EEP101_11_Kristin - Lecture 11: Valuation of Environmental...

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Unformatted text preview: Lecture 11: Valuation of Environmental Amenities Amenities Kristin Kiesel UC Berkeley • Types of Environmental Benefits • Concepts in Benefit Measurements • Measurement Issues • Market and Non-Market Valuation Methods Types of Environmental Benefits Types Use benefits refer to the utility arising from direct or indirect physical use of a resource including commercial use, recreational use, and aesthetic use: use, Consumptive use benefits are private benefits that are derived from resource consumption and contribute to resource depletion. Examples are farming, forestry, fishing, grazing, hunting, mining. Non-consumptive use benefits are generally public good benefits that do not contribute to resource depletion. Examples are swimming, boating, hiking, camping, viewing wildlife, observing scenic forests, mountains, rivers, waterfalls, etc. observing Types of Environmental Benefits (cont.) • Non-use benefits refer to utility that is derived from environmental resources without physical interaction with the resource: the Option value benefits arise in situations where depleting a resource would be an irreversible action. It is derived from maintaining the option to utilize it in the future. For example, extinct plants could have medicinal value that can not be discovered anymore. discovered Vicarious consumption benefits refers to utility derived from Vicarious the consumption of environmental resources by other individuals. For example, you might like it, if friends that visit you get to see a whale. you Types of Environmental Benefits (cont.) Types Stewardship benefits are moral benefits that we derive from knowing that we are doing our parts as stewards of the worlds’ resources: resources: • Bequest benefits refer to utility derived from passing an environmental resource on to children and/or future generations. environmental • Existence value, or inherent benefits refer to utility derived from the knowledge of the mere existence of environmental resources. You might never see many of the endangered species but you might still value their existence. Concepts in Benefit Measurements Concepts • Willingness to pay (WTP) is the maximum amount of money an maximum individual would give up in exchange for all the benefits associated with an environmental resource. We can think of WTP as the area under an individual’s demand curve as an individual would be willing to pay an amount equal to the total benefits received from the environmental good. environmental an individual would accept to forego all the benefits associated with forego an environmental resource. It is the opposite of WTP in terms of resource allocation or property rights. • Willingness to accept (WTA) is the minimum total amount of money minimum WTP < = > WTA? WTP WTP is bounded by an individual’s budget constraint (or income), WTP budget WTA is not. WTA Measurement Issues Measurement • Uncertainty about the amount of benefits, especially when we talk about future benefits Example: – – Suppose the Department of Fish and Wildlife is considering a management project that improves fish habitat in a Suppose trout-fishing stream. Suppose that without the program the outcome is certain and equal to a "Status Quo Benefit,”. The outcome of the Suppose project, however, is uncertain with three possible outcomes for which the department has rough probability measures: measures: Probability: Possible Outcome Under the Project: Possible 1/2 Status Quo Benefit + $6M. 1/4 Status Quo Benefit + $3M. 1/4 Status Quo Benefit + $9M Expected benefit: Expected Benefit of no action = Status Quo Benefit Expected Expected Expected Benefit with project = Status Quo Benefit + 1/2 · $6M + 1/4 · $3M + 1/4 · $9M = Status Quo Benefit + $6M. Status Risk aversion: If uncertainty decreases the department’s willingness to pay relative to the expected benefit of the project. A risk averse department has a WTP of less than $6M. risk Risk Premium: The difference between the expected benefits and maximum WTP by the department. If the department has WTP = $5M, then the Risk Premium on the project equals $1M. the • Heterogeneity in valuation of environmental amenities Market and Non-Market Valuation Methods • Market Values: The use of market prices is the most direct method (e.g. resort skiing, commercial whale watching, etc.). But: 1) Market Failure often occurs when providing environmental Market resources due to externalities. externalities. 2) Many environmental resources are not traded in markets due to 2) traded due public good character. character. Alternative methods Market and Non-Market Valuation Methods (cont.) Market • Engineering and agronomical cost methods: If natural resources can be restored (such as forests) If engineering and agronomical techniques of mathematical programming can be applied to estimate the cost of restoration. restoration. • Hedonic price functions • Travel cost methods • Survey and interviewing techniques: Contingent Survey Valuation (CV) Valuation Hedonic Price Functions • • Goods in general can be thought of as bundles of characteristics. The hedonic price function approach is a method that infers the marginal value of each characteristic (Zi) form the price of the combined bundle: P = a1Z1 + a2 Z2 ......... + an Zn • Implicit prices or valuation (ai) of environmental quality such as air quality can be deduced from market prices of goods such as house prices (e.g. Chay and Greenestone 2005) using statistical analysis and econometric techniques. Issues? • Travel Cost Methods Travel • The value of recreational amenities is inferred from The • associated expenditures. associated The travel cost method uses actual travel expenditures (e.g. The gas, plane tickets, etc.), and opportunity costs of time (e.g. wage rate) to infer valuation of recreational activities. Example: Example: • Assume there is only one lake in a region (e.g. lake Tahoe). It attracts Assume 40,000 visitors/month. Each visitor spends 5 hours boating and 2 hours traveling. The opportunity cost of time is $8/hr for every individual. Gas and car use cost $6/travel hour per visitor. Entry cost is $2/visit. Thus, the total travel cost is: total 40,000 * [8 * 7 + 6 * 2 + 2] = 40,000 * 70 = $2,800,000 • Issues? Travel Cost Methods (Cont.) Travel • The $2.8 million per month is an estimate of a lower bound on WTP The for recreational benefits from the lake, because anyone that finds it optimal to spend time at the lake must receive at least enough benefit to cover the travel cost of getting to the lake, but might receive considerably more. complex. For example, closure of one lake for a specific recreational activity will cause some people to use substitute lakes. In turn, these get more congested and the benefits of using them will decline. account for more than one activity in one trip or visits of multiple sites. sites. • If there are other substitute lakes, travel cost methods become more If • Travel costs vary based on the starting point of the trip. How does one Travel Survey and Interviewing Techniques: Contingent Valuation Method (CV) Contingent • In a lot of instances, there is no other way to elicit nonmarket values than just to ask people directly: market – How much would you be WTP for an amenity? – How much would you be WTA to forego an amenity? How – How would you vote for a proposition involving an environmental or resource use choice? or • Issues? Major Issues with CV Estimates Major • Strategic bias (Not telling the truth): Individuals may report benefits higher or lower than their true benefits in order to advance their own agenda or to hinder the agenda of someone else. hinder a question is put. For example, answers to a WTP question may differ depending on whether the starting point of the initial value is $0 or $100. starting • Framing bias: People's answers may vary according to the context in which • Ill-formed preferences: People may not have well-formed preferences (e.g., WTP and WTA) for unfamiliar goods (e.g., a native of Kansas may not have well-formed preferences for an endangered fish in California that he had never heard of before the survey). never People are limited in their capacity to process, analyze, and retain information. For example, people may infer that an issue is important (and thus has positive WTP) simply because they receive information from a survey, but may have had zero WTP beforehand.. survey, • Information bias: Failure to comprehend or to interpret questions correctly. ...
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