Environmental Economics Exam 1

How does proximity to a hazardous waste dump site impact human welfare?

Example of environmental economics question with spatial analysis components

Permissible projects

Any project where the benefits-cost is positive

Preferable projects

Projects which maximize net benefits in times of limited resources; may require discounting

Ex-ante CBA

CBA is conducted before the project

Ex-post CBA

CBA is conducted after the project

Helps decision whether to do the project and allows for better resource allocation

Advantages of ex-ante CBA

Difficult, expected costs and benefits may be inaccurate 

Disadvantages of ex-ante CBA

Easier and more accurate

Advantages of ex-post CBA

Project is already complete, results are of lesser value

Disadvantages of ex-post CBA

Efficiency

Allocations are Pareto or Kaldor-Hicks optimal

Cost effectiveness

The least cost means of meeting a target

No other allocation could benefit at least one more person without making anyone worse off

An allocation is Pareto optimal if…

Those that are worse off are compensated by those who are better off to even out

An allocation is Kaldor-Hicks optimal if…

Utility

A person’s total satisfaction or benefit from a good or service

$11.75 million

Value of statistical life

WTP for risk reduction / risk reduction

How is VSL calculated?

Weitzman’s Dismal Theorem

CBA can’t be applied to climate change because the consequences of extreme events are far too catastrophic and humans are risk averse

Time preference

States that we prefer current consumption and discount the future

Dynamic efficiency

Allocation that maximizes the present value of all net benefits

Revealed preference

Infer the value people place on a natural resource by examining behavior in the market for related goods

Stated preference

Ask people, often through surveys, how much they value a resource/ their WTP

Averting expenditures, travel cost method, hedonic property value, and hedonic wage method

Four revealed preference methods

Hyperbolic discounting

Discounts steeply in near future but less is distant future; accounts for human decision making

Its not fair to future generations to discount nature

Ethical arguments against exponential discounting

Averting expenditures

How much do you spend to reduce damage?

Gathering WTP to avoid poor water quality from water bottle purchase data

Averting expenditure example

Needs substitute for pollution, purchases may be for other reasons

Disadvantages of averting expenditure

Travel cost method

How much people spend to visit a resource

Hedonic property value

How much do people pay for housing in different locations?

Determine housing price based on proximity to hazardous waste site and lake water quality

Uses of hedonic property value

Can’t measure non-use value, can’t account for all factors and simultaneous effects

Disadvantages of hedonic property value

Hedonic wage

How much income do you need for a particular job?

Contingent valuation and choice experiment

Two stated preference methods

Contingent valuation

Survey people to determine WTP for an environmental good

Responses don’t match reality, people are underinformed, and the range of options influences response

Disadvantages of contingent valuation

Obtains both use and non use values, provides direct response from public

Advantages of contingent valuation

Choice experiment

Ask respondents to choose among alternative bundles of goods

Benefit transfer method

Using similar cases to transfer values to calculate WTP for a differerent case