Valuation methods

Question 1

Benefit Cost Analysis (BCA)

Answer 1

• Benefits of projects exceed cost

- time value of money; cost in future are less worth in the present

Question 2

pittfalls BCA

Answer 2

1. double counting - cost/benefits accounted more than once
2. proper accounting of opportunity cost
3. sunk cost - cost that already have been done cannot be undone
4. job cost - jobs has to be counted as cost/not benefit, opportunity cost –> labour could have been used for other value making processes
5. taxes - tax revenue is a transfer, not relevant for BCA

Question 3

Hedonic Valuation Method (wages)

Answer 3

• estimate Value of statistical Life
• -> estimation of social net benefit of pollution control
• uses statistical approach to estimate wage premium for taking a job with marginal higher risk of death

Disadvantages:

• assumes workers accurately perceive risk
• assumes workers in more risky jobs are no different to workers in less risky jobs

Question 4

Hedonic method (property)

Answer 4

estimate value of local environmental good
- uses statistical analysis to estimate price premium associated with the marginal increase of environmental good
disadvantages:
- correlation with other environmental goods make it difficult
- captures only the values capitalized in property

Question 5

Travel cost method

Answer 5

• estimation of site specific environmental goods, where travel to the site is required
• Treat travel cost to a site as the “price” for the site; use the fact that different site users pay different “prices” to estimate the site demand (MWTP) curve, and the value of changes in the site.
• disadvantages:
• not good for trips to multiple sites
• not good for multi day trips involving multiple activities

Question 6

Contigent valuation method

Answer 6

estimate all types of environmental goods and services
- construct a demand curve by directly asking survey respondents about their willingness to pay for marginal increases in the goods

disadvantages:
- hypothetical bias
--> not the real WTP
- Respondent must clearly
understand the intervention
effect

Question 7

Value of statistical life

Answer 7

• estimate of amount of money society is willing to pay to avoid a death of one life
• basically can be seen as a WTP for a safer job