section_notes_7 - Section Notes 7 Outline Valuation of...

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Unformatted text preview: Section Notes 7 Outline Valuation of Environmental Bene ts Natural Resource Economics Review of Problem Set Valuation of Environmental Bene ts WTP vs. WTA: WTP is area under an individual's demand curve. WTA is the amount you'll accept in return for giving up all bene ts of a resource that you own. WTP<WTA because WTP is bounded by a budget constraint. You should be able to calculated Expected Bene t of a project, when there is a possibility of di erent out- comes. If an organization is risk adverse, then their willingess to pay for a project is less than the Expected Bene t. The risk premium is the Expected Bene t minus the actual WTP. Example: An environmental project has a 0.5 probability of making $100, a 0.3 probability of mak- ing $200, and a 0.2 probably of making $50. What is the Expected Bene t? If the rm is risk adverse and its WTP for the project is $100, what is the risk premium? We calculate the expected bene t as . 5 100 + 0 . 3 200 + 0 . 2 50 = 120 . Risk premium is EB-WTP=20.Risk premium is EB-WTP=20....
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section_notes_7 - Section Notes 7 Outline Valuation of...

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