Environmental 2: Valuations Flashcards
What types of use and non-use values for the environment exist?
Use values: consumptive (eg natural resources), non-consumptive (eg clean air).
Non-use values: existence value, altruistic value, bequest value.
What is the difference between revealed preference and stated preference methods?
Revealed preference methods look at data from existing markets or usage to infer preferences over environmental goods.
Stated preference methods elicit valuations from surveys and do not study usage of actual resources.
Why will WTA normally exceed WTP? What determines this relationship?
The WTA reference point is at a higher utility level than the WTP reference point. Therefore, if the environment is a normal good, WTA > WTP.
WTA will exceed WTP by more if income elasticity of demand is large, or if e and y are less substitutable.
What is the travel costs model? What assumptions does it require?
The travel costs model is a method of revealed preference valuation. It analyses data on how much people spend to reach some environmental site as a lower bound on their valuation of the site. To provide valid estimates of the demand for environmental quality, we assume:
- The environmental good has use value only
- The private good (car trips) is non-essential
- The only purpose of the trip is to visit the site, and there are no close substitutes for the site.
Why does the existence of multiple sites create problems for the travel costs model?
If there are many substitute sites, all prices will be relevant. If expenditure on travel to site i is very sensitive to price, we might conclude that its value is low. But, this may just be because there is a similar site next door whose prices are held constant - if both varied their prices, we would see that valuation is high.
What problems are there with random utility models?
- Number of trips to a site is not explained
- Conditional logit assumes that eliminating a site does not change relative probabilities of visiting other sites.
- Estimating actual travel costs can be difficult
What is hedonic pricing?
The quality of many market goods depends on the environment. A classic example is housing. So, if we can analyse the prices of similar houses where environmental quality varies, we can obtain estimates for environmental valuations.
How can we estimate the welfare effects of non-marginal changes to environmental quality?
Find similar households with similar socioeconomic characteristics but with different implicit prices. Estimate a demand curve for environmental quality from this, and then integrate to find CS.
When is collinearity a problem in estimating the value of environmental quality using hedonic pricing?
Different quality variables may be perfectly collinear. For example, we might want to control for ‘proximity to main transport links’. But, this might perfectly explain all variation in noise pollution.
Why might hedonic pricing understate the value of flood defences, for example?
The people who live in areas exposed to flooding may systematically underestimate the risks of flooding, meaning that the true damages from flood risk are not reflected in their preferences, and therefore are not reflected in the equilibrium price.
Why is single-bounded dichotomous choice the ‘gold standard’ of elicitation methods?
Single-bounded dichotomous choice offers respondents a hypothetical referendum - if the project passes the vote, it will go ahead and cost each person x. x is varied across respondents. Although a large sample is needed to produce statistically powerful results, this method is easy to understand, not subject to anchoring effects, and is incentive compatible.
What biases exist in CV surveys?
- Hypothetical bias: when not having to spend actual money, people overstate valuations, possibly due to ‘warm-glow’ effects.
- Part-whole bias: people report very similar valuations for saving 10 birds, or 1000, or the whole species; or a particular species vs all endangered species.
- Interviewer bias: people want to please the interviewer
- Prominence bias: people conclude the issue is important by the fact that the interview is taking place.
- Strategic biases if they think answers will affect local taxes
- Anchoring and sequence effects
What is a choice experiment? What problems of CV do they solve?
Choice experiments offer participants a choice of discrete environmental projects in a lab setting, and are asked to devote scarce resources to a subset of the projects. This allows researchers to analyse non-use values but with real resource constraints, unlike CV surveys.
