Environmental Economics Lecture 5 Valuation Florian K. Diekert - - PowerPoint PPT Presentation

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Environmental Economics – Lecture 5 Valuation

Florian K. Diekert February 26, 2015 Perman et al (2011) ch. 11-13

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Preview lecture 5

• 1. Theory

◮ Categories of environmental benefits ◮ WTP and WTA

• 2. Practice

◮ Stated preference methods ◮ The method of “contingent valuation” (CV) ◮ Discussion: (http:

//www.aeaweb.org/articles.php?doi=10.1257/jep.26.4)

◮ Revealed preferences ◮ Travel cost method ◮ Hedonic pricing ◮ Production function based techniques

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Valuation: Theory

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Categories of environmental benefits

In the old edition of the Perman book (2003), there were a lot of acronyms, summarized in two equations: EC = UV + EV + OV + QOV TV = CUV + NCUV + NUV

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Willingness-to-pay & willingness-to-accept

Assume that quantity/quality of environmental good e can be treated as an argument in a well- behaved utility function. The individual cannot choose level of e. y is income.

u = u(y, e) e0 e1 At A, WTP for e improvement = BC is Compensating Surplus, CS At A, WTA in lieu of e improvement = DA is Equivalent Surplus, ES e1 e0 At B, WTP to avoid deterioration = BC is Equivalent Surplus, ES At B, WTA compensation for deterioration = DA, Compensating Surplus, CS

Figure: Slide taken from Perman’s webpage http://personal.strath.ac.uk/r.perman/ppts.htm

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Willingness-to-pay & willingness-to-accept

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Compensating and Equivalent variaton

◮ Compensating variation is the change in income that would

compensate for the price change

◮ Equivalent variation is the change in income that would be

equivalent to the price change

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Compensating and Equivalent variaton

◮ Compensating variation is the change in income that would

compensate for the price change

◮ Equivalent variation is the change in income that would be

equivalent to the price change Two necessary conditions for environmental quality changes to be approximately identified by price changes in demand functions:

◮ Non-essentialness ◮ Weak complementarity

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Valuation: Practice

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Stated preference methods: Contingent Valuation

Excerpt of NOAA-panel recommendation:

◮ Sample from entire affected population ◮ Personal interview ◮ Pre-testing ◮ Referendum format ◮ WTP instead of WTA ◮ Reminder of undamaged substitutes ◮ ‘No-answer’ option available

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Contingent Valuation: Discussion

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Revealed preference methods

• 1. Travel cost method

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Revealed preference methods

• 1. Travel cost method
• 2. Hedonic pricing

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Revealed preference methods

• 1. Travel cost method
• 2. Hedonic pricing
• 3. Production function based techniques

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Review lecture 5

• 1. Theory

◮ Categories of environmental benefits ◮ WTP and WTA

• 2. Practice

◮ Stated preference methods (in part. “contingent valuation”) ◮ Revealed preferences: Travel cost method, Hedonic pricing,

Production function based techniques

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Preview next lecture

• 1. A heuristic definition of cost-benefit analysis
• 2. Detour: The moral of choosing A over B
• 3. Cost-benefit analysis in a static and certain world

◮ Tests for marginal and non-marginal projects ◮ CBA and social welfare functions

• 4. Dynamic aspects
• 5. Accounting for uncertainty, risk, and irreversibility