Upcoming in Class

1. Upcoming in Class Homework #8 due Next Thursday Group Outline due Nov. 11 (next Thurs.)

2. Chapter 6 • Classify environmental values • Discuss methods of valuation • Stated vs. Revealed Preferences • Using Cost/Benefit Analysis

3. Environmental Values • Use value – the value that people place on the use of a good or service • Direct use value- the value one obtains by directly using a natural resource, such as visiting a national park • Indirect use value- ecosystem benefits not valued in markets, such as flood prevention or pollution absorption.

4. Environmental Values • Non-use value- values people obtain without actually using a resource • Existence value- the value people place on the continued existence of a resource, such as the benefit of knowing acres of the rainforest have been preserved • Option value- the value people place on maintaining future resource use options • Bequest value-value people place on the knowledge that a resource will be available for future generations

5. Methods to determine value • Revealed Preferences • Market price • Simulated market • Travel cost • Hedonic property values • Hedonic wage values • Avoidance expenditures • Stated Preferences • Contingent valuation • Attribute based models • Conjoint analysis • Choice experiments • Contingent ranking

6. Revealed Preferences • individuals reveal their value through their actions and choices • Direct and observable methods • Market price • Simulated markets • Indirect and inferred methods • Travel Cost • Hedonic values • Avoidance Expenditures

7. Travel Cost Model • Used primarily to estimate the value of various recreational activities such as fishing, hiking, camping and hunting. • In this approach, travel costs incurred in getting to a recreation site serve as a proxy for the price of recreation at the site. • Statistical methods are used to estimate a demand curve for a recreation site using data on travel costs, distance to the site, and other socio-demographic variables. • Does not capture option, existence, or bequest values

8. Hedonic values • Value relative to a characteristic, uses regression analysis (stat. technique) • Hard to separate environmental factors from other housing characteristics • Hedonic property values – • use market data on houses, break down the house’s characteristics, environmental characteristics and compare differences • estimate the marginal willingness to pay for some environmental attribute, such as cleaner air or a decrease in the probability of death. The value of the attribute is measured by estimating its contribution to the value of some other good; for example, how does a change in air quality contribute to the value of a house with a given set of characteristics. • Hedonic wage approach – workers in high-risk occupation demand higher wages

9. Avoidance costs: • The amount people must pay to avoid the adverse effects of the environmental damage. • Involves examining averting or defensive expenditures • Air purifiers for air pollution • Bottled water for water quality • A problem with this measure is that it only considers adverse effects to humans who directly use the resource. As such, other sources of value and costs are neglected.

10. Replacement and restoration costs: • How much would it cost to replace or restore the damaged/destroyed resource? • A major problem here concerns equivalence. Is the replacement or restoration equivalent to that which was initially harmed. If not, this measure of value is not accurate.

11. Stated Preferences Individuals state their value. Used when value is not directly observable (i.e. non-use values) Typically done in survey form.

12. Contingent Valuation • Survey to elicit responses of valuation. • How much are you willing to pay? • Would you pay $X to preserve or prevent change? • Biased • Strategic bias – respondents provide biased answers to influence results • Information bias – respondents have little or no experience • Starting-point bias – predefined range • Hypothetical Bias – respondents treat survey casual and give poor answers • Discrepancy between WTP and WTA • WTP - for quality improvements • WTA – for a loss • Economists working to improve estimation methods • CV analysis use in court cases all the time • Meta –analysis – “analysis of analyses”

13. Methods of evaluating a policy • Cost/Benefit • Issues in Benefit Estimation • Tendency to overstate benefits and understate costs in policy analysis. • Who reaps benefits and who reaps costs? Efficiency is not the only criteria in the policy arena. Equity may also be a concern. • Primary effects vs. secondary effects • Tangible benefits vs. Intangible benefits • Treatment of Risk and Uncertainty • Discount rate • Public sector rate < private sector rate => more projects than is optimal

14. Alternative Methods of evaluating a policy • Cost Effectiveness • Set a minimum or maximum standard • Evaluate policies on that criterion • All efficient policies are cost-effective, but not all cost-effective policies are efficient. • Impact Analysis • List of potential impacts both environmental and economic.

15. Upcoming in Class Homework #8 due Next Thursday Group Outline due Nov. 11 (next Thurs.)