5. Measuring the benefits of environmental protection

Question 1

What are the three non-market benefits of environmental protection categories?

Answer 1

1) Use value
2) Option value
3) Existence value

Question 2

Describe the use value?

Answer 2

There is value int he use of the item for free (eg use of clean air)

Question 3

Describe the option value?

Answer 3

Where an environmental resource will have future benefit that may or may not be yielded and are uncertain, and the depletion of the resource is effectively irreversible (eg pay to preserve approach)

Question 4

Describe the existence value?

Answer 4

The value on the moral concern about environmental degradation including empathy for other species or desire to leave an unspoiled planet for descendants.

Question 5

What is consumer surplus?

Answer 5

It is the difference between what one is willing to pay and what one actually has to pay for a service or product.

Question 6

What is willingness to pay (WTP) and how is it calculated?

Answer 6

It is the willingness of a person to pay for use of a public good, it is the amount over zero. For multiple people it is the sum of the amount each person is willing to pay.

Question 7

What is willingness to accept (WTA) and how is it calculated?

Answer 7

It is the compensation in exchange for a degradation in environmental quality and is the amount of each persons willingness to accept summed together.

Question 8

Which is likely to be higher between WTP and WTA and why?

Answer 8

WTA is likely to be higher, because individuals will be made a bit richer through compensation, where as they will be made a bit poorer by WTP. Evidence suggests WTA is typically 7 times higher for non market goods.

Question 9

What are two reason for the difference between WTP and WTA?

Answer 9

• Prospect theory where people want to keep or preserve the status quo rather than pay to improve it;
• There are no good substitutes for many non market goods so the cost is hard to quantify and therefore so is the true WTP.

Question 10

Which to use? WTA or WTP?

Answer 10

It depends on how the non-market good is owned, for example if it is seen as belonging to the people then WTA is more accurate (eg oil or waste spills).

Question 11

What is another concern with WTA and WTP?

Answer 11

It varies differently between rich and poor. More wealthy people are willing to pay more and will want a higher WTA than poor people for the same common good.

Question 12

What are two ways that environmental risks are assessed and studied?

Answer 12

1) epidemiological - attempts to evaluate risk by examining past cases of human exposure to the pollutant in question
2) animal - where rats and mice are subjected to relatively high exposures and examined.

Question 13

The estimated risk to humans varies depending on factors such as the assumed ‘dose-response model’ - what is this?

Answer 13

The assumptions that are made in moving from high-dose animal studies to low dose human epidemiological studies. These are far from precise.

Question 14

What does the EPA rank as the highest four risks to the US population?

Answer 14

1) habitat alteration & destruction
2) species extinction and loss of biodiversity
3) stratospheric ozone depletion
4) global climate change

Question 15

Public perceptions of relative risk often differ from those based on scientific research, what two reasons may cause this?

Answer 15

• distrust of scientists

- different levels of risk aversion

Question 16

What are the three ways to measuring non-market benefits?

Answer 16

1) Contingent Valuation
2) Travel Cost
3) Hedonic Regression

Question 17

What is Contingent Valuation?

Answer 17

Based on a survey responses about the willingness to pay or accept certain levels of environmental degradation. It is called contingent valuation, as the answers are ‘contingent’ on the questions asked.

Question 18

Why are contingent valuation surveys controversial (4)?

Answer 18

Because of:

• hypothetical bias - real word may be very different
• free riding - exists when people are asked to pay for a public good
• strategic bias - may influence answer if they believe they will have to pay the WTP they state
• embedding bias - answers are strongly affected by the context provided in the question.

Question 19

Despite the problems with a contingent valuation when are they primarily used?

Answer 19

For determining non-market benefits where the good has existence value only.

Question 20

What is another name for the contingent valuation survey and why?

Answer 20

‘stated preference’ as people state their preference, where as travel cost and hedonic regression are ‘revealed preference’ because their preferences are revealed by their other answers.

Question 21

What is the travel cost method?

Answer 21

It is a market based approach to estimate non-market values and is used to measure the benefits associated with recreational resources such as parks, rivers and beaches.

Question 22

How is the travel cost method calculated?

Answer 22

The amount of money people spend on using the resource is measured. By relating differences in travel costs to the differences in consumption a demand curve for the resource can be derived and consumer surplus estimated.

Question 23

What is hedonic regression and how is it calculated?

Answer 23

This method uses the change in prices of related (complementary) goods to infer a WTP for a healthier environment. Hedonic means ‘pertaining to pleasure’ so estimates the pleasure or utility associated with an improved environment.

Question 24

What is a key challenge in both the travel cost and hedonic regression methods?

Answer 24

The ability to control other factors which may affect or change the price.

Question 25

What is the most ethically-charged aspect of benefit-cost analysis?

Answer 25

Having to put a monetary value on human life. Courts do this by discounting future earnings, but this means a retired person has no value. It is difficult.

Question 26

What do efficiency proponents argue is the best value to put on life?

Answer 26

They argue that the best value is the one people themselves choose in the market, eg the premium paid to someone in order to perform a more risky role (firefighter).

Question 27

What are the problems with the efficiency proponents argument on how to value human life?

Answer 27

1) accurate information - do police recruits / fire fighters really know the odds of death?
2) sample selection bias - people who take risky roles may not represent the ‘average person’
3) involuntary nature of risk - labour markets have choice, where as some risks are imposed upon people without implicit consent.