History of Environmental Valuation

1
History of Environmental Valuation

• River and Harbor Act of 1902
• ACOE required to account for both costs and
  benefits of proposed projects
• Flood Control Act of 1936
• Federal participation if benefitsgtcosts
• Interagency Green Book
• Include intangibles in project justification.
  I.e. Environmental impacts

2
History of Environmental Valuation

• A Step Backwards?
• Clean Air Act of 1970
• Clean Water Act of 1972
• Prohibited weighing benefits and costs in setting
  environmental standards
• Based solely on public health criteia

3
History of Environmental Valuation

• Benefit Costs Analysis
• Comprehensive Environmental Response,
  Compensation and Liability Act of 1980 (CERCLA
  AKA Superfund).
• Natural resource trustees have the right to claim
  damages for injuries to natural resources
  occurring on public land
• Oil, Haz. Mats
• A Civil Action Erin Brokovich

4
History of Environmental Valuation

• Benefit Costs Analysis
• Executive Order 12291 (1981, Reagan) Requires
  Benefit/Cost analysis of any project using
  federal funds.

5
How do we measure the benefits of environmental
goods?

• In a market setting, the equilibrium price
  measures the marginal WTP for the last unit.
• Consumer and Producer Surplus measure the value
  of the good.
• Use versus Non-use values

6
How do we measure the benefits of environmental
goods?

• Problem Markets do not typically exist for
  environmental goods.
• No price for environmental goods.
• Does that mean no value?

7
Methods for measuring the benefits of
environmental goods?

• Indirect Market Methods
• Use changes in an existing market to value
  changes in environmental quality
• Travel Cost Models
• Ex Recreational Trips to Lake Erie
• Random Utility Models
• What beach at Lake Erie?
• Hedonic Techniques
• Real Estate values
• Wage Studies

8
Methods for measuring the benefits of
environmental goods?

• Direct Market Methods
• Ask people what the environment is worth to them
  hypothetical market
• Contingent Valuation
• What would you be willing to pay to prevent
  another oil spill like the Exxon Valdez?
• Would you be willing to pay 10 to reduce air
  pollution by 10?

9
The Travel Cost Method

• Opportunity cost of travel defines an implicit
  price for a recreational trip.
• Travel Costout of pocket costsopportunity cost
  of time.
• Labor-Leisure trade-off implies the opportunity
  cost of time is typically valued at the wage rate
  or some fraction thereof.
• Based on TC we can derive a demand curve for
  trips.

10
The Travel Cost Method

• Example TC60-Trips

TC
60
Trips
60
11
The Travel Cost Method

• Example Suppose the average price of a trip30

TC
60
30 trips on average
30
Trips
60
30
12
The Travel Cost Method

• Example Suppose the average price of a trip30

TC
60
Average CS450
30
Trips
60
30
13
The Travel Cost Method

• Example Suppose quality increases so TC70-Q

TC
60
30
Trips
60
30
14
The Travel Cost Method

• Example Suppose quality increases so TC70-Q

TC
60
30
Trips
60
30
15
The Travel Cost Method

• Example At the average price of 30 we would now
  expect 40 trips

TC
60
30
Trips
60
30
40
16
The Travel Cost Method

• Example Consumer Surplus is now 800

70
60
30
Trips
60
30
40
17
The Travel Cost Method

• The value of the quality increase is now
  estimated as 800-450350 per person.
• Interpreted as, recreators are WTP 350 more on
  average for trips with the improved water quality.

18
The Travel Cost Method

• Advantages
• a market situation
• backdoor estimate of the value
• Based on actual behavior

19
The Travel Cost Method

• Disadvantages
• Behavior has to be observed
• Cant measure non-use values
• Statistically complicated

20
The Travel Cost Method

• Data needs
• Travel costs (not easy to measure)
• Individual characteristics
• Number of trips before and after a quality change

21
The Hedonic Method

• Measure Changes in prices due to environmental
  factors
• Examples
• Differences in real estate prices due to
  proximity to superfund sites
• Differences in wages due to risk of injury on the
  job.

22
The Hedonic Method

• Advantages
• Based on observable data
• Disadvantages
• Difficult to measure changes in prices (only
  small changes and many other things affect
  prices).

23
The Contingent Valuation Method

• Just Ask!
• Open Ended Questions How much would you be
  willing to pay
• Problem Individuals can influence outcome
• Solution Dichotomous Choice Questions
• Would you be willing to Pay X?
• Problem Less information WTPgtX or WTPltX, but
  not how much.

24
Pros of CV

• Simple
• Measures Use and Non-Use Values
• Reliable when surveys are designed carefully
• Recently accepted by the courts

25
Cons of the CV method

• Hypothetical Bias
• Ask a hypothetical question get a hypothetical
  answer
• Difficult to validate and defend
• Strategic Bias
• Respondent attempts to influence results instead
  of reveal true WTP.
• More of a problem in open-ended rather than
  dichotomous choice questions
• Free-Riding
• CV values public goods
• Why should I pay if I get the good and everyone
  else pays for it?
• Protest Responses
• Opposed to the method of payment rather than the
  good itself.
• Im opposed to any tax increases so no Im not
  willing to pay increased taxes to save the
  Whooping Crane.

26
Valuing Life

• Many environmental projects save lives
• How do we measure the benefit of the saved lives?
• Controversial
• Value the change in the probability of death
• Willingness to pay for reduced risk.
• Example Suppose a toxic substance is released
  in a city of 1,000,000 people. If exposed, the
  chance of death is 1 in 100,000. What would you
  be willing to pay to reduce the risk to 1 in
  150,000? Suppose on average people are willing
  to pay 5. Then people are willing to pay
  5,000,000 to save 3.33 lives, or on average,
  1,500,000 per life saved.
• Other possibilities
• Willingness to take increased pay for riskier
  jobs.
• Defensive expenditures