9. Economic valuation I - Overview and theory Flashcards
Why do we measure? (Name 2)
- To compare things
- Communication with decision makers
- Calculate damages
- Setting economically optimal tax
Name two problems of economic valuation
- Externalities and nature of environmental goods and services generally leads to under provision, i.e. welfare loss
- There are no perfect markets, i.e. there is no direct assessment of value
- Imperfect markets, i.e. full value is not reflected in existing market prices
- Societal trade-offs and choices are often not based on true values of goods and services
What is the problem with intrinsic value?
The problem of intrinsic value is that it hard to quantify; problem is not with concept but with implementation.
Name two elements of neoclassical economic theory and two associated critiques
- Rational preferences and behavior
- Critique: people are emotional human beings; we sometimes don’t have enough relevant information to make a rational decision
- Utility (profit) maximisation
- Critique: we waste
- Behaviour is independent of others
- Critique: we influence each other
- Behaviour is based on full and relevant information
- Critique: we almost never have full information
Despite being imperfect, why do we use the neoclassical economic model?
Because there is no alternative overarching model of human behaviour with which to measure preferences and values.
Define economics
Economics is the study of how people and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future amongst various people and groups of society.
Define welfare
Welfare = wellbeing = sum of all our individual utilities (includes but is not identical to GDP)
What are utility curves?
Utility curves are combinations between two goods, such as income and recreation quantity.
What is the utility level?
Utility level is the sum of the two goods.
Describe the law of diminishing returns.
More of something is not necessarily better.
As there is more of something, its marginal utility decreases.
What is MRUS?
- Marginal Rate of Utility Substitution
- The extent to which substitution between two goods is possible such that we stay at the same level of utility
- The slope of line tangent to the utility curve.
What are the two categories of primary valuation methods?
- Revealed preferences (actual behavior)
- Stated preferences (hypothetical behavior)
What are the two secondary valuation methods?
- Meta-analysis
- Value transfer (benefits transfer)
What are the four approaches for revealed preferences?
- Market prices (price oriented approach)
- Production function (price oriented approach)
- Travel costs (price/value oriented approach)
- Hedonic pricing (price oriented approach)
What are the two approaches for the stated preferences method?
- Contigent valuation (value oriented approach)
- Coice experiments (value oriented approach)
