Chapter 8: Non-Market Valuation Methods Flashcards
When do we use market prices directly in conducting an efficiency CBA?
We use market prices directly when they are generated by perfectly competitive markets - markets that are not distorted by monopoly, monopsony, taxes or regulations
When do we use market prices indirectly in conducting an efficiency CBA?
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
When is there no market price available?
Some project inputs/outputs will have no market and hence no market price is available to use either directly or indirectly
Some examples of non-market outputs/inputs?
- recreational fishing
- a nice view
- air/water pollution
- a life saved
- a disease prevented
What do we do with the changes in quantities of non-marketed goods and services?
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)
Why is an analyst very likely to encounter the problem of valuing non-marketed goods in CBA?
- 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
What does it suggest if the government wants a CBA?
The fact that the government wants a CBA suggests that there may be non-marketed commodities involved
Why are some outputs/inputs that affect the level of economic welfare not marketed?
- 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)
Private Good
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
Public Goods
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
A pure public good has the following three characteristics
- Non-rivalry in consumption - Consumption of a unit of the good by one individual does not preclude other individuals from simultaneously consuming that unit
- Non-excludaility by producers - Supplying a unit of the good to one person means that everyone can consume that unit if they choose to
- 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
A semi-private good
Has one or two of the three pure public good characteristics
Examples of semi-private goods
- 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)
Classification of goods:
- Rival
- Excludable
Private Goods
- e.g. food, clothing, cars, houses, etc.
Classification of goods:
- Rival
- Non-Excludable
Common Resources
- e.g. fish stocks, timber, city parks, atmosphere
Classification of goods:
- Non-Rival
- Excludable
Natural Monopolies
- e.g. cinemas, cable TV, internet/telecom, bridges/tunnels
Classification of goods:
- Non-Rival
- Non-Excludable
Public Goods
- e.g. free to air TV, national defence, fire/police, sewage, waste disposal, flood protection
External effects
Flows of goods or bags that are generated by the market economy, but are not traded in the market
Externalities that are private in nature
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
Externalities that are public in nature
They are public goods or bags
- e.g. air and water pollution
Why do we expect to see more public bads than public goods?
- 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
Total Economic Value of Environmental Assets
- Use Values (direct and indirect)
- Option and Quasi-Option Values
- Non-Use Values (Bequest and Existence)
TEV: Direct use value
Outputs/services that can be consumed directly
- Extractive (e.g. trade)
- Non-Extractive (e.g. tourism, research, aesthetic)
TEV: Indirect Use Value
Functional benefits employed indirectly
- e.g. biological support, physical protection, global life-support
TEV: Option Value
Future direct and indirect use
TEV: Quasi-Option Value
Expected new information from avoiding irreversible losses of species/habitat/biodiversity
TEV: Bequest Value
Value of leaving use an non-use values to future generations
TEV: Existence Value
Value from knowledge of continued existence, based on e.g. moral conviction
What are we interested in when we perform non-market valuation methods?
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)
Why do we employ non-market valuation techniques?
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
Non-market valuation: Supply-side analysis
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
Non-market valuation: Demand-side analysis
This approach generates values based on consumers’ WTP for environmental services. Two approaches:
- the revealed preference approach
- the stated preference approach
Supply-side analysis: The dose/response method
- 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)
Supply-side analysis: The opportunity cost method
- 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
Supply-side analysis: The preventative-cost method
- 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
Demand-side analysis: Revealed preference approaches
Infer environmental values from observed consumer behaviour:
- Travel Cost Method (TCM)
- Random Utility Model (RUM)
- Hedonic Pricing Model (HDM)
Demand-side analysis: Stated preference approaches
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)
Revealed preference approaches: The Travel Cost Method (TCM)
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)
Revealed preference approaches: The Random Utility Model (RUM)
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
Revealed preference approaches: The Hedonic Pricing Model (HPM)
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
Stated preference approaches: The Contingent Valuation Method (CVM). Advantages/Disadvantages?
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)
Stated preference approaches: Discrete Choice Modelling (DCM). Advantages/Disadvantages?
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
Alternatives to non-market valuation
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)
Alternatives to non-market valuation: Deliberative Value Assessment (DVA)
Groups of experts investigate and discuss the use of environmental resources and make recommendations
Alternatives to non-market valuation: Multi-Criteria Analysis (MCA)
Groups of stakeholders rank alternative performance criteria and the likely success of various policy options in achieving these
