Untitled Quiz

Economic Analysis & Tools

• This chapter covers economic analysis and tools used in environmental resource valuation.

Understanding the Value of Environmental Resources

• Costs and benefits

  • Individuals have preferences leading to hierarchical choices among goods/services; expressed through willingness to pay (WTP).
  • WTP = Willingness to sacrifice for one thing.

• Ability to pay

  • Depends on individual values and wealth.
  • Willingness to pay decreases with the number of units consumed/owned.

• Price elasticity of demand

  • An individual's WTP is shown through demand curves (price as a function of quantity).
  • Curves are different for diverse products and can be parallel or intersect.
  • Elasticity shows sensitivity to price changes of a good.
  • Aggregate demand is the summation of individuals' demand curves.

• Benefits

  • Economists define benefits technically based on willingness to pay.
  • The more a good is valued, the greater its associated benefits.
  • Benefits are calculated by the area below the demand curve.

• Non-use values

  • The USE value is the value derived from good direct use.
  • The OPTION value is the value assigned to maintaining something based on potential future use.
  • The EXISTENCE value relates to the worth placed on knowing a good exists.
  • The BEQUEST value is the worth placed on a good for future generations.
  • The ALTRUISTIC value is the worth placed on a good, even if it's unused, if it's usable by others.

• Pricing

  • When markets don't exist, contingent valuations (bidding games, trade-off games) and revealed preference methods (travel cost, hedonic price) are used.

• Benefits & Knowledge

  • Benefits are affected by how well something is known.
  • Knowledge of something can increase or decrease its worth to a person.

• Communication/Education

  • Communication programs inform on the importance of sustainable development.
  • Environmental goods and services, and their degradation, can be poorly understood scientifically.

Efficiency & Integration of Environmental Markets

• Optimal pollution levels

  • In competitive markets, the optimum pollution level maximizes profit where marginal profit equals marginal external cost.
  • Environmental regulations aim for Pareto optimality, where marginal benefits equal marginal costs.

• Coase Theorem

  • Regardless of the initial distribution of rights, optimal economic equilibrium is achievable in the absence of transaction costs.
  • This ignores who bears the cost or receives the benefit.

• Voluntary restoration of the environment

  • Two polluters with initial capital, value on a pristine lake, and cost to depollute were considered.
  • Is depolluting socially desirable?
  • What is the rational decision of the agents?
  • Markets may fail due to externalities.

Environmental Policy Analysis

• Policy questions involve the level of desired environmental quality (science), costs of meeting goals (economics), and distributing costs and benefits.

• Benefit-cost analysis (BCA)

  • Evaluates the desirability of actions by comparing gains and losses.
  • If the benefit-cost ratio exceeds 1, the decision supports the action.

• Benefit assessment

  • Benefits are the reduced damages a new policy produces.

• Cost assessment

  • Costs are estimated using the "with/without" principle, not before/after. This compares costs with/without a regulation. Enforcement costs are part of the total cost.

• Cost-effectiveness

  • Analyzes the costs of different policy options regarding an objective.

• Note on benefits and disadvantages of each type of environmental policy.