Module 3 Test Flashcards
Nihilism
Nothing has intrinsic value
The denial of the existence of any basis for knowledge or truth
Egoism
Individuals have their own values.
All other humans have instrumental values
Anthropocentrism
All humans have intrinsic values, all animals have instrumental values
Zoocentrism
All animals that experience happiness or pleasure have intrinsic values
Biocentrism
All living organisms have intrinsic values. All abiotic organisms have instrumental values
Ecocentrism
All organisms and ecosystems have intrinsic values
Cosmic universalism
matter, energy, everything has intrinsic values
Opportunity cost
the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity.
if you chose one activity you are giving up the opportunity to do a different option.
Benefit/cost analysis
having a rational framework for decision making. Thinking about it at the time of making the decision. Must value all future outcomes in present terms.
What are two approaches to decision-making?
Rights-based approach: There is no other option but the given one, opportunity cost be damned
Weigh alternatives
Use-value
direct or indirect benefit from its use
direct: utility from using a substance directly, WTP comes from the value of that thing. (ex. Walking on a hiking trail, camping, wood, water)
indirect: Indirect utility. WTP depends on use of other thing (mangroves offers protection)
Non-use value
We may value something now because we plan to use it in the future, or that we may not plan to use, but want to see in the future (high cultural value for example)
bequest value: not about which represents the best net value, but rather what feels better to pass on.
existence value: utility gained in the satisfaction knowing something exists
Option value
We do not need it, but like to use it if necessary
Contingent valuation
What would people be willing to pay/accept for something. You can frame the same question through either way, and often get different answers.
Stated WTP (willingness to pay) for improvised ecosystem services
Stated WTA (willingness to accept) compensation in exchange for degraded ecosystem services.
Is WTP or WTA generally higher? Why?
stated-WTA is typically 2-7x higher than stated-WTP
Loss aversion
- People value losses more than gains. if you give smt to somebody they value it more once they have it. It costs more to take something away from someone when they already have it
Prospect theory:
- People find a reference point and evaluate changes from that point (When people are talking about losses they refer to a reference point).
No good substitutes between environmental and market goods
Should we use stated-WTP or stated-WTA?
The standard practice is to use stated-WTP. WTA results are often less consistent.
However, for preserving an existing piece of common property, already belonging to the “people”, WTA may be best
With either, higher benefits in wealthier communities (matters who you are asking)
What are some sources of error in contingent valuation? Explain 3
Free-riding: contributing less than your WTP
Strategic bias: people might inflate their WTP to get a better outcome, but under the impression they will not actually pay
Framing bias: changing how you ask a question can change the response
How useful is contigent valuation?
CVs provide the only available means for estimating nonmarket benefits based primarily on existence value, so they are widely used
What is consumer surplus?
Consumer surplus is the different between what one is willing to pay and what one actually has to pay for a service or a project
For society at large, it is the difference between the sum of benefits over all people and the total cost of provision
By relating differences in travel cost to differences in consumption, a demand curve for the resource can be derived and consumer surplus estimated
What is the travel cost method?
Evaluation of consumer surplus. The travel-cost method measures the amount of money that people expend to use the resources (parks, rivers, beaches)
No one will pay more for travel somewhere than the benefit they get from being there.
What are some problems with the travel cost method?
People have different opportunity costs, and some may have alternative recreational opportunities that others do not
People have different amounts of money (different means to pay) –> WTP varies
What is the property value method (house price?)
House prices vary
A way of accessing an amenity
Untangling a bundle
Compare change in prices for houses sold before and after contamination become public. Control for all other factors affecting home costs.
What is the wage risk method?
it’s used exclusively for valuing human life (value of a statistical life)
Certain professions are more dangerous
The most ethically charged aspect of benefit-cost analysis is its requirement that we put a monetary value on human life
Old approach, still used in court settlements: future lifetime earning. Retired or disabled person is “worth” $0.
Newer economic approach: wage-risk studies
How do we value a statistical life?
Isolate the wage premium people are paid to accept risky jobs (police officer, firefighter, coal miner)
With this it is possible to estimate a WTA an increase in the risk of death, and thus to estimate implicitly the value of life
Problems with the wage risk method?
- Assumes workers have understood accurate info
- Sample selection bias (Not necessarily average people (lower risk aversion))
- Assumes voluntary and involuntary risks have same value (I.e. car crash where you’re driving and plane crash where you have no control)
- Puts a much larger value on life in rich than poor countries
- Statistical life does NOT equal individual life
What is the engineering approach (replacement cost)?
Involves adding up the cost of an engineering solution: really important for ecosystem services evaluation
- Cost of replacing an ecosystem service (e.g. Commercial pollination services)
- Cost of adapting to environmental damage; cost of complying with needed environmental legislation
○ e.g. Cost of building levees/dikes, repairing from a flow, or of abiding by a new environmental regulation
○ E.g. Important benefit/cost analysis of environmental legislation or climate change mitigation - Central for Ecosystem Services evaluation
What is the life satisfaction approach?
- Focuses on experienced human well-being rather than production
- Translates subjective response to economic measure by comparing impacts
- By using large databases of how happy people are, and what explains it, we can evaluate things in life including the value of pollution, access to park, etc.
Ecosystem services
Conceptualizes the functions of nature as a service to humanity. They are the attempt evaluate and quantify the services of natures. Evaluating the flow of services everyone gets.
- Use values, non-use values, option values
- Overlaid on four categories: provisioning, regulating, cultural, supporting
What is Monbiot’s stance with pricing nature?
Issues with coming up with a price
Not sure that protecting nature will be the financially beneficial option
It effectively pushes the natural world further into the system that is eating it alive
The role of power is left out in these discussions (example: mangrove vs. shrimp farm –> depends who it is benefiting)
Values and framing
- corrupt the movement’s core values
Solution: mobilize
- actively resisting and mobilizing against opponents
What is Marris’ stance on pricing nature?
Gives governments and companies the tools and incentives to protect natural resources and habitats by making it easier to compare alternative outcomes
Win-win situations: everyone involved is left pleased with the result
Translating biological terms to appeal to economists’ vocabulary will persuade them to care about the environment
Integrating environmental values steps
1) Evaluating
- Stated preferences (WTP and WTA)
- revealed preferences (travel cost, property value, and wage risk methods)
- engineering approach
- Life satisfaction approach (subjective well-being approach)
–> aggregation
2) Making tradeoffs
- No choice about making a choice
3) Applying our values
- Pricing nature
- Rights-based approach
- Precautionary / other approaches
- Policy
Contingent choice
More modern tool of CV
“Choice experiments” consist of a series of hypothetical binary choices. By looking at many choices, one can infer valuations of
specific goods using simple models
What are two roles for taxes?
Revenue
Punitive: tax to reduce individual consumption
(Pigouvian: tax equivalent to it’s social cost).
- calculated to be the social cost of the externality
- Ideally for carbon tax (capture the cost of the externality)
Revenue vs. expenditure
The amount collected from taxes may not be the correct amount to spend on something
Considerations and challenges in choosing policies
Mixed messages
- funding cancer research with tax income from cigarettes
Visibility
- sometimes want to make more visible, sometimes want to hide
Free-riding
- Receiving a benefit that they were happy to pay for anyway
Capital turnover timescales
- Average length of time that investment is around
R&D investment and scale-up sequence
Commitment
- Governments are not set up to deal with long-term problems. It is hard to put into place a long run policy that cannot be overturned by the next government.
Rebound effect
- efficiency can increase consumption
Suppose Hydro Quebec is considering providing a weatherization (insulation retrofit) service to a quarter of its customers “free of charge.” Why? Because, by reducing energy demand, it will be able to avoid building a new power plant.
However, the utility will pay for the weatherization by charging slightly higher electricity rates for all its customers.
Is the weatherizatoin subsidy a good idea?
No:
- Equity issue
- Strategic behaviour: People are now going to get into the game of guessing what Hydro Quebec’s next move is. People will hold off their plans to insulate
Free-riding: Some people were already planning to insulate. Some fraction of the subsidy is wasted
Rebound effect: The objective is to reduce the energy demand. People will turn the heat up (since they stop wearing sweaters)
Better policy: Have the recipients pay the bill.
If the project is truly cost-effective, there should be a financing mechanism in which the recipient comes out ahead.
Capital turnover timescale
Investments are exactly what is going to have power in the future, putting resources into something
- Different things have different lifetimes
- When something wears out, we build something new, we replace it
Why do we have nonzero levels of anthropogenic ground-level ozone but essentially zero lead (a heavy metal) in urban air pollution?
a) The Pigouvian taxes on lead have been effective.
b) The cost of removing lead from gasoline was low enough.
c) Diffuse air pollutants cannot be regulated.
d) There was no benefit to cars from having leaded gasoline in the first place.
b)
Why might sooner be more valuable?
Future is uncertain:
- resource/offer might disappear before then, or not be credible.
- i might not exist
Increased income:
- I will have a job, more income by then
- Not be worth as much to me
- in future you might be earning more and not relying on handouts/ can make own benefits
Limited empathy/intrinsic impatience:
- I care less about my future self than i do about me now
Can exchange for productive asset
- let’s you do things that might increase its value
- sell/exchange good for investment money or labour
Discounting interest
When future benefits are not weighed as heavily as current benefits, we say that the future benefits are discounted
Due to interest, resources on hand today are more valuable than resources available at a later date
The amount we would put aside today to grow to a certain benefit in the future is the present discounted value (PDV) of that benefit
Interest definition
growth of productivity over time (flow of benefits over time)
Present discounted value (PDV) formula
PDV = (X) / (1 + r)^T
where,
X= $ received
r= discount rate
T= years
PDV=amount of money one would need to invest in the present to just receive X in T years
How much weight it given to the future when there is a high discount rate? What about a low discount rate?
High discount rate: less weight given to the future
Low discount rate: more weight it given to the future (more certain your investment will pay off)
What does a discount rate of 0 imply?
the future has the same weight as the present
Inflation definition
the rate at which money loses real value over time (prices go up for the same thing)
Real interest rate
RIR=bank interest rate - inflation
RIR is “removed” from most data in advance of any discussion or analysis
Market reflection of the private discount rate.
This is the opportunity cost of risk-free capital. This could be different from the social discount rate, which policy makers might use for some decisions.
What does it mean for people in the future to be richer?
If real per capita economic growth continues at a rate of 2%–3% per year, then people in one hundred years’ time will be 7 (or 19) times as wealthy as us.
Innate vs. consumption discounting
innate: what is the value of future utility
consumption: what is the utility of future marginal consumption
discounting factor
tells us how much to discount marginal
consumption at a particular future date
discounting factor = (marginal utility in the future / marginal utility now) x pure time factor (how much we care)
What will happen to the discount factor if people are wealthier in the future?
discount factor will grow
positive
