Chapter 05: Measuring the Benefits of Environmental Protection Flashcards
What is market and nonmarket benefits?
Benefits pollution control divided two categories:
(1) Market benefits
- Comes from added value to the marke
- Ex. Being healtier = go to work more = pay more
(2) Nonmarket benefits
* Infer how much people willing pay/accept for these benefits if market did exist
* Ex. Being healthier = be happier
Determine the nonmarket benefit of environmental protection?
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Use: value in use
- Ex. Clean river = able to use the river to swim
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Option: resource value if future benefits are uncertain and resource depletion is irreversible
- Ex. Can (potentially) use the resource in the future
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Existence: value from the existence of a species
- Ex. Don’t want it = brings a (nonmonetary) smile
TOTAL VALUE = Use + Option + Existence
What is consumer surplus?
|Difference between the max youre willing to pay and what you actually pay|
- Cannot be a negative value: Zero or Strictly Positive
- Benefit measure pollution reduction = increase in consumer surplus due to reduction
Two ways determine consumer surplus:
- Willingness-to-pay (WTP) for improved quality
- Willingness-to-accept (WTA) compensation in exchange for degraded quality
Reservation Price:
Max price (Reservation Price)= highest amount willing to pay
> Reservation Price: Any price above it and the market is gone
Market Price:
Rest (Market Price) = consumer surplus
- First unit max: $15 - pay $5 = CS of $10
- Second unit max: $14 - pay $5 = CS of $9
Formula for Consumer Surplus:
CS = 1/2(Q*)(P_R-P_M)
WTP and WTA:
Two ways determine consumer surplus:
- Willingness-to-pay (WTP) for improved quality
- Willingness-to-accept (WTA) compensation in exchange for degraded quality
How is the values for WTA and WTP calculated. How do they compare in theory and reality?
For consumer surplus:
- WTA and WTP are on either side of CS
WTA >= CS>=WTP
In theory, because income differences are small, WTA should only be a bit higher than WTP
However:
- WTA value typically 2-7 higher
Difference presists even in tests controlled for inflation
(1) WTA bit higher than CS - individuals made ritcher when compensated for damage
(2) WTP bit lower than CS- individuals made poorer when paying for environmental improvement
What accounts for the difference in WTA and WTP?
- Endowment Effect: Adding something you dont have not a big deal; taking something away already have is worse
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No Close Substitutes: Nothing substitutes for something
Mom’s dead - nothing offered able to compare
When is WTP/WTA used?
- Standard Practice: WTP (WTA estimates may be less reliable)
- If we think common property as belonging to “the people” = WTA may be best measurement
Ethical question(s) regarding WTA and WTP?
Wither WPA/WTA, use of consumer surplus as benefit measure automatically leads higher benefits for clean-up in wealthier communities
- Rich = willing pay more clean-up, also requires higher levels of compensation for degradation
Ex. Putting a vlaue on the reduced risk of death:
One of the most important benefits of environmental clean-up
What are two ways to access risk information?
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Epidemiological:
study past cases of human exposure- Expensive, uncommon, hard
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Animal studies:
- requies translating information for high-dose animal studies to low dose human exposure. Uncertainties
What is preceived risk?
Humans preceive risk differently than actual risks:
- Voluntary vs. involuntary risk
- Lack of knowledge
- Distrust experts
- People risk averse
Risk Aversion:
> Risk Aversion: people dislike exposure to catastrophic events w/ low probability more than unpleasant events occuring w/high probability
Even if they have the same average cost
Risk = Risk/Person * # People
- Two things same risk assessment = not the same risk
- Risk 1/200 people in class die OR the next person walks into the class = both risk 1 (same amount tho different)
What are the two sections and three methods for measuring benefits data-collection?
(1) Stated Preferences: Value of benefits obtained from survey methods
Method #1: Contingent Valuation Analysis
(2) Revealed Preferences: Value of benefits inferred from observed market data
Method #2: Travel Cost Analysis
Method #3: Hedonic Regression Analysis
Define contingent valuation?
Contingent Valuation: (CV Analysis) Survey methods used by economists to determine the benefit of environmental protection; survey response are “contingent” upon questions asked (ask people WTP/WTA)
What are the sources of error for contingent valuation?
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Hypothetical Bias: leads to hypothetical responses (”if”)
- The bias exists of a hypothetical question
- No consequence for action
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Free-riding: May lead understatement of true WTP
- Let someone else pay for it and use it later
- Answer dishonestly (assume everyone else answers honestly)
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Strategic Bias: People inflate their WTP to achieve greater clean-up if they believe they do not have to pay WTP
- Going to have to do it = think strategically
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Embedding Bias: Answers strongly affected context provided (MAIN PROBLEM)
- Ask you a series of questions that lead to a certain conclusion - last question inferred from previous ones
- Only publish one
- Series of questions leading = intentionally misleading
How useful is contingent valuation?
- Disagreement about reliability of CV
- Doing “state of the art job” expensive
- Only available means for estimating existence value component of nonmarket benefits (used widely)
What is travel cost?
- Measure amount money people expend to use resource (parks, rivers, beaches)
- Relating differences in travel costs to difference in consumption - demand curve for resource derived and consumer surplus estimated
- Use travel costs to set up demand curve = use to determien CS/WTA/WTP
How do you derive a demand curve for travel costs?
Demand Curve Derivated:
Total Consumer Surplus
= Area A surplus + Area B surplus + Area C surplus
= 1000 people * (d + e + f) + 1000 people * ((d + e) - 6*25) + 1000 people * (d-50)
How do you determine travel costs for society?
Use subdivisions’s worth * num# people > Add together = value to society
What are the problems with the travel costs method?
Problems:
- People have different opportunity costs
- Some have alternative recreational opportunities
Travel cost method has been textended to address both issues
What is hedonic regression?
- y = Predicted Value and control variables
- Uses changees in price from related (complementary) goods to infer WTP for healthier environment
- Estimates pleasure (utility) associated improved environment
How can hedonic regression be used to assess the value of human life?
Ex. The Value of Human Life
- Most ethically charged aspect of benefit-cost analysis = requirement that we put n montary value on human life
(Old approach - still used court cases) Retired/disabled person = “worth” $0
Economic approach: “wage-risk studies”
- Isolate wage premium people paid to accept risk jobs (police, firefighter)
- Estimate WPA a reduction in the risk of death, and implicity, the value of life
- Holding all else equal
- Not the value of a specific life = amount of money the average individual in society requires to accept a higher risk of death
Problems with hedonic regression?
Problems:
- Accurate Information (Under/overestimation of risk of death)
- Sample selection bias (People select risky jobs are not likely to represent the “average” person’s preference towards risk-aversion
- Involuntary nature of risk (Require more to accept risk imposed upon them without their consent)
Moral Issue: puts larger value on life for folks from rich than poor countries
