CBA Flashcards
Mention an example of a valuation method from each of these two categories. Illustrate your chosen valuation method with an example.
Hedonic pricing for revealed preference ( e.g. price of a house that is affected by environmental factors)
Contingent valuation for stated preference ( e.g. survey of whether and how much people are willing to pay for a certain ecosystem service).
Mention at least two advantages of stated preference methods compared to revealed preference methods.
It is more broadly applicable compared to revealed preferences and it can estimate both use and non-use values
What is cost-benefit analysis?
- A decision making tool to evaluate and compare projects and policies by systematically identifying, quantifying, valuing, and comparing the positive (benefits) and negative ( costs) effects
What are the steps in Benefit-Cost Analysis?
- Identify alternatives ( scenarios)
- always include business as usual
- in practice 4-5 are generally considered
- Quantify effects of alternatives
- Monetize effects
- Take into account when effects occur
- Calculate net present value
What is economic value?
- Economic value reflect relative scarcity:
- how easy can we get it?
- how badly do we want it?
- Economic value should support decisions:
- Incremental value - what we lose, or gain in economic welfare due to a discrete change
- Marginal value - what we lose, or gain, in economic welfare due to an infinitely small change
- Total value
What are the different valuation methods?
- Revealed preferences -> real choices:
- Hedonic Pricing Method: e.g. housing prices
- Travel Cost Method: e.g. tourism
- Averting Expenditures Method: e.g. insulation against noise
- Revealed preferences -> real choices:
- Stated preference -> hypothetical choices:
- Contingent Valuation Method ( “what are you willing to pay for this improvement in environmental quality?”)
- Choice Experiments ( “please choose the alternative that you prefer”)
- Stated preference -> hypothetical choices:
How to use hedonic pricing method?
- Housing prices depend on, among others, environmental factors
- Regress house price on all factors, including environment, coefficient for environment indicates value of environmental factor
- Measure: use value of a nice living environment
How to use travel cost method?
- People pay in travel expenses to enjoy nature reserves
- Estimate demand function by regressing number of trips on travel costs; area under demand function is value of a trip
- Measure: Recreation value of the park
How to use averting expenditures method?
- Individuals can mitigate some environmental problems, e.g. insulation against noise, bottled water
- Expenditures indicate value of environmental effect
- Measure: use value of noise, water purity, etc.
How to use stated preference methods?
- Contingent valuation method:
- “what are you willing to pay for the improvement in the ecosystem service?”
- yes or no, open questions, iterative questions
- one good or service
- Contingent valuation method:
- Choice experiments:
- show a number of alternatives
- several goods or services
- Measure: hypothetical willingness to pay (WTP) or willingness to avoid ( WTA) the costs associated with the good in question
How to find real interest rate (r)?
r = (n-i)/ (1+i), where n is inflation and i is interest
How to calculate present value of future earnings?
- PV ( Xt) = Xt/ (1+r)ˆt
How to calculate the projects Net Present Value?
NPV = sum(t) of Bt/ (1+r)ˆt - Ct/ (1+r)ˆt
In which phases of the decision making process is ECBA used?
Usually, in the phases when measures have to be appraised. But can also be used in the earlier stages, e.g. during the problem analysis and the identification of potential policy responses.
Whose interests should be taken into account, according to the Dutch guidelines?
CBA is intended to inform decision-making in the interests of the whole population.
