Econ review chapter 7

CHAPTER 7: NON-MARKET VALUATION TECHNIQUES

Overview of Non-Market Valuation Techniques

  • Categories:

    • Revealed/Observed:

    • Direct Market Prices

    • Contingent Valuation

    • Stated/Hypothetical:

    • Travel Cost

    • Hedonics

    • Defensive Expenditures

    • Choice Experiments

  • Alternative Non-market Valuation Techniques.

Method 1: Market Price Approach

  • Scenario conceptualization:

    • Example: An invasive species wipes out a forest stand that is commercially sold as lumber.

    • Quantity Lost: 100,000 board feet of lumber.

    • Market Price: $0.30 per board foot.

  • Calculation of Damages:

    • Damages = 100,000 board feet * $0.30/board foot

    • Resulting damages = $30,000.

Key Assumptions of the Market Price Approach

  • All value attributed to use-related benefits is captured through price.

  • Considerations regarding:

    • Harvesting costs.

    • Consumer Surplus and induced price changes.

Method 2: Hedonic Housing Prices

  • Pollution Influence on Housing Prices:

    • Two houses presented (A and B) with identical prices prompting decisions based on pollution levels.

Decision-Making Scenario

  • Comparison made regarding house choices:

    • Situation 1: House A (clean air, $95,000) vs. House B (polluted air, $100,000).

    • Implicit Value of Clean Air = willingness to pay difference:

    • Is clean air worth $5,000?

    • Choose B if yes; otherwise choose A.

The Hedonic Pricing Principle

  • Value Revelation:

    • Buyers reveal their value for clean air through market decisions in housing.

    • Hedonic method evaluates heterogeneous product amenities and characteristics.

Market Dynamics Example

  • Market A and B start at $100,000:

    • Excess Demand for B results in price increases for B.

    • Excess Supply for A results in price decreases for A.

    • Equilibrium Outcome:

    • House A: $75,000, House B: $105,000.

    • Implicit market value for clean air = $105,000 - $75,000 = $30,000 per house.

Estimation of Hedonic Housing Price Functions

  • Housing market complexities include:

    • Structural Characteristics: bedrooms, bathrooms, square footage, lot size, etc.

    • Neighborhood Characteristics: quality of schools, proximity to highways, parks.

    • Location Characteristics: distance to landfills, scenic views.

  • Hedonic Price Function:

    • Example:
      ext{Housing price} = f( ext{#bedrooms, #baths, #sqft, lot size, fireplace?, pool?, school district quality, proximity to highway, distance to park, distance to landfill})

Environmental Value Applications

  • Estimation applications in environmental value via land markets include:

    • Air pollution

    • Landfills/Hazardous Waste Sites

    • Proximity to open space and environmental amenities.

Example Results of Hedonic Studies

  • Discounts Identified:

    • Location within ½ mile of heavily contaminated river results in a $5,116 discount.

    • Office buildings within 0.5 miles of a hazardous site incur 36% discount compared to those 2 miles away.

    • Proximity to high-quality ocean views adds ~60% to housing prices; low-quality views add about 8%.

    • Locations within a mile of a hog operation incur $5,000 - $7,000 discount.

Method 3: Hedonic Wage Studies

  • Focus is on the evaluation of health risks due to environmental factors:

    • Include regulatory contexts: Clean Air Act, hazardous waste management.

Safety Statistics Examples

  • Quantified Risks of Various Situations:

    • Infection during a hospital stay: 1 in 15.

    • Birth defects: 3 in 100.

    • Death in car accidents: 1 in 6,500.

    • Death by lightning strikes: 1 in 6.2 million.

Value of a Statistical Life (VSL)

  • Definition and Determination:

    • Statistical life represents random lives within a defined group at risk.

    • Example: For 100,000 individuals, if risk of death is 0.003, then:

    • 300 statistical lives lost without intervention.

    • If intervention reduces risk to 0.002, then 200 lives lost leading to a calculation of intervention benefits based on statistical life valuation.

Hedonic Wage Adjustments

  • Analysis shows trade-offs workers are willing to accept for varying degrees of job-related risk:

    • Example: Higher wages are associated with higher job risks.

  • Calculation of Value of Statistical Life (Example):

    • Workers willingness to accept a salary of $25,000 for lower risk (1 in 20,000) versus $25,500 for a higher risk (1 in 10,000).

    • Total Calculation: VSL derived when considering how much a group of workers collectively pays to mitigate risk.

Method 4: Travel Cost Models

  • Focused on recreational demand changes due to environmental quality.

  • Travel Cost as Price Measurement:

    • Includes the cost of travel, time and entry fees.

    • Established via Hotelling's approach (1947).

Example: Recreational Trips Calculation

  • Recreation Scenario for Goose Creek State Park:

    • Round-trip transport costs calculated: time cost, operational costs, entrance fee:
      extTotalTravelCost(TC)=extTimeCosts+extAutoOperatingCosts+extEntranceFeeext{Total Travel Cost (TC)} = ext{Time Costs} + ext{Auto Operating Costs} + ext{Entrance Fee}

    • Computation Example:
      1 hour (time cost) * $10/hour + 40 miles (auto costs) * $0.25/mile + $5 = $25.00.

Trip Demand Function Evaluation

  • Set Trip Demand Functions (Example):

    • Initial demand function: modeled as:
      extQB=30−TCBext{QB} = 30 - TCB

    • Inverse function:
      extDB−1:TCB=30−QBext{DB}^{-1}: TCB = 30 - QB.

Environmental Improvement Impact Estimation

  • Using demand shifts post-improvement to measure consumer surplus changes:

    • Consumers’ willingness to pay adjusts based on recreation site quality improvements.

Method 5: Averting Behavior Models

  • Focused on how individuals adapt behaviors to mitigate environmental harm:

    • Examples include adapting consumption (bottled vs. groundwater after contamination).

Willingness to Pay for Environmental Clean-Up

  • Calculation models for averting behaviors take into account costs before and after contamination.

    • Measure value through willingness to pay for clean groundwater, therefore demonstrating economic cost of environmental degradation.

Stated Preference Methods

  • Used for measuring non-use values with controversial yet pivotal implications in environmental economics.

Contingent Valuation Overview

  • Poses direct queries to assess WTP for providing environmental goods.

  • Historical context starts from the ‘40s, significantly evolved post-Exxon Valdez spill analysis with rigorous standards added in methodology.

Exxon Valdez Case Study Relevance

  • Utilization of CV in legal contexts leading to sizable compensation based on robust interviews conducted post-spill events demonstrating hazardous environmental impact.

  • Monetary Outcomes:

    • Initial WTP estimates show substantial aggregate non-use values; pivotal continuous study following initial assessments.

Choice Experiments

  • Present alternative scenarios assessing various attributes’ values, gauging preferences.

  • Fundamental Dynamics:

    • Attribute and alternatives listed to derive consumer preferences through rankings and choices, assessing externalities of environmental management programs.

Final Notes

  • Conclusively, various non-market valuation methods have distinct methodologies, applied contexts, benefits, and challenges requiring rigorous data and interpretation for effective environmental policy application and development.