Intro to monetary valuation of non-market goods Flashcards
What is a value system?
Value systems refer to the normative and moral frameworks people use to assign importance and necessity to their beliefs and actions.
What is value?
The term value refers to the contribution of an action or object to user-specified goals, objectives or conditions. The specific value of that action or object is tightly coupled with a
user’s value system because the latter determines the relative importance of an action or object to others within the perceived world.
Economic value: one of many possible ways to define and measure value → useful when making economic choices that involve tradeoffs in allocating resources. Measures of economic value are based on what people want – their preferences (→ Utility theory).
What is valuation?
Valuation is the process of expressing a value for a particular action or object. Economic valuation is based on individual preferences and choices. People express their preferences through the choices and tradeoffs that they make, given certain constraints, such as those on income or available time.
In a market economy, the amount of money that a person is willing to pay for something tells how much of all other goods and services they are willing to give up to get that item. This is referred to as “willingness to pay” (WTP)
What is the NEB?
The net economic benefit, to an individual, is the benefit received from paying less for a good than the maximum amount that the person is willing to pay for it. Thus, if a person is willing to pay up to $3 for something, but the market price is $1, then the net economic benefit for that item is $2.
In order to make decisions based on economic values, what we want to measure is the Net Economic Benefit (NEB) from a good or service, i.e. for individuals:
the amount that people are willing to pay, beyond what they actually pay:
NEB = WTP - P
two goods that sell for the same price may have different net benefits
What is the Total Economic Value (TEV)?
Total economic value (TEV) is a concept in cost–benefit analysis that refers to the value derived by people from a natural resource, a man-made heritage resource or an infrastructure system, compared to not having it. It appears in environmental economics as an aggregation of the (main function based) values provided by a given ecosystem.
The total economic value (TEV) is the sum of all the relevant use and non-use values for a good or service.
All use and non use values refer to a variation in the level of the individuals’ utility
Use vs non-use values.
- use values, based on actual use of a given good or service
– Actual value (current direct or indirect values) and Expected value (near future)
– Option value is the value that people place on having the option to enjoy something in the future. - non-use, or “passive use” values, not associated with actual use, or even an option to use, a given good or service.
– Existence value: non-use value that people place on simply knowing that something exists, even if they will never use it.
– Bequest and Altruism values: values that people place on knowing that not us, but future or current generations, respectively, will have the option to enjoy something.
What is the Economic valuation for non-market G/S?
Not all goods and services from which individuals derive wellbeing, are traded in markets: ‘non-market’ goods and services.
↘E.g. many environmental resources.
In order to estimate the economic value of these goods and services, or the costs deriving from impacts on them (e.g.environmental degradation), the use of economic valuation methods (or ‘non-market valuation’ methods) is required.
Economic valuation methods provide estimates of ‘willingness to pay’ (WTP) for non-market goods, i.e. a measure of economic value in monetary terms, analogous to market;
↘E.g. the economic value of an improvement in river water quality,
measured by the WTP of individuals for that improvement.
What is the monetary value?
Monetary value is the amount that would be paid in cash for an asset or service if it were to be sold to a third party. For example, tangible property, intangible property, labor, and commodities are priced at their monetary value.
Measuring the monetary value of something does not require that it would actually be bought and sold in markets. It only requires estimating how much purchasing power (€) people would be willing to give up to get it (or would need to be paid to give it up), if they were forced to make a choice.
Monetary values are not mandatory in order to take sound economic decisions, but they are the prerequisite needed for Cost Benefit Analysis (CBA).
What is indicator-based valuation?
Indicator-based methods can be combined with monetary valuation and
support ranking or prioritizing the expected benefits of environmental
investments: e.g. CEA or MCA.
Indicator-based valuation may be less expensive and require less time to apply, but it does not allow for robust economic analysis, such as estimating benefits for social groups, or discounted values of future benefits.
What are some cases of economic valuation?
– Quantification of compensation (debits and credits)
– Cost Benefit Analysis
– Pricing policies (entry fees, taxes, charges etc.)
– Green corporate and national accounting
When markets exist
– Market prices (with adjustments)
When markets do not exist
– Use non-market valuation techniques
– Intangibles, non-quantifiable…
What are the categories of Actual Environmental Values?
• Direct-use values: goods and services directly consumed by users:
– Products (e.g., edible, medicinal, production process inputs ) – Recreation – Waste assimilation – Research – Education
• Indirect-use values: indirect benefits arising from ecological system:
– Biological support (links to other species and habitats)
– Physical protection (coastal defence function)
– Climate regulation
– Global life support (functions that aid in supporting life on Earth)
How is the value of water explained?
Resources such as water have a ‘total value’ which is infinite since it is essential for supporting all life.
↘ what is measured by economic valuation is the relative value of a change from one state to another.
• The ‘total economic value of water’ refers to the sum of all components attributed to:
– Direct uses made of it (e.g. abstraction for drinking);
– Indirect uses made of it (e.g. ecological services such as provision of habitat for species);
– Preferences for ensuring future uses of water; and
– Reasons that are independent of use, including ensuring a sustainable water
environment for the future generations.
• All these value components sum up to the ‘Total Economic Value’ (TEV), which provides a comprehensive description of the sources of economic value for a good or service.
How is economic valuation applied?
• 3 steps:
- Qualitative assessment of the good or service and the change that is to be
valued (input from other disciplines) - Quantitative assessment of the good or service and the change that is to be
valued (inputs from disciplinary models or actual data collection.) - Monetary assessment of economic values (inputs from economic valuation
methods are used to estimate the monetary value of the change in the
provision of the good or service).
The approach adopted depends on the type(s) of costs and benefits to be estimated, related context-specific details, and also data availability, particularly in terms of the quantitative assessment stage.
Why is economic valuation important for environmental policy making?
• The economic valuation allows for a direct comparison of environmental costs and benefits to financial costs and benefits in policy-making.
This is done most commonly via Impact Assessments and Cost-Benefit Analysis (CBA).
Benefits
– Anything that increases human wellbeing
– Avoided cost
• Costs
– Anything that decreases human wellbeing
– Forgone benefit
Explain ecosystem valuation
Ecosystem valuation can help resource managers deal with the effects of market failures, by measuring their costs to society, in terms of lost economic benefits.
The costs to society can then be imposed, in various ways, on those who are
responsible, or can be used to determine the value of actions to reduce or
eliminate environmental impacts.
The costs of implementing different options can be compared to the increased economic benefits of reduced externalities.• E.g. a stream polluted by agricultural runoff: the benefits from eliminating the pollution can be compared to costs of actions to reduce the runoff, or can be used to determine the appropriate fines or taxes to be levied on those who are responsible.
