E.  Valuing the Environment

• Costanza, et al (2014)

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1.  Total economic value

• Value determined by humans

• Willingness to pay (WTP) - maximum amount people are willing to pay for a good or service

• Some ecological economists and noneconomists advocate "rights-based" notion of value - nonhuman species may have inherent rights

• Ecocentric worldview - most fundamental source of value derives from ecosystem functioning

• Willingness to accept (WTA) - minimum amount people would be willing to accept for an action that reduces well-being

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a.  Use value

• Tangible benefits that can be physically observed

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(1)  Direct use value

• Benefits obtained from deliberate use of a resource

Ex. - Wood, non-wood products, hiking, hunting

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(2)  Indirect use value

• Tangible benefits obtained with no effort taken

• Also called ecosystem services

Ex. - Soil erosion control, flood protection, carbon storage

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b.  Non-use value

• Benefit obtained without actually using the resource

• Largely psychological

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(1)  Option value

• Benefit from having future options for use

Ex. - Future recreation, potential pharmaceuticals

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(2)  Bequest value

• Benefit from the knowledge that the resource is available for future generations

Ex. - Forest available for future generations to use

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(3)  Existence value

• Benefit from a resource that will never be used - knowledge that resource exists provides a benefit

• Separate from bequest value

Ex. - Welfare from just knowing a forest exists

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c.  Summary

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2.  Valuation techniques

a.  Market valuation

• Some resources sold in existing markets

• Calculate consumer and producer surplus

Ex. - Wood, fish, groundwater

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b.  Cost of illness method

• Estimate cost of illnesses due to environmental factors

(1)  Direct costs - medical costs, foregone wages

(2)  Indirect costs - decreases in human capital, pain and suffering, decreases in productivity

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c.  Replacement cost methods

• Estimate cost to repair or restore a resource

Ex. - Fertilizer to replenish soil, planting trees

• Use least cost option when there are multiple options

• Habitat equivalency analysis (HEA) - compensate for damages with an equivalent amount of habitat restoration

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3.  Revealed preference methods

• Actual behavior infers a value

• Value is captured by market forces

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a.  Travel cost models

• Use travel cost as a proxy for price to estimate demand

• Other independent variables - demographics, site characteristics, quantity and quality of substitute sites, weather, dates

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b.  Hedonic pricing

• People value a good because of its characteristics, not the good itself

• Value of environmental quality capitalized into the value of property

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• Hedonic wage model - impact of environmental risk incorporated into wages

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c.  Defensive expenditures approach

• Calculate expenditures households take to avoid or mitigate exposure to a pollutant

• Gives minimum willingness to pay

• Goods may be purchased for other reasons

Ex. - Bottled water, water purification systems

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4.  Stated preference methods

• Ask people hypothetical questions

• Contingent valuation - use surveys to determine valuation

- Ask respondent to state willingness to pay for an environmental improvement

• Endowment effect - some put high value on something they already possess

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(1)  Survey design

(a)  Open-ended - respondent asked to state maximum WTP

(b)  Payment card - respondent asked to choose from numerous potential WTP

(c)  Single-bounded - respondent asked whether they would pay a specific amount

• Referendum format - question presented as a vote

(d)  Double-bounded - respondent given one amount, and then another based on answer

(e)  Multiple-bounded - respondent asked whether they are willing to pay on multiple options

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(2)  Sources of bias

(a)  Strategic bias

• Answering incorrectly to try to achieve a policy outcome

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(b)  Yea-saying

• Saying because person thinks that is what researcher wants to hear

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(c)  Range bias

• Respondent influenced by range given, may choose middle point

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(d)  Protest bids

• Respondent opposes question or method of payment

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(e)  Nonresponse bias

• People don't respond, makes sample non-representative

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