Chapter 7 - Benefit-Cost Analysis: Benefits Flashcards
What are the two approaches of measuring benefits?
- Direct Approach
- Indirect Approach
What is the Direct Approach of measuring benefits?
Use market prices to reflect WTP (loss of incomes and output, reduced productivity, expenditures needed to offset environmental damage
When is the Indirect Approach used to measure benefits?
When no market exits
What does the Indirect Approach include?
Imputing WTP of individuals as revealed through their behaviour or upon questioning
What are the two ways to use an Indirect Approach?
- Revealed Preference Method
- Stated Preference Method
What three things do damage estimates involve?
- Measure emissions
- Determine ambient quality
- Dose-response Function
What does a Dose-Response function do?
Researchers need to isolate the effect of only the pollution
Direct Estimation methods can only be used in ____________ markets.
existing
What is a key Direct Estimation method?
Cost of Illness Approach
How is the Cost of Illness Approach a direct measurement?
If people are suffering from breathing conditions from air pollution, they will be seeking additional medical care. These costs will provide monetary estimates of the pollution damage.
Reduced pollution results in _______ cost of production Producer’s WTP for reduced pollution is the change in producers surplus.
lower
Marginal Revenue (MR) =
The price (P) of one unit sold.
What is a problem with Direct Damage Measurements?
It underestimates peoples WTP to reduce pollution
If direct measurement approaches do not work, economists will go to the ___________.
WTP
Define Consumer Surplus:
The net benefit a person derives from consuming a good what is gained over and above the total expenditure on the good.
If no market exists, what two methods are used?
- Revealed Preference Methods
- Stated Preference Methods
What are the three kinds of Revealed Preference Methods?
- Preventative or Mitigating Expenditures
- Hedonic Estimation
- Surrogate Markets
What is the one type of Stated Preference Method?
- Contingent Valuation Methods (CVM)
What are some limitations of the Preventative Expenditures method?
- Defensive methods may not exist for a pollutant
- Defensive methods may be hard to measure
- May be difficult to ascertain if a particular expenditure was actually used as a defensive measure against pollution
- Defensive methods may not capture full damage
- Ability to pay for defensive measures may differ across income groups
Define the Hedonic Estimation Method?
Isolate the contribution of the environmental good towards the total price of some other good which does have a market.
What are the two common examples of Hedonic Estimations?
- Housing Markets
- Wage differentials between industries with different environmental standards
Why are Housing Markets an example of Hedonic Estimation Methods?
As houses are bought and sold, air quality differences would be capitalized into the market prices of the houses.
Why are Wage Differentials an example of Hedonic Estimation Methods?
Say one has a high health hazard risk and the other industry does not, the wage differentials would compensate those with a greater risk more than the workers who are not exposed to the risks.
What are the six steps to utilizing Hedonic Estimation methods?
- Define and measure environmental attribute
- Specify hedonic price function
- Collect data
- Value the environmental attribute using econometrics
- Derive demand curve for environmental quality
Change in consumer surplus with a change in environmental quality
What are three limitations of the Hedonic Pricing Method?
- Property markets may not be active
- Buyers must be able to perceive the environmental quality accurately
- Housing bubbles or speculation: May lead to house prices increasing in a certain region, makes it difficult to isolate the effect of environmental attributes related to the house.
What are Surrogate Markets also known as?
Travel Cost Method
What do Surrogate Markets do?
Use surveys to collect large amounts of data before an econometric can isolate the value placed on this particular amenity.
What are three limitations of the Travel Cost / Surrogate Market Method?
- Multi-purpose visits
- Disutility from travelling
- Sampling biases in surveys
What is a CVM?
Contingent Valuation Method
What do CVMs do?
This is a Stated Preference Method, it involves doing surveys where respondents state their WTP.
What are the 5 phases associated with the CVM?
- Identification and description of environmental characteristics to be evaluated.
- Sampling procedure to select respondents
- Design and apply survey questionnaires
- Aggregate responses and analyze results
- Calculate WTP
What are some limitations of the CVM?
- Hypothetical character
- Incentive to misstate true WTP
- The WTP and willingness to accept do not always match.
