Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 3 Valuing the Environment:...

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Chapter 3

Valuing the Environment: Methods

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Introduction

• This chapter examines valuation methods of environmental resources.

• This chapter will also discuss the various valuation techniques.


Objectives

• Outline the complexities of cost-benefit analysis including the monetization of costs and benefits.

• Define types of values: use value, option value, existence value and total willingness to pay.

• Classify the available nonmarket valuation methods by whether they are based on observed behavior or a hypothetical market and whether they are direct or indirect.

• Present the potential biases associated with the contingent valuation method.


• Provide an overview of cost estimation methods.

• Illustrate other complexities including the valuation of human life, benefits transfers, the monetization of intangibles, the treatment of risk and the choice of the discount rate.

• Present alternatives to benefit-cost analysis: cost-effectiveness analysis and impact analysis.

• Illustrate the valuation of the environment using examples.


Why Value the Environment?

• Many federal agencies require benefit/cost analysis for decision-making.


Valuing Benefits

• Types of Values Use Value

• the willingness to pay for direct use of the environmental resource

Option Value

• the willingness to pay for the future ability to use the environment

Nonuse Value

• individuals’ willingness to pay to preserve a resource that he or she will never use


Total willingness to pay (TWP)

TWP = Use Value + Option Value + Nonuse Value


Example 3.1


Example 3.1 (continued)


Valuing Benefits

• Classifying Valuation Methods Revealed preference methods

• Methods which are based on actual observable choices and from which actual resource values can be directly inferred

Direct stated preference methods

• Methods to elicit respondents’ TWP when the value is not directly observable


Valuing Benefits

• Classifying Valuation Techniques Contingent Valuation Method Travel Cost Models Hedonic Property Value and Hedonic Wage

Approaches Contingent Ranking and Conjoint Analysis


TABLE 3.1 Economic Methods for Measuring Environmental and Resource Values


Contingent valuation method• It is to elicit people’s willingness-to-pay (WTP) in a

hypothetical market

• Major concerns include strategic bias, information bias, starting-point bias, hypothetical bias and discrepancy between WTP and willingness-to-accept (WTA)

• A NOAA panel (1993) legitimized the use of contingent valuation.

• Meta-analysis utilizes a cross section of contingent valuation studies for determining non-use values and could eliminate the biases.


Example 3.3


Travel Cost Models infer values of recreational resources by determining how much visitors spent getting to a site and then using this information to estimate a demand curve for that site.

Hedonic property value and hedonic wage approaches use regression analysis to infer environmental values from spending on goods which include those values.

Contingent ranking and conjoint models are useful when project options have multiple levels of different attributes.


TABLE 3.2 Attributes in the Maine Forest Harvesting Conjoint Analysis


TABLE 3.3 A Sample Conjoint Analysis Survey Questionnaire


Using Geographic Information Systems for Economic Valuation

• Incorporating spatial dimensions into economic analysis, for example, in hedonic property valuation models (Example 3.4)

Valuing Human Life

• Controversial subject Focusing on calculating the change in the probability of

death resulting from a reduction in some environmental risk and then placing a value on that change (Table 3.4)


Example 3.4

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TABLE 3.4 The Cost of Risk-Reducing Regulations


TABLE 3.4 The Cost of Risk-Reducing Regulations (1 of 2)


TABLE 3.4 The Cost of Risk-Reducing Regulations (2 of 2)


• Issues in Benefit Estimation Primary Versus Secondary Effects

• Considering both primary and secondary consequences while implementing environmental projects

Tangible Versus Intangible Benefits

• Tangible benefits can reasonably be assigned a monetary value.

• Intangible benefits cannot be assigned a monetary value.


Approaches to Cost Estimation

• The Survey Approach Involves asking polluters about their control costs

• The Engineering Approach Using engineering information to estimate the

technologies available and the costs of purchasing and using those technologies.

• The Combined Approach Combining both survey and engineering

approaches


The Treatment of Risk

• A dominant policy is one which confers the higher net benefits in every outcome.

• The expected value of net benefits is the sum over the possible outcomes of the present value of net benefits of that outcome weighted by its probability of occurrence. The policy selected should be the one with the highest expected present value of net benefits.

• The evaluation of irreversible decisions requires extra caution.

0

, 1,...,I

j i iji

EPVNB PPVNB j F


• Choosing the Discount Rate The appropriate rate to use will depend on the

nature and expected lifetime of the project, who is doing the financing and the level of risk (See Example 3.5).

• A Critical Appraisal Concerns exist on the reliability of benefit/cost

analysis.


Example 3.5


Cost-Effective Analysis

• Second Equimarginal Principle (the Cost-Effectiveness Equimarginal Principle): The least-cost means of achieving an

environmental target will have been achieved when the marginal costs of all possible means of achievement are equal (See example 3.6).


Example 3.6


Impact Analysis

• An impact analysis attempts to quantify the consequences of various actions.

• Impact analysis places a large amount of relatively undigested information at the disposal of the policy-maker.


Summary

• Total Economic Value

• Valuation Methods Benefit-cost Analysis

• Valuation Techniques

Cost effective Analysis Impact Analysis

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 3 Valuing the Environment:...

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