Economic Valuation

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Economic Valuation

• Dr. Katrin Rehdanz
• Research Unit Sustainability and Global Change
• Depts. GeoSciences Economics

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Contact

• Bundesstrasse 55, Room 027
• Tel [phone]
• Email katrin.rehdanz_at_zmaw.de
• Web-site
• http//www.fnu.zmaw.de/
• gt courses
• gt valuation
• The sheets are there as well

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The Course

• The theory and practice of the monetary valuation
  of environmental goods and services not traded on
  markets
• Prior knowledge micro, calculus
• Reader
• Other courses

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The Lectures, before whit week

• 3.4. Introduction The nature of value
• 10.4. Demand and welfare theory
• 17.4. Cancelled !!!
• 24.4. Econometrics
• 1.5. Free
• 8.5. Contingent valuation I
• 15.5. Contingent valuation II
• 22.5 Choice modelling

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The Lectures, after whit week

• 5.6 Production function approaches I
• 12.6 Production function approaches II
• 19.6 Hedonic pricing
• 26.6 Benefit transfer and meta-analysis
• 3.7 Footprints
• Exam 10.7. or 17.7.?

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Economic Valuation, lecture 1

• Course aims and set-up
• Price and Value
• Total Economic Value
• Why and what to value?
• Uses of economic valuation

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An economic theory of value

• Theory of value is a generic term and
  encompasses all the theories that explain the
  exchange value or price of goods and services
• Key questions
• Why are goods and services prizes as they are?
• How does the value of goods and services comes
  about?
• How to calculate the correct price of goods and
  services (if such a value exists)?
• Main categories
• Intrinsic theories (objective) the value is
  contained in the object itself (e.g. costs
  involved in the production process)
• Subjective theories The object must be useful in
  satisfying human wants (desired) and it must be
  scarce

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Price Value Greeks

• Their economy can be described as premarket
• Anthropocentric view
• They concentrated on human control
• One of the earliest economists was Xenophon
  (427-355 BC)
• His ideal leader would pursuit pleasure and avoid
  discomfort
• the greater the number of superfluous dishes set
  before man, the sooner a feeling of repletion
  comes over him
• a flute is wealth to one who is competent to
  play it, but to an incompetent person it is no
  better than useless stones ... unless he sells it

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Price Value Greeks -2

• Xenophon developed the idea of subjective utility
  further in a dialogue
• Aristippus asks Do you mean that the same
  things are both beautiful and ugly?
• Socrates replies Of course and both good and
  bad. For what is good for hunger is often bad for
  fever and what is good for fever is bad for
  hunger what is beautiful for running is often
  ugly for wrestling and what is beautiful for
  wrestling ugly for running. For all things are
  good and beautiful in relation to those purposes
  for which they are well adapted ...
• Subjective evaluation in the measurement of good
  versus bad

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Price Value Greeks -3

• Protagoras (480-411 BC)
• For him there was no objective truth, only
  subjective opinion and man is the measure of all
  things
• Therefore, although truth can not be discovered,
  utility can
• It is up to the citizens to decide what
  constitutes social welfare and how to achieve it
• Aristotle (384-322 BC)
• Interested in ethics rather markets
• Discusses value in terms of incremental
  comparisons based on subjective marginal utility
• Value in use versus value in exchange
• Trade only if surpluses exist and mutually
  beneficial
• Scarcity What is rare is a greater good than
  what is plentiful

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Price Value Early Christian Writers

• The rise of Christianity overlapped the decline
  of the Roman Empire and offered a different kind
  of civilizing influence
• Thoughts center on the right use of material
  gifts
• Wealth came to be looked upon as a gift of God
• Primarily interested in the morality of
  individual behaviour
• No interest in how and why of economic mechanism
• St. Augustine (354-407) went further than others
  and confirmed the subjective nature of value
• There is ... a different value set upon each
  thing proportionate to its use ... Very
  frequently a horse is held more dear than a
  slave, or a jewel more precious than a maid.
  Since every man has the power of forming his own
  mind as he wishes, there is very little agreement
  between the choice of a man who through necessity
  stands in real need of an object and of one who
  hankers after a thing merely for pleasure.

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Price Value Medieval

• From 700 to 1200 Islam led the world
• They preserved and developed the contribution of
  the Greeks while the west was sinking into the
  dark age
• In the medieval the Catholic church had a
  monopoly on learning
• The medieval economics, therefore, was a product
  of the clergy (particularly the Scholastics)
• The main interest was justice, not exchange
• One form of justice is exchange justice
• Albertus Magnus (1206-1280)
• Value in exchange must comply with cost of
  production (labour and expenses)
• Thomas Aquinas (1225-1274)
• reaffirmed value in use versus value in exchange
• he argued that price varies with need

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Price Value Medieval 2

• Henry of Friemar (1245-1340)
• was the first to look at aggregate (average)
  demands and scarcity, again without separating
  the two demand and supply
• Jean Buridan (1295-1385)
• introduced effective demand
• differentiated between consumers wants
  (luxuries, necessities) and recognized that they
  operate in the same market
• Gerald Odonis (1290-1349)
• introduced scarce and differentiated labour
• relative efficiencies of different skills and
  costs of education
• John Crell (1590-1633)
• combined the supply theory of value (Odonis) with
  the demand theory of value (Buridan),
• or in Scholastic terms, scarcity in the face of
  need (raritas) with need in the face of scarcity
  (indigentia)
• he did not realise that the two were merely
  components of a single principle

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Price Value Early

• A period of emerging commercial capitalism when
  empiricism and objectivism became important
• Sir William Petty (1623-1687)
• his methodological approach attempted to separate
  morals from science
• tried to unify land and labour in one value
  system
• recognised that money is the standard of value,
  medium of exchange, and store of value
• Richard Cantillon (1680-1734)
• he distinguished between actual (market) price
  and intrinsic value (equilibrium price)
• Physiocrats (18th century)
• claimed that only agriculture can create surplus
• a supply theory of value, with land rather than
  labour

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Price Value Classical

• After 1776, when The Wealth of Nations was
  first published, the field of economics got more
  organised and gathered steam
• Adam Smith (1723-1790)
• Value in use versus value in exchange
• Actual versus natural price
• Labour theory of value The value of any
  commodity ... not to use ... but to exchange ..
  is equal to the quantity of labour which it
  enables him to purchase or command. Labour is the
  real measure of the exchangeable value of all
  commodities
• David Ricardo (1772-1823)
• simplified and consolidated Smiths labour theory
  of value

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Price Value Classical -2

• Jeremy Bentham (1748-1832)
• introduced utility as a measure of a persons
  happiness and social welfare as the sum of
  individual utility
• Thomas Malthus (1766-1834)
• argued for a supply-and-demand value
• William Nassau Senior (1790-1864)
• recognised that value depends on (1) relative
  utility, (2) relative scarcity, and (3)
  exchangeability

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Price Value Neo-Classical

• William Stanley Jevons (1835-1882)
• distinction between total and marginal utility
• nature of marginal utility
• equimarginal utility in decision and exchange
• Alfred Marshall (1842-1924)
• Theory of demand elasticity, substitution, input
  factors
• Consumer and producer surplus

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Current Thinking

• Neo-classical revolution Value is relative,
  value measures demand versus supply, value is
  based on consumption and production
• Price is marginal value, value is the area under
  the demand curve, value equals utility
• Basis of valuation Peoples preferences, what
  people want
• Values depend on context
• Supply, demand
• Uncertainty Something that is uncertain is worth
  less, an uncertain loss is worth more
• Uniqueness Something that is unique is worth more

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Recent developments

• Total economic value Use value Intrinsic
  value
• Use value Actual use value
• Option value
• Quasi-option value
• Option value Value in potential use by self
• Value in potential use by others
• Value in potential use by future individuals
• Quasi-option value Value of avoiding
  irreversibilities in the light of expected future
  knowledge
• Intrinsic value Existence value

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Existence Value

• Existence value is unrelated to any actual or
  potential use
• Existence value may be related to sympathy, or
  stewardship
• Existence value is not right-based, as rights are
  absolute, and values are relative
• People express, and seem to have existence values

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What to value?

• Individuals can derive value from environmental
  goods and services from more sources than direct
  consumption
• Types of environmental services
• source of materials input fossil fuel, wood
  products, fish, water etc.
• life-support services liveable climatic regime,
  breathable atmosphere
• amenity services recreation, wildlife
  observation, scenic view, passive use values
• sink for the assimilation of wastes

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Resources and Markets

• Many environmental resources are not transacted
  at markets
• Atmosphere, oceans, wilderness
• Many resources are public goods or open access
• Other resources are traded
• Land, minerals, energy
• Markets are often far from perfect and
  externalities are present

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Property Rights

• Property is
• The right to use
• The right to exclude
• The right to destroy
• Property rights are often attenuated
• Property rights can be
• Private
• Common
• Public
• Government
• Absent (open access)
• Environmental resources are seldom privately owned

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Uses of Economic Valuation

• Regulation can either seek optimum or not
• If an optimum is sought, the marginal external
  cost function must be estimated, and expressed in
  money
• Find optimum Marginal benefit equals marginal
  cost (Cost-Benefit Analysis)
• Ex ante, e.g., Pigou tax
• Ex post, e.g., evaluation of policy
• Demonstrate value of environment
• Extend national accounts

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Pollution Damage(billions of US)
Damage avoided
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This course will ...

• Present techniques to measure the value, in the
  neo-classical sense, of commodities that are not
  traded in markets
• Present neo-classical techniques to measure use
  values
• Discuss alternative techniques
• Show empirical examples