Lecture 8

Question 1

What is the use of a CBA?

Answer 1

To ensure that the benefits of a project will exceed the costs

Question 2

Why do we have to ‘value’ the environment?

Answer 2

Because environmental goods have no market to determine their price

Question 3

Define direct use value?

Answer 3

Value obtained removing a product in nature (eg. Timber revenue)

Question 4

Define indirect use value?

Answer 4

Obtained through a non-removable product in nature (eg. Recreation)

Question 5

Define option use value?

Answer 5

Value of the potential future absolute to use a resource (eg. Future recreation)

Question 6

Define bequest value?

Answer 6

Value placed in benefits that may be derived by future generations (eg. Future generations recreation)

Question 7

Define existence value?

Answer 7

Value of benefit from knowing a resource exists (eg. Preserving biodiversity)

Note: only non-use value out of the 5

Question 8

What is an expressed preference method?

Answer 8

People asked to express preferences or values (eg. Contingent valuation method)

Question 9

What is a revealed preference method?

Answer 9

People’s preferences are revealed by their actions (eg. Travel cost method/hedonic pricing method)

Question 10

How does a contingent valuation method work?

Answer 10

Uses surveys to identify people’s WTP for an environmental asset

Question 11

Example of when CVM was used?

Answer 11

Exxon Valdez oil spill in 1989

Question 12

Design of a CVM survey?

Answer 12

1) explanation of problem
2) details of how it would be solved
3) questions to determine individuals WTP (can also ask WTA compensation, and questions can be open ended/referendum format)
4) questions to determine individual’s social, economic and demographic background

Question 13

CVM analysis of survey equation?

Answer 13

Total WTP = average WTP x relevant population

Question 14

6 issues with CVM?

Answer 14

Hard to define relevant pop.
Part-whole bias
Starting point bias
Payment method proposed may affect WTP
Hypothetical payment issues (protest vote, also unlikely respondent to actually put money where mouth is)
Data intensive+time consuming

HPSPHD

Question 15

Benefit of CVM?

Answer 15

Ability to measure all different types of values

Question 16

Explain 3 steps of travel cost method?

Answer 16

1) individuals asked where they travelled from, how they travelled and how many visits they do/year
2) travel costs estimated and related to visits/year
3) demand curve estimated showing relationship between travel costs and number of visits (demand = MWTP)

Question 17

How to work out consumer surplus from MWTP diagram?

Answer 17

= area under curve

Question 18

Issue with demand curve in travel cost method?

Answer 18

It only shows the lower bound of WTP since travel costs may be lower than actual WTP

Question 19

How to estimate demand curve in travel cost method?

Answer 19

1) divide area around size into zones (concentric or counties)
2) trip generating function created

Ie. Visits from each zone to the site are a function of: travel costs of each zone, socioeconomic characteristics of each zone, population of each zone

Question 20

6 steps (structure) of travel cost method?

Answer 20

1) zoning
2) sampling visitors (questionnaires)
3) calculating visitation rates
4) calculating travel costs per zone
5) statistical regression estimated to estimate relationship between visitation rates and other variables
6) demand curve constructed

Question 21

TCM weaknesses? (4)

Answer 21

1) multi purpose visits
2) pleasure from travel (enjoy it tf longer route, don’t enjoy tf greater cost to get there)
3) ignores non-users and non-use value (eg option, existence, direct or bequest values)
4) house purchase decision (buying nearby to reduce travel costs -> undervaluation)