Untitled Quiz

Study Notes

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.