Valuing the Environment:

Methods
Introduction to Valuation of Environment
• Basic techniques to evaluate environmental damage
• Benefit-cost analysis
• Cost-effectiveness analysis
• Impact analysis
• Need of applying general concepts to the actual estimates of compensation.
• Special techniques to value the benefits from environmental improvement or, conversely,
to value the damage done by environmental degradation
• Why special techniques are necessary?
• Most of the normal valuation techniques that have been used over the years cannot be
applied to environmental resources.
• Benefit–cost analysis requires the monetization of all relevant benefits and costs of a proposed
policy or project
• It is also important to monetize those environmental goods and services that are not
traded in any market.

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Why we value environment?
• Environment may have a value that goes beyond its direct usefulness
to humans is consistent with modern economic valuation techniques
• Example of Pollination
• Pollination may be useful for other environmental amenities
• Agriculture
• Genetic diversity
• Ecosystem resilience
• Nutrient cycling

• What are the consequences of the reduction in pollination on environment?

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Value of environment: Pollination
• Bauer and Wing (2010) find that a decline in pollination services
would cause
• $10.5 billion losses to the crop sector
• economy-wide losses (noncrop sectors) are estimated to be $334 billion.
• Disproportional damage in world-wide
• Can the Black-mirror story become true?

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Valuation
• Valuation techniques are necessary
• Damage like pollution
• Services provided by the environment
• How to value the damage caused by pollution?
• The damage may have several forms
• Human health
• Agriculture
• Animal welfare
• Outdoor activities
• How to assess?
• Identify the affected parties
• Estimate the damage on affected parties
• Estimating responses by the affected parties toward averting or mitigating some portion of
the damage
• Place a monetary value on the physical damages.

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Valuation
• How we will identify affected parties?
• It is not possible run large numbers of people through controlled
experiments.
• If people were exposed to different levels of some pollutant, we need to
study the short-term and long-term effects.
• Some people might become ill and/or die.
• Human experimentation??
• Two options
• Infer the impact on humans from controlled laboratory experiments on
animals
• Statistical analysis of differences in mortality or disease rates for various
human populations living in polluted area.

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• Animal experiments are expensive, and the extrapolation from effects
on animals to effects on humans is tenuous at best.
• Many of the significant effects do not appear for a long time.
• Statistical studies deal with human populations subjected to low
doses for long periods.
• It may be problematic: correlation does not imply causation.
• Example: the fact that death rates are higher in cities with higher pollution
levels does not prove that the higher pollution caused the higher death rates.
• older populations, smokers, other causes

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• It is necessary to discover
• whether pollution causes an increased incidence of respiratory disease
• how much reduction in respiratory illness could be expected from a given reduction
in pollution.
• The nonexperimental nature of the data is problematic.
• Different analysis from the same data may have remarkably different
conclusions.
• Diagnostic problems are compounded when the effects are synergistic
• When the effect depends, in a non-additive way, on what other elements are in the
surrounding air or water at the time of the analysis.
• After identifying the damage, it is needed to monetize it.
• It is very complex to value to extending a human life by several years or to the pain,
suffering, and grief borne by both a cancer victim and the victim’s family.

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Discussion
• How can these difficulties be overcome?
• What valuation techniques are available not only to value pollution
damage, but also to value the large number of services that the
environment provides?

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Types f Value
• The total economic value conferred by resources is decomposed into
three main components:
• use value
• option value
• nonuse value

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Use value
• Use value represents the direct use of the environmental resource.
• Any example?
• Fish harvested from the sea
• Timber harvested from the forest
• Water extracted from a stream for irrigation
• The scenic beauty conferred by a natural vista
• If you used one of your senses to experience the resource—sight, sound,
touch, taste, or smell—then you have used the resource.
• Some of these uses are called passive-use values or nonconsumptive use
values if the resource is not actually used up (consumed) in the process of
experiencing it.
• Pollution can cause a loss of use value

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Option Value
• The option value is the value people place on a future ability to use
the environment.
• Option value reflects the willingness to pay to preserve the option to
use the environment in the future even if one is not currently using it.
• Use value the value derived from current use,
• Option value the desire to preserve the potential for possible
future use.
• Do you plan to go to Salda Lake next summer?
• If not, but would you like to preserve the option to go someday in the
future?

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Nonuse Value
• Nonuse value represents the common observation that people are more
than willing to pay for improving or preserving resources that they will
never use.
• One type of nonuse values is a bequest value.
• Bequest value is the willingness to pay to ensure a resource is available for your
children and grandchildren.
• Another type of nonuse value, a pure nonuse value, is called existence
value.
• Existence value is measured by the willingness to pay to ensure that a resource
continues to exist in the absence of any interest in future use.
• John Krutilla states
• “There are many persons who obtain satisfaction from mere knowledge that part of
wilderness North America remains even though they would be appalled by the prospect of
being exposed to it.”

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• These categories of value can be combined to produce the total
willingness to pay (TWP):
• TWP = Use Value + Option Value + Nonuse Value.
• Nonuse values are less tangible than use values.
• They represents motivations
• Total willingness to pay estimated without nonuse values, however,
will be less than the minimum amount that would be required to
compensate individuals if they are deprived of this environmental
asset.

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Valuation Methods
• We aim to estimate the total willingness to pay for the good or
service in question.
• This is the area under the demand curve up to the quantity consumed
• How to value it for non-market goods and services?
• Examining behavior
• Drawing inferences from the demand for related goods
• Through responses to surveys.
• Valuation methods may be divided into two categories
• Stated preference method
• Revealed preference method

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Economic Methods for Measuring
Environmental and Resource Values

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Discussion
• Assume a particular sport fishery is being threatened by pollution,
and one of the damages caused by that pollution is a reduction in
sport fishing.
• How is this loss to be valued when access to the fishery is free?

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Stated Preference Method
• Stated preference methods use survey techniques to elicit willingness to pay for a
marginal improvement or for avoiding a marginal loss.
• The most direct approach is called contingent valuation
• Contingent valuation provides a means of deriving values that cannot be obtained
in more traditional ways.
• The simplest version of this approach is asking respondents what value they
would place on an environmental change.
• Asking “yes” or “no” question such as whether or not the respondent would pay $X to
prevent the change or preserve the species. In this case,
• No: an upper bound
• Yes: a lower bound
• This survey approach creates a hypothetical market and asks respondents to
consider a willingness-to-pay question contingent on the existence of this market.
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Biases in Stated Preference Method
• The major concern with this method has been the potential for
survey respondents to give biased answers.
• Five types of potential bias
• strategic bias
• information bias
• starting-point bias
• hypothetical bias
• the observed discrepancy between willingness to pay (WTP) and willingness
to accept (WTA).

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Strategic Bias
• Strategic bias arises when the respondent provides a biased answer in
order to influence a particular outcome.
• Example: The valuation of a stretch of river for fishing,
• Assume that the decision depends on whether or not the survey
produces a sufficiently large value for fishing
• The respondents who enjoy fishing may answer by ensuring a high
value, rather than the lower value that reflects their true valuation.

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Information Bias
• Information bias may occur whenever respondents are forced to
value attributes with which they have little or no
experience/information.
• If the respondent has no experience or information on the subject,
he/she may misperceive the value.
• This can lead very false claims and conclusions.

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Starting Point Bias
• Starting-point bias may arise in those survey instruments in which a
respondent is asked to check off his or her answers from a predefined
range of possibilities.
• How that range is defined by the designer of the survey may affect the
resulting answers.
• Example: A range of $0–$100 may produce a valuation by respondents
different from a range of $10–$100, even if no bids are in the $0–$10
range.
• In a study of willingness to pay to protect nature areas in Denmark from
new highway development, it is found that the starting-point bias in the
choice experiment was gender specific,
• with female respondents exhibiting the greatest sensitivity to the starting point
(Ladenburg and Olsen, 2008).

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Hypothetical Bias
• Hypothetical bias may occur if the respondent is being confronted by a
contrived, rather than an actual, set of choices.
• Since the respondent will not actually have to pay the estimated value, ill-
considered answers may be given.
• Some of the studies found that the willingness-to-pay estimates derived
from surveys exceeded actual expenditures
• the majority of those found that the differences were not statistically significant
(Hanemann, 1994).
• In a study based on student experiments in China, France, Indiana, Kansas,
and Niger, it is found significant differences in bias across locations.
• Given that policy-makers frequently rely on existing benefits estimates
when making decisions on other locations, this finding should not be taken
lightly (Ehmke et al., 2008)
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