Economic valuation Flashcards
(15 cards)
What is economic valuation?
Trying to find an appropriate price for environmental goods that have no price/assigning a monetary value to environmental factors that are not usually taken into account e.g. air quality
Willingness to pay vs willingness to accept
MWTP substitutes price: what a person would pay for little more of something
TWTP substitutes consumer surplus
MWTA: what a person would be willing to accept as compensation for a little less
demand is based on which is larger
e.g. food safety higher WTA
depends on property rights: if people have a moral or legal or assumed right to a good we use WTA
Classifying the values of the environment
indirect benefits: the environment is valued indirectly through the role in the production process such as sources of energy, waste assimilation, support services
direct benefits:where the environment directly effects utility such as air quality, direct sources of amenity, bird watching
Cost-benefit analysis
a decision making rule to decide on different policy options in terms of their net contribution to social well being (identifies strengths and weaknesses)
used in policy appraisals, setting taxes, national accounting
define the policy then identify and value the impacts of the policy, discount the costs and benefits, apply NPV, then apply sensitivity analysis
Methods of environmental valuation
Stated preference approach - contingent valuation experimental market (mix of SP and RP) revealed preference approach - hedonic price function, household production (travel cost and defensive expenditures) production function approach combination of different approaches is important
Constructing a market
the demand in the environment is not observed
for this reason a market needs to be developed
stated preferences: consumers are asked what they would pay for a good
experimental market: researcher constructs all of the characteristics of a market and observes behaviours, money is exchanged
Stated preference: contingent valuation
find a persons willingness to pay based on hypothetical situations (should follow a well developed protocol)
for example drinking water in Seoul, chemical spills so people were asked in survey their willingness to pay for cleaner water WTP(q0 and q1)
average WTP: 3.28 dollars per month
however only hypothetical questions asked
ambiguity of what people are valuing
Embedding effect
Goods need to be separate
1992 experiment valuing public goods
by embedding questions you get inconsistent results
experimental markets try to overcome the nature of hypothetical situations involving real money e.g. goose hunting in Wisconsin
Revealed Preference: Hedonic Price Function
method of analysing consumer choices
in the real world a bundle of goods has a set price, hedonic price function focuses on the price of an individual element of that bundle
want to infer the value placed on specific characteristics of goods based on the bundle price - need to find consumers willingness to pay
air quality
assume that each house is characterized by a single variable; z (air quality), other characteristics are fixed such as size, area
what is the shape of the HPF p(z) - how does it vary with different levels of air quality - need to look at supply and demand
the consumer - buys one house and allocate their income between (z) and all other goods (x)
need to consider how much consumers would bid for a house given z and the utility they desire
bid function (y,z,u): maximum amount willing to bid for a house with air quality z remaining withing their budget constraint - need to choose the level of z that maximises utility
point of choice is where the bid function is tangent to the price function
the producer - seller with a cost structure costs of producing a house with air quality z (r,z)
market equilibrium - HPF emerges as bid function and offer function are in tangency thus determines z and p(z), consumer producer and market all have the same valuation for one unit of the characteristic
Willingness to pay (HPF)
with the HPF we know the marginal price of air quality at different levels but we do not know demand (need to know WTP at different levels) however each individual only chooses one consumption point along the HPF
solution: assume all individuals along the HPF are variants of the same person (with different income levels) can then translate the observations on choice z into a set of data as to how MWTP changes with z (statistically conclude MTWP function)
pā(z) = f(z, alpha)
measure the slope and estimate WTP
e.g. chicago housing data 1999: looks at WTP for reductions in SO2 and PM
WTP for SO2 = $1000
Value of a statistical life (VSL)
One application of HPF can be used to determine how much workers are paid for more risky jobs (estimate market value for small changes in fatality risk)
VSL = change in W / change in pie
W = wage rate
pie = probability of death on the job
Revealed preferences: defensive expenditures
seek to minimise potential damage to oneself
A simple model: noise pollution from a nearby road
individual is interested in the level of quiet from within the house (higher Qs are better)
D(Q,P) to reduce noise within the house
example: 1991 WTP for ozone control in LA
Revealed preferences: travel cost
individuals consume visits to a park (v) and a basket of goods (x) there are multiple sites so difficult to implement consumer will look at costs and benefits and compare
demand = g(p,y)
example: zonal travel: ask a sample of visitors to the site in question, estimate the number of visitors per year to the site alone, calculate a visitation rate
example is the Brittany oil spill of 1978 looking at the demand for two beaches (one spoiled, one clean) and calculate the visitation rates from 21 regions in france
Random Utility Model
Another way to calculate multiple sites
number of consumers and number of sites and utility of consumer n in visiting site i
utility is not observable but someones choice is
e.g. rock climbing in scotland 2000
climbing routes are split into 8 areas and climbers are asked to rank attributes
from this calculated travel costs and trips to that area
then look at the impact of management mechanisms such as parking fees
Production Function Approaches
environment is an input to some production of a market good or service
changes are estimated by looking at effects on outputs and prices
this approach includes dose response models (impact of pollution on market valued outputs) and eco-system service valuation models
estimates the PF: when the quantity of pollution changes how does this affect market outcomes and decisions
example: mangrove thailand
