Lecture 7 Renewable Natural Resources

Question 1

NPV

Answer 1

Equation

Question 2

Measuring net benefit: indirect expression of preferences

Answer 2

Estimation of environmental benefit through the market prices of other goods
Avoidance cost approach
Travel cost approach
Hedonic prices

Question 3

Measuring net benefit: direct expression of preferences

Answer 3

Environmental benefit is estimated on the basis of surveys on the hypothetical reserve price
Contingent valuation method

Question 4

Measuring net benefit: Avoidance cost approach

Answer 4

Reacting to negative environmental influences, people can spend money to avoid these. Based on the money spent on these items, conclusions can be drawn on the benefit of the elimination of negative environmental influences with policy
Assessment of avoidance cost approach:
1. Simple approach to estimate the benefit of an environmental measure (e.g. reduction of air pollution)
2. Problem: goods used to reduce negative environmental influences also generate other, additional benefits. It is difficult to distinguish these effects.

Question 5

Measuring net benefit: Travel cost approach

Answer 5

The travel cost method is relatively easy to apply and for that reason is used quite often.
Problems:
1. Travel and opportunity costs are difficult to measure (correctly).
2. How can substitutes be accounted for?
3. As in every poll, sample selection problems can appear (e.g. regular visitors of the nature reserve can be over-represented).
4. Poll only record the utility value but not the existence value of environmental goods.
5. Only works for environmental goods with recreation value, value for commercial use cannot be ascertained with this method.

Question 6

Measuring net benefit: Hedonic prices

Answer 6

Measures the value which people accord to different features of a good.
This model is extremely intuitive, as it allows a monetary valuation of environmental factors directly through market prices.
But: empirical models are extremely complex. There are also problems of getting together such extensive data on the product characteristics. If important attributes are missing this could lead to considerable biases.

Question 7

Measuring net benefit: Contingent valuation method

Answer 7

1. People are questioned about their willingness to pay for certain
   environmental goods.
2. An authentic payment mechanism is defined.
3. Information on the people questioned is collected.

Problems: protest responses, influence of current events, authenticity of voiced willingness to pay.

Question 8

Measurement of risk in cost-benefit analysis

Answer 8

Risk comprises of two components:
1. Stochastic: dependent on chance
2. Systematic: dependent on circumstances (e.g. risk of getting cancer by smoking)
For a risk assessment, the probability and severity of the event must be known. This is based on:
1. Historical data. Problem: Technical progress can have an influence (e.g. cars have better security equipment)
2. Analogy. E.g. animal testing to draw conclusions on the impact of toxins on humans. Problem: animal organisms react differently, often very high dosages are used in animal testing etc.

Question 9

Time dimension of cost-benefit anaylsis

Answer 9

Markets are not perfect and there are different interest rates.
Choice of discount rate remains arbitrary

Question 10

Objection to the Cost-benefit analysis for environmental issues

Answer 10

• Methodological weakness of the basic methods (travel cost method etc.)
• Are consumer preferences the correct benchmark for social decisions?
• Is it right to only consider humans’ position? Should animals and plants be awarded an own ethical point of view in the cost-benefit analysis?