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Natural Resource and Environmental Economics Chapter 6.pptx

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Natural Resource and Environmental Economics Chapter 6.pptx

  1. 1. Chapter Six Valuation of Environmental Resources • Economists generally assume that individuals, not the government, are the best judges of what they want • The economic value of a particular item measured by the most someone is willing to give up in other goods and services • In a market economy, money is a universally accepted measure of economic value pollution by TY
  2. 2. Why environmental valuation and analysis? • market prices cannot be relied on for env’tal resources • to identify socially optimal decision – optimal pollution tax rate, project appraisal pollution by TY
  3. 3. pollution by TY
  4. 4. Economic valuation technique  Environmental valuation is mainly based on the assumption that: individuals are willing to pay for environmental gains and, on the other hand, willing to accept compensation for some environmental losses.  The individual demonstrates preferences, which, in turn, place values on environmental resources.  Environmental economists have developed a number of market and non-market based techniques to value the environment.  According to Garrod and Willis (1999), environmental valuation methods can be broadly divided into two kinds of methods: Revealed preference and stated preferences. pollution by TY
  5. 5. Economic valuation technique.. There are 3 generally accepted approaches 1. Market Prices • Market Price Method - Applies for products or services that are bought and sold in commercial markets. • Productivity Method - for ecosystem products or services that contribute to the production of commercially marketed goods • Hedonic Pricing Method - Estimates economic values for ecosystem or environmental services that directly affect market prices of some other good • Travel Cost Method- Estimates ecosystems that are used for recreation. - Assumes that the value of a site is reflected in how much people are willing to pay to travel to visit the site pollution by TY
  6. 6. Economic valuation technique.. 2. Circumstantial Evidence – Damage Cost Avoided, – Replacement Cost, and – Substitute Cost Methods Damage Cost Avoided, Replacement Cost, and Substitute Cost Methods – Estimate economic values based on costs of avoided damages resulting from lost ecosystem services, costs of replacing ecosystem services, or costs of providing substitute services pollution by TY
  7. 7. Cont…. 3. Surveys Expressed Willingness to Pay • Contingent valuation method -The most widely used method for estimating non-use value. Asks people to directly state their willingness to pay for specific environmental services • Contingent choice method- Does not directly ask for willingness to pay—this is inferred from tradeoffs that include cost as an attribute • Contingent experiment method- Benefit Transfer Method - Estimates economic values by transferring existing benefit estimates from studies already completed for another location or issue pollution by TY
  8. 8. • Revealed preference methods are “observable” because they involve actual behavior and “indirect” because they infer a value rather than estimate it directly. • The two most commonly used revealed preference techniques are the hedonic price method and the travel cost. • Suppose, for example, a particular sport fishery is being threatened by pollution, and one of the damages caused by that pollution is a reduction in sport fishing. • How is this loss to be valued when access to the fishery is free? pollution by TY
  9. 9.  One way to derive this loss is through travel cost methods.  Travel cost methods: may infer the value of a recreational resource (such as a sport fishery, a park, or a wildlife preserve where visitors hunt with a camera) by using information on how much the visitors spent in getting to the site to construct a demand curve for willingness to pay for a “visitor day.” pollution by TY
  10. 10.  One interesting paradox that arises with the travel-cost model is that those who live closest to the site and may actually visit frequently, will have low travel costs.  These users will appear to have a lower value for that site even if their (unmeasured) willingness to pay for the experience is very high.  Another challenge in this model is how to incorporate the opportunity cost of time.  Usually, this is represented by wages, but that approach is not universally accepted. pollution by TY
  11. 11. Hedonic pricing method • The method is based on the assumption that any difference in wage rates or property values between normal areas and degraded areas is due to the value of the environment • it uses differences in prices of related goods (e.g. housing prices) to estimate willingness to pay for an environmental good, taking into account other relevant factors that determine the price of the related good. • The difference in the value can be seen and technically identified as the implicit value attached to environmental change. • The basic limitation of the method is that it requires large data and greater statistical competence and it requires real property markets, does not capture non-use values of environmental resource • it has very little relevance for environmental resources located in remote areas and in developing countries where competitive markets do not exist pollution by TY
  12. 12. Stated preference method (Direct method) • Stated preference method: is a non-market direct method based on individuals’ responses to surveys and questionnaires relating to hypothetical situations  Direct stated preference: case that might be used when the value is not directly observable  Stated preference methods: use survey techniques to elicit willingness to pay for a marginal improvement or for avoiding a marginal loss.  Constructed markets • Contingent valuation method (CVM) • Choice modelling pollution by TY
  13. 13. CONTINGENT VALUATION  The most direct approach, called contingent valuation, provides a means of deriving values that cannot be obtained in more traditional ways.  The simplest version of this approach merely asks respondents what value they would place on an environmental change (such as the loss of a wetlands or increased exposure to pollution) or on preserving the resource in its current state. pollution by TY
  14. 14. WTP VS WTA • People view gains and losses differently • WTP is limited to an individual‘s income • WTAC is unbounded • Confirmed by empirical studies, but not uncontested • Implies that surveys, policies need to be carefully designed • If an individual has the legal right, WTAC is the appropriate concept • It can be difficult to determine property rights (public goods) • Sometimes the current allocation is taken as the legal entitlement • Improvements = WTP and reductions = WTAC pollution by TY
  15. 15. DESIGN A CV STUDY • Define a market scenario • Choose an elicitation method • Design market administration • Design sampling • Design of experiment • Estimate WTP-function pollution by TY
  16. 16. DEFINE MARKET SCENARIO • What is being valued? A day at the beach, a view of the beach? Pollution of a single beach, or all beaches? • What is being valued is a policy intervention or a change in pollution – these have to be plausible and comprehensible • What is the payment vehicle? A tax, an entrance fee, a levy on parking – note that people have opinions on these pollution by TY
  17. 17. CHOOSE ELICITATION METHOD • Direct question: How much are you willing to pay? • Bidding game: Are you willing to pay X? If yes, X+d? If no, X-d? • Payment card: Choose from a list of numbers, including comparisons • Referendum choice: Are you willing to pay X? for different X, to many people • (Note: we are looking for the maximum amount) pollution by TY
  18. 18. • ADMINISTRATION & SAMPLE • Mail: No feedback or clarification possible • Telephone: Has to be simple and short, no graphical material • In-person: Expensive, interviewer bias • Are the people approached a representative sample? And those who answered? Does the survey itself induce a bias, for example, in knowledge? pollution by TY
  19. 19. EXPERIMENT & ESTIMATION  If one hypothesizes a relationship between WTP and income, then the suggested values (payment card, bidding game, referendum) have to be independent of income  If one hypothesizes a relationship between WTP and political colour, then one should include a question about the interviewees political opinions  But sample sizes need to be small, and interviews short! pollution by TY
  20. 20. VALIDITY • Content (face) validity: Does what is measured and • what is supposed to be measured coincide? • Criterion validity: Do the measured values correspond to other measurements of the same thing? • Construct/convergent validity: Do the measured values correlate to measurements of similar things? • Construct/theoretical validity: Do the measurements correspond to predictions? pollution by TY
  21. 21. RELIABILITY • The more familiar people are with the good and the scale, the more reliable the measured values • For public goods, referenda and taxes are perhaps best; for (quasi-)private goods, individual questions and entrance fee may be better • The payment vehicle may distort the measure Payment cards and perhaps bidding games give the most reliable results pollution by TY
  22. 22. 22 CVM • Exxon in fear of the large size of the damage claims being made against it funded a study to discredit CVM • National Oceanic and Atmospheric Administration (NOAA- the government body that is responsible for issuing regulations on the assessment of damage from oil spill) formed a panel consisting of distinguished economists to consider criticisms of CVM and make recommendations to NOAA
  23. 23. 23 CVM- • Panel agreed that CVM is valid if the following recommendations are taken into account: – Dichotomous choice format – Minimum response rate of 70% – In person interviewing – WTP rather than WTA – Sensitivity to scope is accounted for – Respondents are reminded of their budget constraints
  24. 24. NOAA Panel on CV Recommendations: 1. Sample: Statistician recommend size and type to ensure significance of results. 2. Non-responses High rate makes results unreliable. 3. Interviews Face to face are best, must test effect of interviewer. 4. Reporting Data and procedure used must be available to all. 5. Questionnaire design: Piloted + pre-tested 6. Cross-tabulations: Cross checks to assess interpretation of data 7. Elicitation procedure: WTP better than WTA, Yes/No Q’s 8. Accurate Description of issue 9. Expenditure implications pollution by TY
  25. 25. 25 CVM-Overview • It is clear that people are WTP for non-use, or passive use, environmental benefits. • However, these benefits are likely to be implicitly treated as zero unless their monetary value is somehow estimated. • So, how much are they worth? • Since people do not reveal their willingness to pay for them through their purchases or by their behaviour, the only option for estimating a value is by asking them questions.
  26. 26. 26 CVM-Overview • However, the fact that the CVM is based on asking people questions, as opposed to observing their actual behaviour, is the source of enormous controversy. • The conceptual, empirical, and practical problems associated with developing monetary estimates of economic value on the basis of how people respond to hypothetical questions about hypothetical market situations are debated constantly in the economics literature.
  27. 27. Problems in CV studies 1. Treatment of Outliers – a source of bias • Strategic responses • Protest answers (refusal to answer) 2. Embedding Problem • Tendency for WTP answers to be similar across different surveys. • Part whole bias – some people claim this invalidates the whole process 3. Starting Point Bias • Structure of survey influences all responses and the order of magnitudes in responses. • Yes/No Q’s in ascending vs descending order influences answers given. 4. Instrument Bias • Proposed financing affects peoples’ answers. pollution by TY
  28. 28. ..con..  The major concern with the use of the contingent valuation method has been the potential for survey respondents to give biased answers.  Five types of potential bias have been the focus of a large amount of research: (1) strategic bias, (2) information bias, (3) starting-point bias, (4) hypothetical bias, and (5) the observed discrepancy between willingness to pay • (WTP) and willingness to accept (WTA). pollution by TY
  29. 29. 29 CVM • CV survey was carefully designed to minimise CV limitations – Use of probability sampling – Referendum elicitation format – In person interviews with cards photos and maps – Accurate description of the valuation scenarios – Checks on understanding and acceptance – Yes/no follow up questions – Careful pre-testing
  30. 30. Choice-experiment method (CEM): • This is rather a group of methods where individuals are asked to choose between different alternatives of environment good, but where there are no direct questions about valuation. • In an individual CE question, individuals are faced with a choice between two “projects” which differ in the environmental dimension, and in addition in some other dimensions. One advantage that CE has over CVM is the ability to separately identify the value of individual attributes of a good. However, the CE questionnaire needs respondents to answer complex choices or rankings between bundles with many attributes and levels. • On the other hand, a weakness of CE relative to CVM is just that it is less direct. When people have a good sense of the value of particular environmental goods, it is best to ask them directly about this value, instead of asking in a circumscribed way. pollution by TY