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ECON3220 Final Exam > Chapter 8: Non-Market Valuation Methods > Flashcards

Chapter 8: Non-Market Valuation Methods Flashcards

1
Q

When do we use market prices directly in conducting an efficiency CBA?

A

We use market prices directly when they are generated by perfectly competitive markets - markets that are not distorted by monopoly, monopsony, taxes or regulations

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2
Q

When do we use market prices indirectly in conducting an efficiency CBA?

A

We use market prices indirectly when we adjust them to generate shadow-prices. In this way, prices that are generated in imperfectly competitive markets can provide information that can be used in the CBA

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3
Q

When is there no market price available?

A

Some project inputs/outputs will have no market and hence no market price is available to use either directly or indirectly

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4
Q

Some examples of non-market outputs/inputs?

A
  • recreational fishing
  • a nice view
  • air/water pollution
  • a life saved
  • a disease prevented
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5
Q

What do we do with the changes in quantities of non-marketed goods and services?

A

Changes in quantities of non-marketed goods and services affect the level of economic welfare
- They need to be valued in efficiency and referent group CBA (but do not enter into market or private)

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6
Q

Why is an analyst very likely to encounter the problem of valuing non-marketed goods in CBA?

A
  • If inputs/outputs don’t have marked prices the market resource allocation will not be efficient
  • Governments thus see a need to regulate the private market or undertake public expenditures in areas neglected by the market
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7
Q

What does it suggest if the government wants a CBA?

A

The fact that the government wants a CBA suggests that there may be non-marketed commodities involved

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8
Q

Why are some outputs/inputs that affect the level of economic welfare not marketed?

A
  • Market: vehicle for trade commodities
  • For trade to occur, property rights in the commodities have to be reasonably complete and enforceable
  • Buyers may not be willing to pay for an input/output unless they believe they will have full and exclusive use of it and will be able to sell it to someone else if they wish (private goods)
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9
Q

Private Good

A

The buyer has full and exclusive use of the good for a specified period of time, and will be able to sell it to someone else if they wish

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10
Q

Public Goods

A

Goods which lack some of the property rights characteristics of private goods, and as a consequence are not supplied in efficient levels by the private market

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11
Q

A pure public good has the following three characteristics

A
  1. Non-rivalry in consumption - Consumption of a unit of the good by one individual does not preclude other individuals from simultaneously consuming that unit
  2. Non-excludaility by producers - Supplying a unit of the good to one person means that everyone can consume that unit if they choose to
  3. Non-excludability by consumers - Supplying a unit of the good to one person means that everyone will consume that unit whether they wish to or not
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12
Q

A semi-private good

A

Has one or two of the three pure public good characteristics

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13
Q

Examples of semi-private goods

A
  • Free to air broadcasting (non-rival in consumption and non-excludable by producers)
  • An uncontested motorway (excludable by both producers and consumers but non-rival in consumption)
  • Some kinds of air pollution (excludable by producers, but non-excludable by consumers and non-rival in consumption)
  • An open access fisher (rival in consumption but not excludable by producers)
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14
Q

Classification of goods:

  • Rival
  • Excludable
A

Private Goods

- e.g. food, clothing, cars, houses, etc.

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15
Q

Classification of goods:

  • Rival
  • Non-Excludable
A

Common Resources

- e.g. fish stocks, timber, city parks, atmosphere

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16
Q

Classification of goods:

  • Non-Rival
  • Excludable
A

Natural Monopolies

- e.g. cinemas, cable TV, internet/telecom, bridges/tunnels

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17
Q

Classification of goods:

  • Non-Rival
  • Non-Excludable
A

Public Goods

- e.g. free to air TV, national defence, fire/police, sewage, waste disposal, flood protection

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18
Q

External effects

A

Flows of goods or bags that are generated by the market economy, but are not traded in the market

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19
Q

Externalities that are private in nature

A

One agent’s activity affects the welfare of one other agent
- e.g. your neighbour’s tree shades part of your garden
This kind of issue can often be resolved through negotiation

20
Q

Externalities that are public in nature

A

They are public goods or bags

- e.g. air and water pollution

21
Q

Why do we expect to see more public bads than public goods?

A
  • Excludability is largely a matter of cost
  • To some extent, producers can decide whether to limit availability of the good or bad they produce
  • It is in their interests to limit the availability of goods, which they charge a price for
  • It is not in their interests to limit the availability of bads, from which they derive no benefit
22
Q

Total Economic Value of Environmental Assets

A
  • Use Values (direct and indirect)
  • Option and Quasi-Option Values
  • Non-Use Values (Bequest and Existence)
23
Q

TEV: Direct use value

A

Outputs/services that can be consumed directly

  • Extractive (e.g. trade)
  • Non-Extractive (e.g. tourism, research, aesthetic)
24
Q

TEV: Indirect Use Value

A

Functional benefits employed indirectly

- e.g. biological support, physical protection, global life-support

25
Q

TEV: Option Value

A

Future direct and indirect use

26
Q

TEV: Quasi-Option Value

A

Expected new information from avoiding irreversible losses of species/habitat/biodiversity

27
Q

TEV: Bequest Value

A

Value of leaving use an non-use values to future generations

28
Q

TEV: Existence Value

A

Value from knowledge of continued existence, based on e.g. moral conviction

29
Q

What are we interested in when we perform non-market valuation methods?

A

We are interested in the likely changes in total value as a result of a proposed project
- The project either increases the annual value derived from a public good by some amount (a project benefit), or it decreases the annual value by some amount (a project cost)

30
Q

Why do we employ non-market valuation techniques?

A

To place dollar values on changes in the flow of of benefits and costs generated by a public good
- Required to make the benefits/costs associated with environmental changes commensurate with the other project benefits and costs

31
Q

Non-market valuation: Supply-side analysis

A

This approach generates values based on the costs of either preventing or not preventing environmental damage. Three approaches:

  • the dose/response method
  • the opportunity cost method
  • the preventative cost method
32
Q

Non-market valuation: Demand-side analysis

A

This approach generates values based on consumers’ WTP for environmental services. Two approaches:

  • the revealed preference approach
  • the stated preference approach
33
Q

Supply-side analysis: The dose/response method

A
  • Environmental attributes (e.g. water quality) enter not the production function
  • Can be applied only to those use-variables of the environment which are generated by the market system
  • Cannot be used to estimate non-use values, or to account for non-marketed use-values (e..g private recreation)
34
Q

Supply-side analysis: The opportunity cost method

A
  • Calculates cost of preventing/limiting environmental damage by either not undertaking or by modifying the project (opportunity cost = foregone net benefits or additional costs)
  • Then left to the decision-maker to judge whether the benefits of preventing/limiting damage are large enough to justify the cost
  • Threshold Analysis: minimum value that environmental values would need to take to justify foregoing/modifying
35
Q

Supply-side analysis: The preventative-cost method

A
  • Assumes value of resource is equal to the cost of preventing/mitigating the environmental damage, or replacing/restoring the environmental asset (replacement cost method), or relocating the environmental activity
  • Might be reasonable approach if private individuals/groups were observed to be willing to incur these costs
  • Sometimes used in legal processes in estimating damages
  • Can overstate the extent of environmental losses and lead to excessive protection
36
Q

Demand-side analysis: Revealed preference approaches

A

Infer environmental values from observed consumer behaviour:

  • Travel Cost Method (TCM)
  • Random Utility Model (RUM)
  • Hedonic Pricing Model (HDM)
37
Q

Demand-side analysis: Stated preference approaches

A

Estimate environmental values by asking consumers what they are willing to pay for the preservation of environmental assets:

  • Contingent Valuation Method (CVM)
  • Discrete Choice Modeling (DCM)
38
Q

Revealed preference approaches: The Travel Cost Method (TCM)

A

By observing consumer behaviour in the market for travel (a related market) to and from a recreational site, we can estimate the annual consumer surplus generated by that site for its users
- Assumes that the number of visits is a continuous function of price (travel cost)

39
Q

Revealed preference approaches: The Random Utility Model (RUM)

A

Uses trip data and travel costs, together with consumer characteristics e.g.. income/taste to analyse consumer choice among alternative recreational sites

  • A model of discrete choice among substitute sites
  • RUM takes explicit account of site characteristics in modelling choice among sites, so it can be used to value the individual attributes of a site, and changes in site value per trip as a result of changes in these attributes
  • Cannot predict changes int eh number of visits in response to attribute changes
40
Q

Revealed preference approaches: The Hedonic Pricing Model (HPM)

A

Regresses observed market prices against the levels of various attributes of a good/service in order to place separate valuations on these attributes
- Widely used in product design

41
Q

Stated preference approaches: The Contingent Valuation Method (CVM). Advantages/Disadvantages?

A

Asks people what they would be willing to pay for the services of the environmental asset in question.
Advantage: Applies to use and non-use values
Disadvantage: Possible presents of various biases:
- hypothetical market bias (respondents not really paying for the services in question)
- strategic bias (respondents try to influence the outcome)
- design bias (the way questions are phrased can affect results)

42
Q

Stated preference approaches: Discrete Choice Modelling (DCM). Advantages/Disadvantages?

A

Asks people to value a range of options, which may consist of various types/levels of environmental protection as well as levels of more conventional forms of economy activity (e.g. jobs). Survey results can be used to calculate trade-offs and marginal values of types of environmental protection

  • Advantage: May be less prone to bias because of its focus on choice among alternatives
  • Disadvantage: No rule governing the range of possible alternatives or the possible level of each
43
Q

Alternatives to non-market valuation

A

Based on sampling selected groups and are regarded as being an integral part of the decision-making process itself:

  • Deliberative value assessment (DVA)
  • Multi-Crtieria Analysis (MCA)
44
Q

Alternatives to non-market valuation: Deliberative Value Assessment (DVA)

A

Groups of experts investigate and discuss the use of environmental resources and make recommendations

45
Q

Alternatives to non-market valuation: Multi-Criteria Analysis (MCA)

A

Groups of stakeholders rank alternative performance criteria and the likely success of various policy options in achieving these

ECON3220 Final Exam (11 decks)

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