rent-seeking or directly unproductive profit-seeking (DUP)
activities
Recalling Some Basics
Efficiency vs. equity:
P
price ceiling policy
S
P*
P1
c
CS
Tot
-c-b
-a+b
-a-b
Distribution
effect
a
b
D
Q1 Q*
PS
Q
Deaweight loss
(efficiency)
Environmental Economics
Pollution:
P
TSMC
Demand
PMC
C
PS
P*
D
SMC
E
B
A
QS
Q*
Q
• negative externality
• social marginal costs (SMC)
• private marginal costs (PMC)
• total social marginal costs:
TSMC = SMC + PMC
• total vs. marginal costs
• internalizing a -ve externality
• social vs. private optimum
- no 0 pollution
- balancing market and nonmarket goals
• what if a +ve externality?
• NSB = C +D + E
Environmental Economics
WTP
Env. Improvements:
A
WTP*
Marginal
benefits
B
E*
Quantity of
environmental
improvement
• marginal benefit curve
• marginal benefits of envir.
improvement vs. marginal
costs of pollution
• demand curve for envir.
quality improvement
• WTP for environmental
quality improvement
• trade-off between environm.
improvement and other things
we could do with income
• total benefits to the society
• total benefits vs. CS
Environmental Economics
WTP
Env. Improvements:
• marginal cost curve
• environmetal improvement
does not come for free
Marginal
costs
WTP*
C
E*
Quantity of
environmental
improvement
Environmental Economics
Optimum level of
pollution/environm.
improvement:
WTP
Marginal
costs
A
WTP*
Marginal
benefits
B
C
E*
Quantity of
environmental
improvement
• max NSB from environmental
improvement: NSB = TB – TC
 MB = MC
• socially efficient quantity of
pollution
• who should enjoy the benefits
and who should bear the costs?
Environmental Economics
MB
MC
MD
MC
MD(Q)
MC(A)
MC(Q)
MB(A)
WTP*
A
Qmax
A*
Q*
Amax
Q
Abatement vs.
pollution damages:
• Two ways to look at the same
problem:
- max NSB  MB(A) = MC(A)
- min TSC  MD(Q) = MC(Q)
• socially efficient quantity of
pollution
• who should enjoy the benefits
and who should bear the costs?
Natural Resource Economics
Biological Model:
Stock (X)
• population growth curve:
X=f(t)
• logistics curve
• carrying capacity: XMAX
• minimum viable population:
XMIN
XMAX
B
XMIN
X0
A
C
Time
Natural Resource Economics
Biological Model:
dX/dt
• population growth rate:
dX/dt =f(X)
• identify A, B and XMAX
• maximum sustainable yield
• MSY  highest possible
harvest
MSY
X0
XMSY
XMAX X
Natural Resource Economics
Economic Model:
dX/dt
H
E4
• effort
• if E   X  and viceversa
• doubling effort does not mean
doubling harvest
E3
MSY
H3
H4
H2
E2
E1
H1
X0
X4
XMSY X3
X2 X1 XMAX X
Natural Resource Economics
Economic Model:
H
• harvest
• H=f(E)
• what about X?
H3
H4
H2
H1
E0 E1
XMAX
E2
E3
E4
EMAX
X0
E
Natural Resource Economics
Economic Model:
TR
TC
HPROF
TR
TC
HOA
E0
EPROF
EOA EMAX E
• total revenue: TR=PH
• total costs: TC=WE
• single owner equilibrium:
(HPROF, EPROF)
- max p vs. MSY
- conservation
• open access (i.e. no owner)
equilibrium: (HOA, EOA)
- OA vs. max p vs. MSY
- conservation
Natural Resource Economics
Economic Model:
TR
TC
HPROF
HOA
E0
EPROF
• total revenue: TR=PH
• total costs: TC=WE
• single owner equilibrium:
(HPROF, EPROF)
- max p vs. MSY
TR
- conservation
TC
• open access (i.e. no owner)
equilibrium: (HOA, EOA)
- OA vs. max p vs. MSY
- conservation
EOA EMAX E • The “Tragedy of the
commons” (Hardin 1968)
Natural Resource Economics
Introducing time: discounting
Marginal product + Rate of capital appreciation = Discount rate
wait
X0

P0
=
year 0
V0
X1

P1
=
year 1
harvest
V1
indifference
Property Rights
Coase Theorem:
I
H
MEC
A
B
MNPB
C
O
G
D
E
Q*
J
F
Qmax
• what is a property right?
• Pareto improvement
• sufferer’s property right
• polluter’s property right
• problems:
- transaction costs
- open access
- information gathering costs
- distributive impacts
Resource Management Regimes
• private:
- individuals have a duty to observe the rules of use determined by the
controlling agency
- the agency has the right to determine those rules
• state:
- individuals have the right to undertake socially acceptable uses and a
duty to refrain from unacceptable uses
- others have a duty to respect individual rights
• common:
- a management group has the right to exclude non-members
- non-members have a duty to abide that exclusion
- co-owners comprise the management group and have rights and duties
related to the use of resources
• open access (no property):
- no users or owners are defined
- individuals have the privilege but not the right to use resources
Renewable Resources and Games
• prisoners’ dilemma game:
- non-cooperative game
- isolation
- no binding agreement
- the resource must be privatized or be subject to some form of state
regulation and control
• assurance game:
- cooperative game
- interdependence
- binding agrrement
- overexploitation of renewable resources in open access and common
property situations can be solved by cooperative agreement
• extensions:
- incentives/institutions
- repeated over time
- no single regime is universally best suited to the wise NR management
Economic Instruments for Envir. Policy
Pigovian tax:
Costs
Benefits
• optimal tax
• need to know:
- MNPB
- MEC
• information aymmetries?
MEC
MNPB
(MNPB – t*)
t*
O
Q*
Q
Economic Instruments for Envir. Policy
Costs
Tax
A
MAC2
Pigovian tax:
MAC3
MAC1
t*
X
B
Y
C
O
S1
S2
S3
Abatement
• low-cost solution to standard
setting
• standard at S2: TACst = OAS2
+ OBS2 + OCS2
• tax t*: TACtax = OXS1 + OBS2
+ OYS3
• TACst - TACtax = S1XAS2 S2CYS3
• S1XAS2 > S2CYS3  TACst >
TACtax
Why to Prefer Environmental Taxes?
• directly into the prices of the goods, services or activities
polluter-pays-principle
• create incentives for producers and consumers
• more cost-effective pollution control than regulations
• spur to innovation
• raise revenues which can be used directly to improve the
environment
Why Are Envir. Taxes Not Widespread?
• uncertainty about the justice of Pigovian taxes
• lack of knowledge of the damage function
Economic Instruments for Envir. Policy
Envir. Standards:
• command-and-control
• need to have:
- monitoring agency
- penalties
• only by accident optimal
• for being optimal:
- standard at Q*
- penalty equal to P*
- certainty of penalty
Costs
Benefits
MEC
S
P*
P
MNPB
O
Qst
Q*
QB
Qmax
Taxes vs. Standards
• taxes as least-cost solutions
• taxes are dynamically efficient
• administrative costs?
• outright prohibition
Economic Instruments for Envir. Policy
Permit
price,
Costs
Marketable Permits:
MAC
S*
MEC
P*
P1
O
Q*
Q1
Q2
• Q*: optimal number of permits
• P*: optimal price of permits
• S* is the supply curve
• MAC curve = demand curve
Economic Instruments for Envir. Policy
Marketable Permits:
Permit
price,
Costs
• cost minimization
• low-cost polluters sell permits
and high-cost polluters buy them
S*
MACT
MAC2
P*
MAC1
O
Q1
Q2
Q*
Pollution
permits
Economic Instruments for Envir. Policy
Permit
price,
Costs
Marketable Permits:
Reduced Gov’t supply,
environmental reserve
groups purchase
S*
Increased
Gov’t supply
of permits
P**
P*
D
O
Q*
D’
Pollution
permits
• new entrants
• opportunities for non-polluters
• inflation and adjustment costs
• technological ‘lock-in’
• spatial issues
• types of permit systems:
- ambient permit system (APS)
- emissions permit system (EPS)
- pollution offset (PO) system
Agricultural Pollution
Non-Point Source Pollution:
• spatial diffusion
• high variability: in space and time
- polluter’s responsibility (who?)
- pollution level at the source (how much?)
- ecological and economic damage caused (how?)
 traditional instruments cannot be used
Agricultural Pollution
Input-based instruments:
• input taxes and subsidies
- the regulatory agency should know the private
production function, but
- information asymmetries
• input proxies and empirical models
- information asymmetries
- other uncertainties
Agricultural Pollution
Ambient-based instruments:
• concentration of pollutant in the environment
• collective penalties
- Segerson’s (1988) scheme, but
- likely penalization of farms if close to the optimum
- dynamic incentive disappears
- costs of information and monitoring borne by
farmers
Cost-Benefit Analysis
What is Cost-Benefit Analysis (CBA)?
CBA is a set of operational rules, that guides public
choice among several project alternatives
• CBA is a method to make decisions
• decision-making involves always more than one alternative
(at least two: with and without)
• the evaluation process is made comparing advantages and
disadvantages
• advantages and disadvantages are evaluated with reference to
certain objectives
• CBA is applied mainly in the public sector
Cost-Benefit Analysis
Two types of analysis
• private sector: financial analysis
• public sector: economic and social analysis
 different objective function  different contents
 same evaluation phases and decision rules
Decision-maker
PUBLIC
PRIVATE
Objective
max NSB
max p
Evaluation
SB, SC, SRD
R, C, r
Decision rules
NPV, B/C, IRR
NPV, B/C, IRR
Cost-Benefit Analysis
Financial analysis vs. economic analysis
Costs
Revenues
TSMC
Revenues
TR
PMC
Financial
Analysis
SMC=EC
Economic
Analysis
Costs
QS
QP
Q
Cost-Benefit Analysis
Why Cost-Benefit Analysis?
• because the market fails to reach the social
optimum
• to overcome the paternalistic approach at public
policy
Cost-Benefit Analysis
How CBA must be carried out?
• two fundamental principles:
- welfarism: individual preferences
- Pareto principle: potential Pareto improvement
• two issues:
- how to compare different individual welfare status?
Kaldor-Hicks compensation criterion
- how to measure the impacts of different
alternatives? Money as numeraire
Discounting
Why do we need discounting?
• projects usually have a duration longer than 1 year
• current consumption is valued higher than future
consumption (inter-temporal preference)
How to discount?
• cash flow: stream of benefits and costs on the time scale
• how much a future amount of money is worth today:
Vn=V0·(1+r)n  V0=Vn·(1+r)-n
Discounting
Discounted cash flow
Cash Flows (nominal and discounted values), r=10,00%
Ct
0
1,000
0
-1,000
0.000
1,000
0
-1.00
1
385
858
473
0.909
350
780
430
2
363
823
460
0.826
300
680
380
3
346
785
439
0.7513
260
590
330
4
337
747
410
0.6830
230
510
280
5
322
725
403
0.6209
200
450
250
2,753
3,938
1,185
2,340
3,010
670
Total
Bt
NBt
(1+r)-t
Year (t)
DCt
DBt
DNBt
Investment Criteria
Net Present Value (NPV)
sum of all items in a discounted cash flow, i.e. it is the value
obtained summing all discounted net benefits
n

NBt
Bt  Ct 
NPV  

 B C
t
t
t 0 1  r 
t 0 1  r 
n
decision rules:
• acceptability:
• choice:
NPVi    i
NPVi*  NPVj  i  j
It is a monetary value
It depends on the value of the discount rate (exogenous)
Investment Criteria
Benefit/Cost Ratio (B/C)
ratio between the sum of discounted benefits and the sum of
n
discounted costs
t


B
1

r

t
B C  t n0
t


C
1

r
 t
decision rules:
• acceptability:
• choice:
t 0
B/Ci  1  i
B/Ci*  B/Cj  i  j
It is a pure number
It depends on the value of the discount rate (exogenous)
Investment Criteria
Benefit/Cost Ratio (B/C)
the discount rate that yields NPV equal to 0 or B/C equal to 1
n

Bt  Ct 
NPV  
0
t
t  0 1  r 
n
IRR = r :
B C
 B t 1  r 
t 0
n
t
 Ct 1  r 
t
t 0
decision rules:
• acceptability:
• choice:
IRRi  r  i
IRRi*  IRRj  i  j
It is the average yearly return of a given investment
It does not depend on the value of the discount rate (?)
1
Investment Criteria Comparison
Costs
Benefits
3,000
B/C
B
3
C
2
2,000
B/C
1,000
1
NPV
0
0
IRR
0.05
0.10
0.15
0.20
0.25
0.30
rate of discount (r)
0.35
0.40
0.45
Investment Criteria Comparison
Criteria
NPV
B/C
Meaning
Ideal Application
Absolute number, difference
between discounted benefits
and costs
Pure number,
benefits per
unit of invested
capital
 Unconstrained resources
 Independent alternatives
 Existence of a reference discount
rate
 Less risky projects
 Limited resources
 Independent alternatives
 Existence of a reference discount
rate
 Limited resources
 Dependent alternatives
 Existence of a reference discount
rate
B/C
increm.
project
“
IRR
Yearly average
rate of return
 Lack of a reference discount rate
Drawbacks
 Max profitability in absolute
terms
 Does not reflect the risks of
“big” projects
 Depends on how costs and
benefits are defined (i.e. gross
or net)
 Depends on how costs and
benefits are defined (i.e. gross
or net)
 Possibility of more than one
IRR
 Depends on the project
length
Sensitivity Analysis
• CBA abuse can be rampant
• SA is explicit discussion of the sensitivity of NPV and B/C
ratios to changes in
- assumptions
- figures
- calculation methods
• highlight all parts of an analysis that may be controversial
or uncertain
• provide scenarios based on range of those figures
• it should be automatic in any good CBA
Total Economic Value
What does environmental valuation mean?
• Valuation means monetary valuation
• WTP or WTA  preferences
• economic value measurements help to identify the
social optimum:
- ex ante, i.e. before deciding on environmental regulation
- ex post, i.e. after a regulation has been imposed
• demand curves: Marshallian vs. Hicksian
• exact measures: compensating vs. equivalent
Total Economic Value
Synopsis of Exact Measures for the Monetary Evaluation of Environmental Quality Change
Implicit
property
rights
Environm.
improvement
Environm.
worsening
Hicksian measures
Ref. conds.
(environm.
quality)
Refer.
utility
(welfare)
Individual
accepts the
change
Max WTP to
secure a
benefit
Min WTA to
tolerate a
loss
Compensating var.
Compensating surplus
POST
PRE
Individual
doesn’t accept
the change
Min WTA to
forego a
benefit
Max WTP to
prevent a
loss
Equivalent variation
Equivalent surplus
PRE
POST
Total Economic Value
A taxonomy of components
Randall
and
Stoll
(1983)
Fisher and
Raucher
(1984)
USE
VALUES
Direct
CURRENT use
USE
VALUES
USE
BENEFITS
USE
VALUES
Potential
use
EXISTENCE
VALUES
Characteristics
Direct - Consumptive UV
use
- Non-consumptive UV
values
On-site, weak
complementarity
On-site, weak
complementarity
Indirect
- Vicarious
use
consumption
values
Off-site, weak
complementarity
Option
value
Static, risk aversion,
soft uncertaintiy
EX-ANTE
NON-USE
VALUES
No
use
Definition
EX-POST
Indirect
use
INTRINSIC
BENEFITS
SYNOPSIS
Boyle and Freeman
Bishop
(1993)
(1987)
Quasi-Option
value
Dynamic, preference for
flexibility, hard uncertaintiy,
learning by doing
Bequest
value
Intergenerational altruism
NON-USE
VALUES
Intrinsic
value
Interpersonal altruism,
benevolence toward people,
sympathy toward animals,
environmental responsability
Total Economic Value
TEV and Decision-Making
• Damage and benefit are obverse sides of the same
concept
• Cost-benefit analysis:
- proceed with the development: (BD - CD - BP) > 0
- do not develop :
(BD - CD - BP) < 0
• TEV measures BP
Total Economic Value
Evaluation Techniques
• Indirect:
- change in the vector of price: HPM
- change in the vector of quantities: TCM
• Direct:
- hypotetical: CVM
- experimental
• weak complementarity condition
Evaluation techniques
Hedonic price method (HPM)
• look for a market in which private goods (e.g. real
estate) or factors of production (e.g. labour), that
are linked to the environmental good through a
complementarity relationship, are bought and sold
• the good is fully described by its attributes, which
influence the price of the good
• example: real estate property
Evaluation techniques
Hedonic price method:
Property
price
P
Slope of PP
P
Environmental
quality
• PP = f (PROP, NHOOD,
ACCESS, ENV)
• implicit price for the one unit
of the environmental
characteristic:  PP/ ENV
• marginal WTP
Evaluation techniques
Travel cost method (TCM)
• whenever the consumption of an environmental
good involves some travel costs
• visitors to a given natural area enjoy an amount of
gross benefits at least equal to the costs they incur
• knowing travel costs, it is possible to infer the use
value of the natural area
• example: outdoor recreation
Evaluation techniques
Travel cost method:
Travel
costs
TC3
• two step procedure:
I) Kj=ixij/Aj= ifi(TCij, wij)
II) demand for OR:
x(P)=ijAjfi(TCij+P, wij)
• use value of OR:
C
B
TC2
A
TC1
D
K3
K2
K1 Attendance
rates
V=ijAj 0P* fi(TCij+P,
wij)dP
where P* is the reservation
price, i.e. fi(TCij+P*, wij)=0
Evaluation techniques
Contingent valuation method (CVM)
• use survey questions to elicit WTP for provision of
an environmental good
• hypothetical market:
- description of the good
- hypothetical circumstances (level of provision, payment
vehicle, available substitutes, etc.)
- questions to elicit WTP
• also respondent’s characteristics  benefit
transfer
• example: any environmental good
Evaluation techniques
YES
WTP
$ 400 ?
YES
$ 400
NO
max WTP ?
WTP
$ 200 ?
YES
INITIAL BID
$ 100
CVM formats:
max WTP ?
$ 200
max WTP ?
NO
WTP
$ 100 ?
$ 100
NO
YES
max WTP ?
WTP
$ 50 ?
$ 50
NO
YES
max WTP ?
WTP
$ 25 ?
$ 25
NO
max WTP ?
•
•
•
•
•
open-ended:
iterative bidding game
payment card
close-ended, single bounded
close-ended, double bounded
Evaluation techniques
CVM formats:
•
•
•
•
•
Probability of
being WTP
1.0
E[WTP]
0
$
open-ended:
iterative bidding game
payment card
close-ended, single bounded
close-ended, double bounded
Evaluation techniques
CVM formats:
•
•
•
•
•
Probability of
being WTP
1.0
D
C
B
A
0 NN B3 NY B1
YN
B2
YY
$
open-ended:
iterative bidding game
payment card
close-ended, single bounded
close-ended, double bounded
Evaluation techniques
CVM issues
• Reliability: extent to which the variance of an
estimate, such as mean WTP, is due to random
sources  survey design
• Validity: extent to which an instrument measures
the concept under investigation, i.e. presence of
systematic errors (bias)
- strategic bias  incentive compatibility
- hypothetical bias  scenario
- design bias  ordering & wording; focus groups/pre-test
Evaluation techniques
Conclusions
• Indirect: only if weak complementarity  only use
values
• Direct: all components of TEV  CVM more
versatile tool
How important is to estimate single TEV
components?
Operationally we focus on the TEV of a resource,
not on its components