valuation 1 - low priority

Question 1

How are nonmarket benefits determined?

Answer 1

Nonmarket benefits are determined by inferring how much people would be willing to pay or accept for these benefits if a market for them did exist

Question 2

The nonmarket benefits of environmental protection

Answer 2

 Use: value in use
 Option: a resource has option value if the future benefits are uncertain and resource depletion is irreversible
 Existence: value from the existence of a species/resource

Total Value = Use + Option + Existence

Question 3

Measuring benefits - consumer surplus

Answer 3

 The benefit measure for pollution reduction is the increase in consumer surplus due to such a reduction
 Consumer surplus is the difference between what one is willing to pay and what one actually has to pay for a service or a project

Question 4

How to determine consumer surplus

Answer 4

 Willingness-to-pay (WTP) for improved quality
 Willingness-to-accept (WTA) compensation in exchange for degraded quality

 In theory, because income differences are small, WTA should be only a bit higher than WTP

Question 5

Problem with WTA and WTP

Answer 5

 WTA values are typically 2 to 7 times as high as WTP values!
 This difference persists even in tests specifically designed to control for inflated WTA figures

Question 6

Explaining WTP/WTA Disparities - prospect theory

Answer 6

Prospect theory: people may adopt the status quo as their reference point and demand higher compensation to allow environmental degradation than they are willing to pay to make improvements -otherwise known as the ‘endowment effect’

If prospect theory is correct, it would reshape our marginal benefit curve for pollution reduction

Question 7

Explaining WTP/WTA Disparities - substitution

Answer 7

Substitution. The degree of substitutability between environmental quality and other consumption goods

If environmental goods really have no good substitutes this could explain the difference.

Question 8

Using WTA or WTP

Answer 8

 The standard practice is to use WTP because WTA estimates may be less reliable
 But if we think of common property as belonging to “the people” then WTA maybe the best measurement

Question 9

WTP/WTA Ethical Issues

Answer 9

 With either WTA or WTP, the use of consumer surplus as our benefit measure automatically leads to higher benefits for clean-up in wealthier communities.
 The rich will both be willing to pay more for clean-up, and also require higher levels of compensation for degradation.
 This is especially stark when we come to putting a value on reduced risk of death: one of the most important benefits of environmental clean-up…

Question 11

Nonmarket benefits

Answer 11

inferring how much people would be willing to pay or accept for these benefits if a market for them did exist

Question 12

The nonmarket benefits of environmental protection

Answer 12

 Use: value in use
 Option: a resource has option value if the future benefits are uncertain and resource depletion is irreversible
 Existence: value from the existence of a species/resource

 Total Value = Use + Option + Existence

Question 13

Consumer surplus

Answer 13

 The benefit measure for pollution reduction is the increase in consumer surplus due to such a reduction
 Consumer surplus is the difference between what one is willing to pay and what one actually has to pay for a service or a project

Question 14

two ways to determine consumer surplus

Answer 14

 Willingness-to-pay (WTP) for improved quality
 Willingness-to-accept (WTA) compensation in exchange for degraded quality
 In theory, because income differences are small, WTA should be only a bit higher than WTP

Question 15

Problem with WTA and WTP

Answer 15

 WTA values are typically 2 to 7 times as high as WTP values!
 This difference persists even in tests specifically designed to control for inflated WTA figures

Question 16

Explaining WTP/WTA Disparities - Prospect theory

Answer 16

 Prospect theory: people may adopt the status quo as their reference point and demand higher compensation to allow environmental degradation than they are willing to pay to make improvements - otherwise known as the ‘endowment effect’
 If prospect theory is correct, it would reshape our marginal benefit curve for pollution reduction

Question 17

Explaining WTP/WTA Disparities - Substitution

Answer 17

 Substitution: The degree of substitutability between environmental quality and other consumption goods
 If environmental goods really have no good substitutes this could explain the difference.

Question 18

Using WTP or WTA?

Answer 18

 The standard practice is to use WTP because WTA estimates may be less reliable
 But if we think of common property as belonging to “the people” then WTA may be the best measurement

Question 19

WTP/WTA Measures of Benefits: Ethical Issues

Answer 19

 With either WTA or WTP, the use of consumer surplus as our benefit measure automatically leads to higher benefits for clean-up in wealthier communities.
 The rich will both be willing to pay more for clean- up, and also require higher levels of compensation for degradation.
 This is especially stark when we come to putting a value on reduced risk of death: one of the most important benefits of environmental clean-up…

Question 20

Step 1 in measuring the benefits of pollution reduction

Answer 20

 Step 1 in measuring the benefits of pollution reduction: assess the risks
 Information on health risks come from two sources:
 Epidemiological: studying past cases of human exposure
 Animal studies from laboratories

Question 21

Epidemiological or animal studies - problems

Answer 21

 Epidemiological studies: expensive, uncommon and hard to do well.
 Animal studies: require translating information from high-dose animal studies to low dose human exposure, creating multiple uncertainties

Question 22

Perceived Risk

Answer 22

 Individuals may perceive risk differently than the actual risk for a few reasons:
 Voluntary vs involuntary risk
 Lack of knowledge
 Distrust of Experts
 People are risk averse

Question 23

Risk Aversion

Answer 23

 Risk aversion: people dislike exposure to catastrophic events occuring w/ low probability more than unpleasant events occurring w/ high probability– even if they have the same average cost.

Question 24

Measuring Benefits: Three Methods

Answer 24

 Stated Preference: value of benefits obtained from survey methods
 1. Contingent Valuation Analysis
 Revealed Preference: value of benefits inferred from observed market data
 2. Travel Cost Analysis
 3. Hedonic Regression Analysis

Question 25

Contingent Valuation

Answer 25

 Survey methods used by economists to determine the benefits of environmental protection; the survey responses are “contingent” upon the questions asked
 Basically, ask people their WTP and/or WTA

Question 26

CV design in general - Framing

Answer 26

Set up a ‘hypothetical market’ – this ‘frames’ the issue. E.g. policy restoring old civic buildings. Reason for payment (aesthetic improvement) must be clear; as must the means of raising funds (raising taxes). Pre-testing of questionnaires (focus groups?)

Question 27

CV design - Practicalities

Answer 27

Face-to-face/telephone/mail - potential biases? non-response bias, interviewers ‘leading’ respondents…

Bids obtained through detailed explicit choices, open-ended questions, or dichotomous choice?

Question 28

Sources of Error in CVs

Answer 28

 Hypothetical Bias
 Hypothetical questions → hypothetical responses

 Free-riding
 May lead understatement of true WTP

 Strategic Bias
 People might inflate their WTP to achieve greater clean-up if they believe they will not have to pay their WTP

 Embedding Bias
 Answers are strongly affected by the context provided about the issue at stake

Question 29

Is CV useful or useless?

Answer 29

 Economists disagree about the reliability of CV analysis. Also doing a ‘state of the art’ job can be very expensive - see Diamond and Hausmann (1994)
 However, CVs provide the only available means for estimating the existence value component of nonmarket benefits, so they are often used