Chapter 5 - Berck _ Helfand

Chapter 5 - Berck _ Helfand - Chapter 5. Measuring Benefits...

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Chapter 5. Measuring Benefits to Consumers What are the benefits associated with a good? One classic test for any number of potential government activities, such as providing water, regulating pesticides, or improving air quality, is whether the benefits of the activity exceed the costs. Doing this comparison, of course, requires an estimate of the benefits associated with a good, the subject of this chapter. Benefits are in the eyes of the beholders; that is, measures of benefits come from consumer preferences. The previous chapter described the relationship between a consumer’s preferences and a consumer’s demand curve. This chapter uses that relationship to provide estimates of the value of a good to that consumer. While the demand curve signals how much a consumer will purchase when faced with a market price, additional steps are necessary to get at the value that the consumer places on the good. Important environmental resources, such as clean air and the existence of endangered species, are not traded in markets. The estimation of these benefits is especially important in environmental economics, since policymakers want to know why they should protect environmental resources. If people value these resources, the argument for their protection is clear; if that value is larger than the costs associated with protection, the argument is even stronger. This chapter presents the theory of measuring benefits for both marketed goods and non-marketed environmental goods. The next two chapters then describe specific methods used to apply this theory for environmental goods. In the meantime, this chapter explores How to estimate the value of a good – a consumer’s total willingness to pay – from the demand curve for that good. Two other methods for estimating value – compensating and equivalent surplus – that estimate the change in income equivalent to the difference between indifference curves. How to add up individual benefits to get total benefits for a group of people. Water Scarcity in Tunisia Supplying water to rural communities in developing countries is a vital but difficult endeavor. Worldwide, the percentage of rural populations with access to a reliable source of water has increased—from only 30% in 1980 to 70% by 1994. However, the programs that provide this water often fall short of supplying the quality and quantity of water that people demand. Bringing water into remote rural communities is expensive, requiring the construction of extensive infrastructure and management programs. Because these infrastructure investments frequently lead to government involvement, water prices and quantities are often not set through market processes. Instead, water supplies may be determined by government budgetary priorities, and prices are set with a variety of objectives in mind – including both keeping water affordable and recovering costs. To keep water affordable, many times these systems provide only a limited degree of
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This note was uploaded on 03/03/2009 for the course ECON 370 taught by Professor Helfand during the Winter '08 term at University of Michigan.

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Chapter 5 - Berck _ Helfand - Chapter 5. Measuring Benefits...

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