Chapter 7

Assessing Benefits for

Environmental Decision Making

“Write injuries in dust , benefits in marble”

-Benjamin Franklin (1706–1790)

© 2007 Thomson Learning/South-Western Thomas and Callan, Environmental Economics

 Contents

 Environmental Benefits: Conceptual Issues

 Approaches to Measuring Environmental
Benefits: An Overview

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 Introduction

 The objective of environmental policy planning is

to minimize risk, which is a benefit to society.
 There are opportunity costs associated with
minimizing the risk
 To use benefit-cost analysis, policymakers must
quantify associated benefits and costs

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 Environmental Benefits
Conceptual Issues

 Environmental benefits measure damage reductions

 Policy brings about changes in these damage
reductions, and these changes are referred to as
incremental benefits
 Incremental benefits are the reduction in health,
ecological, and property damages associated with
an environmental policy initiative

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 Types of Incremental Benefits

 Primary environmental benefits

 Damage-reducing effects that are a direct consequence
of implementing environmental policy
 Example: low incidence of respiratory ailments, more
stable ecosystem and prosperous fishing industry.
 Secondary environmental benefits
 Indirect gains to society that may arise from a
simulative effect of primary benefits or from a demand-
induced effect to implement policy
 Example: improved worker and agricultural productivity

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 Assign Value to Incremental Benefits

 Since environmental quality is a public, non-

marketed good, its demand cannot be
identified because of non-revelation of
preferences
 But if we could infer society’s demand (or
MSB) for environmental quality, we could
measure incremental benefits.

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 7.1 Annual Benefits Associated with
Title I through V of 1990 clean air act
Source Category 2000 Benefits 2002 Benefits
(millions) (millions)

Mortality $113,556 $126,894

Chronic Illness 6742 7,476

Hospitalization 502 589

Minor Illness 1864 2,084

Welfare 5245 5,696

Total $127,909 $142,739

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 Modeling Incremental Benefits
 Area under MSB is TSB
 Changes in TSB would be incremental
benefits
 Find baseline TSB before policy
 Find new TSB after policy is implemented
 Subtract baseline from new TSB

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 Modeling Incremental Benefits (MSB)

25 MSB = 25 - 0.3A
Incremental Benefits =
19.0 $91.25 million
MSB ($millions)

17.5

D = MSB

0 20 25 A (abatement %)
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 Modeling Incremental Benefits (TSB)

Incremental Benefits = $91.25 million

531.25 TSB
440.0
TSB ($millions)

TSB = 25A - 0.15A2

0 20 25 A (abatement %)
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 Valuing Environmental Quality
Two Sources of Value

 Total value = User value + Existence value

 User value is the benefit derived from physical use or
access to an environmental good
 Direct user value is the benefit derived from directly
consuming services provided by an environmental good
 Indirect user value is the benefit derived from indirect
consumption of an environmental good
 Existence value is the benefit received from the
continuance of an environmental good
 Motivated by vicarious consumption and stewardship

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 Valuing Environmental Quality
Two Sources of Value

 Vicarious consumption: Utility associated with

knowing that others derive benefits from an
environmental good
 Stewardship: Sense of obligation to preserve the
environment for future generations

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Approaches to
Measuring Benefits
 Two Major Approaches

 Physical linkage approach

 Estimates benefits based upon a technical
relationship between environmental resource and
user of resource
 Behavioral linkage approach
 Estimates benefits using observations of behavior in
actual markets or survey responses about
hypothetical markets

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 Overview (see Table 7.2)
 Physical Linkage
 Damage Function Method
 Behavioral Linkage
 Direct Methods
 Political
Referendum Method
 Contingent Valuation Method

 Indirect Methods
 AvertingExpenditure Method
 Travel Cost Method
 Hedonic Price Method

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Damage Function
Method
A Physical Linkage Approach
 Damage Function Method
 Specifies a relationship between a
contaminant (C) and some observed total
damage (TD)
 Estimates benefits as TD declines from the
policy-induced change in C
 Note: Dose-response function is one type of
damage function

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 Damage Function Model
Damage reduction
in nonmonetary terms
Damage function
TD0
Total damages (TD)

TD1
Suppose policy causes a
decline in the contaminant
from C0 to C1

0 C1 C0 Contaminant (C)
 Assessing the Damage Function
Method

 Estimates only one type of incremental benefit at a

time (contaminant reduction may increase other
crops or improve human health)
 Represents only a first step, since it is not capable
of simultaneously monetizing the damage reduction
that it identifies

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 Application of the Damage
Function Method

 Analysts use it for measuring a specific type of

incremental benefit, as opposed to performing a
comprehensive benefit assessment.

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 Example

 Suppose a U.S. policy reduces pollution

damage to crops, resulting in a higher crop
yield as an incremental benefit
 Model as an increase in supply (S)
 Measure the incremental benefit as:
(consumer surplus (CS) + producer surplus (PS))

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 Incremental Benefits
$
S0
a
Incremental benefit = ebc

b S1
P0
c
P1

e
D
0 Q0 Q1 Q of corn
Contingent Valuation
Method (CVM)

Direct Method under Behavioral

Linkage Approach
 CVM

 Estimates benefits from survey responses

about WTP for environmental quality
contingent upon hypothetical market
 Tries to finesse nonrevelation problem
 Steps:
 Construct model of hypothetical market
 Design survey
 Assess honesty of respondents

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 Assessing the CVM
 Broad applicability
 Can capture existence as well as user value
 Inherent biases due to survey approach

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 Application of the CVM
 Estimate the value of a statistical human life
 Measure society’s WTP for water quality
improvements.

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Averting Expenditure
Method (AEM)

Indirect Method under Behavioral

Linkage Approach
 AEM

 Estimates benefits as the reduction in spending on

goods that are substitutes for a cleaner
environment
 As pollution damages the environment, people incur
“averting” expenditures to improve their personal
environment
 This spending is reduced as policy improves the overall
environment
 This spending reduction is an estimate of the WTP
for associated incremental benefits
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 AEM

 Air pollution = use protective covers, install air

purifier or frequent visit doctor
 Water pollution = install water filtration system,
purchase cleaning products and rust removers
 Noise pollution = install sound-deadening insulation,
purchase medication to aid sleeping, or move to
new location.

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 Modeling AEM

 Define overall environmental quality (E)

 The relevant market for study is personal environmental
quality (X)
 D is MB; S is MC or averting expenditures
 MC0 of X0 is linked to a given level of E 0
 As the overall environment improves, or as E increases from say, E 0
to E1, the individual incurs lower costs, so MC shifts right from MC 0
to MC1 and X0 improves to X1
 Change in spending for the same level of X is an estimate of
incremental benefits
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 Modeling AEM
abc is WTP for improvement
$ in E based on achieving X1
MC0 (based on E0)

E rises to E1
b MC1 (based on E1)
c

d
a
D = MB

0 X0 X1 Personal environmental quality (X)

 Assessing the AEM
 Problem of jointness of production
 Some AE yield benefits other than those from
improving environmental quality
 e.g., air conditioning provides comfort as well as
filters the air
 Hence, the benefit estimate can be biased

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