Environmental

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Environmental Ecological Economics for
Development

• Lecture 2 Valuation of the Environment

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Outline

1. Economic values for the environment
2. Contingent Valuation (CVM)
3. Hedonic Pricing (HP)
4. Travel Cost Method (TCM)
5. Production Function Approach (PFA)

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1. Values for the environment

• Pricing/charging of un-priced environmental goods
  services
• Valuing environmental impacts in cost-benefit
  analysis
• Controversial basis of methods
• Subject to lobbying and manipulation

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Demand curves substitution and income effects
Price of X2 rises from Px21 to Px21 leading to a
fall in consumption of X2 which can be decomposed
into a substitution and an income effect. Welfare
evaluation requires that we remove the income
effect so that we arrive at a compensated
demand curve
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Economic valuation - demand and consumer surplus
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Categories of Goods
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Demand for private public goods
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(No Transcript)
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Economic valuation methods
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1. Economic value of the environment

• Use values direct use of environmental resources
• e.g., fertility of soil, fish from the sea,
  timber from forest, water from stream, etc.
• Option values the value people place on future
  ability to use environment the willingness to
  preserve the environment even if one is not
  currently using it
• future use by descendants or by others
  altruism
• Existence values willingness to pay for
  preserving or improving resources that people
  will never use unrelated to any actual or
  potential use
• existence of environment, even without human
  beings, is intrinsically important
• non-human rights

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1. Economic value of the environment (cont)

• Four categories of environmental services use
  and option values (e.g., forest)
• Input for production timber, honey, medicinal
  plants
• Waste sink absorbs CO2, dumping area
• Amenity service recreation
• Life-support service soil cover, plants
  animals, rainfall

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1.Economic value of the environment (cont)

• Non-use/existence value willingness to pay for
  preserving or improving resources that people
  will never use unrelated to any actual or
  potential use
• existence of environment, even without human
  beings, is intrinsically important
• non-humans rights

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1. Economic value of the environment (contd)

• Direct indirect approaches to measure values
• Direct asking individuals questions about the
  value of environmental services captures both
  use and non-use values e.g., CVM
• Indirect estimates from the observed behaviour
  of individuals in relation to marketed
  commodities to estimate only use-values, e.g.,
  HP, TCM, PFA

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2. Contingent Valuation Method (CVM)

• Directly asking people about their
• willingness-to-pay (WTP) for availability of an
  environment service and/or
• willingness-to-accept (WTA) compensation for loss
  of an environmental service

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2. Contingent Valuation Method (CVM) (cont)

• Six stages in CVM
• Set-up a hypothetical market
• Obtain bids
• Estimate mean WTP or WTA
• Estimate bid curves
• Aggregate data
• Evaluate the CVM exercise
• Use preserving a community forest as example

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2. Contingent Valuation Method (CVM) (cont)

• Set-up a hypothetical market
• Create a reason for payment
• the forest cannot be preserved without the
  management by the forestry department which
  entails costs
• How are funds to be raised
• Income taxes? Property tax? Fees? Contributions?
  User fees? etc.

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2. Contingent Valuation Method (CVM) (cont)

• Obtain bids
• Survey instrument administered asking individuals
  to state their
• maximum WTP
• or
• minimum WTA

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2. Contingent Valuation Method (CVM) (cont)

• The bids can be obtained through
• Bidding game higher and higher amounts suggested
• Close-ended referendum yes/no reply to a single
  payment
• Payment card a range of values on a card
• Open-ended question no value suggested

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2. Contingent Valuation Method (CVM) (cont)

• Estimate mean WTP or WTA
• Mean/median of the bids are calculated
• Protest bids zero bids for reasons other than
  attaching zero value e.g., refuse to attach any
  value, non-response
• Outliers median preferred if there are
  problematic outliers

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2. Contingent Valuation Method (CVM) (cont)

• Estimate bid curves
• How are the bids related to the individual
  characteristics of respondents?
• WTPi or WTAi f(Ii, Ei, Ai, Qi, O)
• Ii income Ei education Ai age Qi size
  of forest O other relevant factors

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2. Contingent Valuation Method (CVM) (cont)

• Estimation of bid curve helps to address issues
  like,
• Do richer people value the forest more than the
  poor?
• Do educated people value the forest more than the
  uneducated?
• Do older people value the forest more than the
  younger?
• How sensitive are people to the stock of forest?

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2. Contingent Valuation Method (CVM) (cont)

• Aggregate data
• The bid value from the sample has to be scaled-up
  to the relevant population
• Corrections for sampling biases as in other
  studies may be required
• If the bids are related to different periods of
  time ? discounting

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2. Contingent Valuation Method (CVM) (cont)

• Evaluate the CVM exercise
• May include sensitivity analysis
• Proportions of protest bids
• Understanding of hypothetical market by
  respondents
• Comparing with results from other studies
• etc.

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2. Contingent Valuation Method (CVM) (cont)

• Some problems in CVM
• Strategic bias respondents may over- or
  under-state bids to influence possible outcomes
• over-state if respondents think others may
  provide the resources (NIMBYs)
• under-state if respondents think they are going
  to provide the resources (the free rider problem)

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2. Contingent Valuation Method (CVM) (cont)

• Design bias the design of the survey may bias
  respondents bids
• Choice of bid vehicle bidding game, close-ended
  referendum, open ended questions, etc. may give
  different results
• Nature of hypothetical market income taxes?
  property taxes? fees? etc.
• Starting point bias the starting point of the
  bid may influence the final choice of respondents

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2. Contingent Valuation Method (CVM) (contd)

• Mental account bias
• respondents may systematically over-state WTP by
  thinking about a broader problem than the
  specific environmental problem
• respondent may report the total WTP for
  preserving all forests rather than the specific
  forest

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2. Contingent Valuation Method (CVM) (cont)

• Hypothetical market error do people act the same
  way in a hypothetical market as they do in a
  real one?
• Responsibility considerations should polluters
  pay for preserving the environment?

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2. Contingent Valuation Method (CVM) (cont)

• Some empirical applications
• Social forestry in Orissa, India (Kohlin, 2001a)
• community forests more beneficial to people
  living far from forests and those depending on
  market purchase

a. Kohlin, Gunnar. "Contingent Valuation in
Project Planning and Evaluation The Case of
Social Forestry in Orissa, India." Environment
and Development Economics, 2001, 6(2), pp. 237-58.
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2. Contingent Valuation Method (CVM) (cont)

• Wetland in Taiwan (Hammitt, et al., 2001)
• estimated households WTP to preserve Kuantu
  wetland
• Community forestry in Ethiopia (Mekonnen, 2000)
• household size income, distance, number of
  trees owned and sex of head significant

Hammitt, James K. Liu, Jin-Tan and Liu,
Jin-Long. "Contingent Valuation of a Taiwanese
Wetland." Environment and Development Economics,
2001, 6(2), pp. 259-68. Mekonnen, Alemu.
"Valuation of Community Forestry in Ethiopia A
Contingent Valuation Study of Rural Households."
Environment and Development Economics, 2000,
5(3), pp. 289-308.
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3. Hedonic Pricing (HP)

• HP identifies the value of an environmental
  service by examining how market value of a good
  (e.g., a house) is affected by environmental
  damage (e.g., pollution)
• How much lower would the price of a house be in a
  polluted neighbourhood as compared to a similar
  house in a non-polluted neighbourhood?

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3. Hedonic Pricing (HP) (contd)

• Estimation of hedonic price function
• Ph f(Si, Nj, Ak, Qm)
• Ph house price
• Si site/property characteristics (rooms,
  garage, garden, etc.)
• Nj neighbourhood characteristics
• Ak accessibility (link with other
  neighbourhoods)
• Qm environmental quality

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3. Hedonic Pricing (HP) (cont)

• The HP function tells us by how much property
  price changes for a change in environmental
  quality captures WTP
• Typically as environmental quality improves,
  property prices rise but at diminishing rate
• Problems in HP econometric problems, market
  segmentation (ethnic composition, owner vs.
  rental), etc.

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Pi f (Qi)
House prices, Pi
Environmental quality, Qi
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4. Travel Cost Method (TCM)

• The cost of using the environmental service as
  proxy for value of environment
• Mainly used in outdoor recreation, fishing,
  hunting, boating, national park
• Travel cost for individual i to site j, Cij
• Cij DCij TCij Fj, i1, , n j 1, , m
• DCij distance costs
• TCij time costs (opportunity cost of labour)
• Fj entrance fee

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4. Travel Cost Method (TCM) (cont)

• Trip generating function (TGF) predicts how many
  visits, Vij, by individual i to site j given
  travel cost and socio-economic characteristics
• Vij f(Cij, Ii, Ei, Ai, etc.)
• Ii income
• Ei education
• Ai age
• The TGF gives a demand curve for changes in
  travel cost WTP for the service

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Costs per visit, C
C
C1
C2
Vmax
No. of visits, Vj
V1
V2
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4. Travel Cost Method (TCM) (cont)

• Maximum number of visits when travel cost (fee)
  is 0
• At C2 C1, V2 V1 number of visits individual
  still interested to visit (there is WTP for the
  service) s/he willing to pay as high as C
• Travel costs/fee capture the amounts people are
  willing to pay (consumer surplus) to visit the
  environmental service the value of the
  environmental service

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4. Travel Cost Method (TCM) (cont)

• Some problems with TCM
• Multi-purpose trips
• Calculating
• distance costs (e.g., only petrol, depreciation,
  etc.)
• the value of time (what is the opportunity cost
  of time for visiting the environmental service?)
• is complicated
• Econometric problems

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5. Production Function Approach (PFA)

• Examines how environmental quality affects firm
  or household production
• How much marketed inputs are required to
  compensate for environmental degradation so that
  the same level of output is produced?

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5. Production Function Approach (PFA) (cont)

• Production function
• Qi f(L, K, I, E)
• Qi quantity of output
• L labour
• K capital
• I other inputs
• E environmental quality
• What are the additional costs in L, K and I if E
  deteriorates?

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5. Production Function Approach (PFA) (cont)

• E.g., fish catch declining with pollution of
  water
• How much more labour, capital (e.g., fishing
  boats) and other inputs are required to get the
  same catch as before the pollution?
• The additional costs incurred for the additional
  labour, capital and other inputs measure the
  value of the water pollution