Chapter 5

Measuring the Benefits of Environmental Protection

5.1 Introduction
5.2 Use, Option and Existence Value
5.3 Consumer Surplus, WTP and WTA
5.4 Risk: Assessment and Perception
5.5 Measuring Benefits I: Contingent Valuation
5.6 Measuring Benefits II: Travel Cost
5.7 Measuring Benefits III: Hedonic Regression
5.8 The Value of Human Life
5.9 Summary

This chapter discusses the methods that economists use for valuing the
non-market benefits of environmental quality. Concepts of use, option and
existence value are introduced; consumer surplus from increased consumption is
presented as the theoretically appropriate measure of value. The differences
between WTA and WTP measures are discussed, as are risk assessment
procedures and risk perceptions. Finally, contingent valuation, travel cost, and
hedonic regression methods are presented, with value-of-life estimates being used
to illustrate the latter.
The focus in the chapter is on the real problems faced in measuring non-
market benefits. Consider the questions an analyst has to answer in the process of
estimating, for example, the benefits of PCB clean-up:

1. Is consumer surplus a good measure of benefits, especially when valuing

life?
2. Which measure should be used: WTP or WTA?
3. How reliable is the risk assessment?
4. How good are the benefit measures?
5. What discount rate is used to value future benefits?

There simply are no generally-accepted answers to any of these questions. A good

benefit analyst can only state clearly the assumptions made at every turn and invite
the reader to judge how sensitive the estimates might be to alternative
assumptions.
In spite of their many uncertainties, however, non-market estimates of
environmental benefits are increasingly in demand by courts and policy-makers.
The message with which I leave the students is that a blunt tool is better than no
tool at all. At this point, benefit analysis is a social science in its relative infancy
which, nevertheless, is being asked to tackle very difficult issues. Perhaps the
wealth of research currently underway will lead to greater consensus on acceptable
resolutions to the problems identified in this chapter.
Application 5.1 A Travel-Cost Example (ANALYTICAL, 1)

Now it is time for your first consulting job as an environmental economist.

The Forest Service would like to know whether they should set aside some
National Forest land, previously slated to be logged, for hiking. You are helping do
a travel-cost analysis to estimate the benefits of the set-aside.
Survey data has been gathered from 500 hikers who visited a forest in a
neighboring state. Using a statistical technique called regression analysis, you
have controlled for differences in income, employment status, age and other
important factors that might affect the number of hiking trips taken. Taking these
factors into account, you have developed the following relationship:

Cost to get to # of Hiking Trips

Hiking Areas Per Person Per Year

$20 8
$40 6
$80 2

1. Graph the demand curve for hiking trips as a function of the "price" -- the
travel cost.

2. Based on demographic information about the people living in the vicinity of

the proposed park, you have estimated that 50,000 people will take an average of 4
hiking trips per year. For the average person, calculate: (1) the consumer surplus
for a single visit to the new park by a visitor with travel costs of $20; (2) the total
consumer surplus for an average visitor (hint: the area of a triangle is 1/2(B*H));
and (3) the total expected consumer surplus per year from the proposed park.

Answers

1. See figure below.

1
 Travel Cost Analysis

100
90
Consumer
80 Surplus

70
Travel Cost ($)

60
50
40
30
20
10
0
0 1 2 3 4 5 6 7 8 9 10
# Trips Per Year

2. Consumer surplus for the first trip is just the WTP less the travel cost; in the
problem in the book , I forgot to give you the travel costs. Say they were $20. Then,
CS is $90-$20=$70.
Consumer surplus for the average person is the area under the demand
curve for the average number of trips (4), or the shaded area. Note the average
travel costs must be $60, if 4 trips are taken. One can figure out the answer using
geometry: the shaded area is a triangle, with area 1/2*40*4=$80.
Total consumer surplus is just average consumer surplus times the
expected number of visitors: 50,000*$80=$4,000,000.

Application 5.2

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Calculating the Value of Life

As an economist, you have been doing a project trying to estimate the

willingness-to-accept risk on the part of workers. You have gathered data on a
variety of occupations, ranging from clerical work to truck driving to coal mining.
You have uncovered the following relationship:

$2,500

$2,000
Extra wage per year

$1,500

$1,000

$500

$0
0 1 2 3 4 5 6
Mortality Risk (out of 10,000)

1. What is your estimate of the “value of a statistical life”? What does this
mean?
2. Why might this value be a poor estimate of the value placed on lives
saved from pollution reduction? (Three reasons)

ANSWERS

1) If you draw a line through the points, you notice that for each 1/10,000
increase in mortality risk, the wage premium rises by about $400. Thus,
10,000 workers trade $400 each for a total of $4 million per life lost: the value
of a “statistical life”.
2) Three reasons:
a) This is WTA for voluntary risk; environmental risk is involuntary
b) Sample selection bias: are the individuals surveyed (fire fighters) more “risk
lovers” than the average individual?
c) Rationality: do the individuals really know the risk they are shouldering in
exchange for the wage premium?

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Application 5.3 Plover Protection

Consulting job three. Suppose you were analyzing the use value of a public
beach, and controlling for income, age, preferences, and everything else that
might affect beach visits, you have gathered the following data:

Travel Cost Number of day

trips/yr
$0 40
$20 20
$39 1
$40 0

1. If there are 1000 people in each of the three travel cost categories ($0, $20,
$39), what is the approximate total consumer surplus arising from day trips to this
beach?

2. Your boss needs help evaluating a decision to close this particular beach in
order to preserve habitat for an endangered sea bird called a plover that inhabits
only this stretch of beach. From a CV study you know that US citizens are WTP
$1,500,000/yr to preserve the plover. Based on your analysis, and your
understanding of the usefulness and limitations of these benefit analyses, do you
conclude that protecting the plover is efficient? Argue both sides. (This answer
requires at least four paragraphs!)

3. Under the Endangered Species Act, could your analysis have any legal
bearing on the decision to protect the Plover?

Answers

1. First you need to graph the “demand curve” for this one—showing the
relationship between travel cost and beach visits:

$travel
cost

$40

$20

4
 0
0 20 40
Beach trips per year

The net benefits to the three groups are the three triangles showing their consumer
surplus from beach travel after paying travel costs:

NB= Value to those who take: 1 trip+ 20 trips +40 trips=

1/2*1*1*1000+1/2*20*20*1000+1/2*40*40*1000=

500+200,000+800,000=$1,000,500

2. Protection is efficient: benefits from endangered species protection (1.5 million)

outweigh the lost value of beach recreation (1 million). This is especially true
because the travel cost overestimates the value of this stretch of beach—people
can substitute onto neighboring beaches for recreation.
Protection may not be efficient: Some significant costs of beach closure are
not included—impact on local economy from reduced visitors. And what of
potential bias in estimating WTP? Hypothetical, strategic, free-riding, and
especially—embedding? Discuss these.
(Counter: if we are going to count negative impacts on local economy from
beach closure, than we need to count positive impacts of those tourism dollars
spent elsewhere)

3. No. Endangered species act is based on ecological sustainability, not efficiency.

Multiple Choice

1. Existence value

a. is not a component of total value.

b. will tend to be larger for low income people.
c. depends both on moral concern and ability to pay.
d. is a type of option value.
e. is a type of use value.

2. Public concern about environmental risks

a. probably does not reflect risk aversion.

b. generally mirrors scientific assessment of actual risk.
c. does not depend on whether the risk is voluntary in nature.

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d. displays substantial skepticism about the validity of scientific risk assessment.
e. should be ignored when it is inconsistent with scientific evidence.

3. Willingness-to-pay estimates for environmental improvements

a. should, in theory, be close estimates of the consumer surplus gained from public
goods provided free of charge.
b. should, according to standard economic theory, be much lower than willingness-
to-accept estimates of consumer surplus.
c. are generally much higher than willingness-to-accept estimates.
d. are value-free, unbiased estimates of how much society could gain from
environmental improvements.
e. all of the above.

4. The contingent valuation method for estimating benefits does not suffer from

a. hypothetical bias.
b. strategic bias.
c. embedding bias.
d. free-riding.
e. inefficiency.

5. In the travel cost method, researchers are primarily interested in linking

variations in travel cost with

a. variations in income.
b. variations in age.
c. variations in the opportunity cost of time.
d. variations in use of the resource.
e. variations in occupations.

6. hedonic regression estimates of the value of life

a. do not suffer from a sample selection bias.

b. do not display an income bias.
c. account for the "voluntary" nature of on-the-job risk.
d. do not put a zero value of life on a retired person.
e. adequately address poor information on the part of workers about job risks.

Answers to Multiple Choice: c,d,a,e,d,d.