measurement of environmental damage (benefit)

Lecture note 6 Measurement of Environmental Damage Benefit • Total economic value of an environmental resource • Valuation techniques For assigning economic value to non-market goods

Lecture note 6

Measurement of Environmental Damage

(Benefit)

• Total economic value of an environmental

resource

• Valuation techniques

For assigning economic value to non-market goods and services

Total economic value

Direct Use Indirect Use Option values Existence values

Output can

be consumed

directly

Future direct and indirect use

value

Value from knowledge

of continued existence

Functional benefits

Food

NTFP

Biomass

Ecological functions Biodiversity

Conserved

Habitats Endangered

Economists define the value of change in terms of

How much of something else an individual is willing to give up

to get this change/or

How much they would accept in order to permit the change to occur

How can we know?

Experiment

Ask people ‘How much they would be willing to pay’

Surrogate markets/ hedonic property value model

Damage function approach

Benefit transfer approach

Perspectives on measuring economic values of the env good/ service, and the usefulness of such information for policy making

Can be measured Accurately and reliability

Can not be measured Accurately and reliability

Useful

for policy making

Not useful

for policy making

A

D C

B

Choice among valuation techniques

Use more than one technique and compare the results

Different techniques may measure different things

Considering the needs of the users of valuation studies

And the needs of the public

The cost of carrying out a valuation study

Components of a CV questionnaire

 A hypothetical description of the term under which the

goods/services to be offered

 Question’ how much an individual is willing to pay for

Or ‘ how much he/she is willing to accept in compensation to forgo a loss

 A series of questions about socioeconomic and demographic

characteristics of the respondents and his/her family

 A hypothetical description of the term under which the

goods/services to be offered

 When the service will be available

• How the respondent will be expected to pay

• How much others will be expected to pay

• What institutions will be responsible for delivery

• The quality and reliability of the service

 Question’ how much an individual is willing to pay for

Or ‘ how much he/she is willing to accept in compensation to forgo a loss: Yes/No questions and open-ended questions

 A series of questions about socioeconomic and demographic

characteristics of the respondents and his/her family: age, sex, income, job, education,…

Options for asking CV questions

 Direct/ open-ended question: Max WTP _

 A single YES?NO Question {200,… 500} YES/NO

 Option 2 and option 1

 Two YES/NO questions: divided respondent into two

groups:

Group 1 :from low value to high value Group 2: from high value to low value

 Two YES/No questions followed by an open-ended question

 Three YES/NO questions: for two groups of respondents

Analysis of willingness-to-pay responses

 Mean, frequency and other descriptive statistics of WTP

 Cross tabulations of WTP with socioeconomic (SE) and

demographic (DC) characteristics

 Multivariate analysis of the determinants of WTP

WTP i = f(SE i , DC i , P Si )

P Si : prices and availability of substitute goods and services

 Determinants of WTP (for yes/no question):

Logit/ probit model

Surrogate market techniques (revealed preference)

Indirect approach to monetary valuation of env

benefits by looking at observed market behaviour and choices (i.e market for some other goods/services related to env benefits and costs of concern

The goods/services bought and sold in these

surrogate markets will often have as complements

(or attributes) the env benefits and cost in questions and these will influence the decision to buy or sell

The Travel Cost Method (TCM)

Widely used to measure the demand and benefits of recreation site facilities and characteristics

 Information on money and time spent by people in getting

to a site is used to estimate WTP for a site’s facilities/ characteristics

By looking at how different people respond to differences in money travel cost

 The travel cost demand function is the derived demand for

a site’s services and depends on the ability of a site to provide the recreation activity

Required data: variation in prices, consumption, quality

characteristics

Procedural steps

 The site is divided into concentric circles (zones)

 Visitors to the site are sampled using a questionnaire :

Zone of origin and other demographic/attitudinal information Frequency of visits to the site

Frequency of visits to substitute sites Trip information: length, nights stayed, travel paths, meal

 Visitation rates are then found for each zone (visitor days

per capita)

 Measurement of travel costs to and from the site

Set up the relationship bt visitation rate and travel

cost

Vi = a + bTCi + cINCi + dEDi + ….+ STCi

Travel cost, income, education, TC to substitute sites

 The observed total visitation for a site from all zones represents one point on the demand curve for the site

Travel cost: entrance fee, direct money cost, time cost

Hedonic pricing method (HPM)

Widely used to measure benefits and costs relevant to air and noise pollution

 Define the market commodity (Property in this case) and

the environmental good/service which is an attributes of the market commodity (e.g air pollution)

 Set up Hedonic Price Function : the determinants of the

price of the commodity

P= f (S, N, E)

P: Property price; S: structural characteristics; E: air quality

 Using cross-sectional data

Damage Function Approach

Does not aim to measure individuals’ preferences for better levels of environmental quality directly.

Establishing a dose-response relationship between

environmental damage (response) and some cause of this damage such as pollution (the dose)

Damage function relates physical/biological changes in the ambient environment to the level of the cause of the change

Procedural steps

 Setting up a physical damage function

R= f( P, other variables) P: physical damage, P is the cause of the damage

 Estimate the function to find dR/dP

Calculate the actual change in pollution due to the

environmental policy change

Calculate V.dP (dR/dP)=V.dR=dD

dR: the actual change in pollution

V: monetary value per unit of physical damage (V)

To give the ‘damage avoid’ or benefit of the environment