1. Evaluating the environment Gauri-Shankar Guha

2. Dr. Gauri-Shankar Guha ASU - Econ 63532 Evaluating the Environment For the individual, economic values is theoretically measured in terms of utility. Money equivalents are based on welfare economics concepts, approximated by either:  The maximum Willing to Pay to have more of an environmental good, or less of an environmental bad (WTP)  The minimum compensation sum the individual requires to have less of an environmental good, or more of an environmental bad. (WTA)

3. Dr. Gauri-Shankar Guha ASU - Econ 63533 Assumptions about property rights Do people hold rights to the existing level of environmental quality (or improvements) Example: threat of reduced air quality;  WTP if assume do not have the right to existing level;  WTA if assume do have the right. Sometimes the decision over WTP/WTA will be implied by legal considerations (eg in Denmark, access to the countryside is guaranteed by law, so no question about WTP for such privileges)

4. Dr. Gauri-Shankar Guha ASU - Econ 63534 Anthropocentricity All economic values are utilitarian: have to be traced back to impacts on people. (This means intrinsic values are left out.)

5. Dr. Gauri-Shankar Guha ASU - Econ 63535 Theoretical Measures of Welfare: Standard practice This is a crude measure since it cannot isolate income (wealth) & substitution effects. Advanced practice more exact measure

6. Dr. Gauri-Shankar Guha ASU - Econ 63536 Standard practice Consumer Surplus: Change in consumer welfare as measured by the change in the area under the Marshallian Demand Curve. CS =  D(p, Y) (Using Slutsky, we may separate effects:  x/  p=  h(p,u) /  p+x*  x /  Y ) (substitution) (wealth / income)

7. Dr. Gauri-Shankar Guha ASU - Econ 63537 Advanced practice Compensating Variation -Old level of Utility at New State (or Price) CV=E(po, u0) – E(p1, u0) =  h(p, u0)dp (integrate from p1 to p0) Equivalent Variation - New level of Utility at Old State (or Price) EV = E(po, u1) – E(p1, u1) =  h(p, u1)dp (integrate from p1 to p0)

8. Dr. Gauri-Shankar Guha ASU - Econ 63538 Total Economic Value (TEV): Use value: for example, the value of the wetland to bird watchers (non-consumptive), fishermen, hunters (consumptive) Option value: willingness to pay to keep option open for future use, even if don’t use now. Non-use values: (also called passive use) people who care about the wetlands even if they don’t ever go there. Eg people who are WTP something to protect it because it is rare/ beautiful/ ecologically valuable. (an awkward area of valuation, but very important) Ecosystem / indirect values: value of wetlands for the market-related service flows it provides e.g flood defence, pollution control, nursery for coastal fisheries.

9. Dr. Gauri-Shankar Guha ASU - Econ 63539 Increasing Use of Environmental Valuation Cost Benefit Analysis in appraising projects/policies which impact on the environment. Damage assessments/compensation claims Estimating the value of externalities for calculating eco-taxes

10. Dr. Gauri-Shankar Guha ASU - Econ 635310 Environmental Valuation Methods Direct Methods -Based on surveys -Direct involvement of consumer Indirect Methods -Based on secondary information -Inferential

11. Dr. Gauri-Shankar Guha ASU - Econ 635311 Direct Methods  contingent valuation method (CVM)  contingent ranking  choice experiments

12. Dr. Gauri-Shankar Guha ASU - Econ 635312 Indirect Methods Recreation demand models travel cost model random utility model Hedonic pricing Production function approaches dose response avoided cost ecosystem value models

13. CVM design and definition issues Population definition Product description / client education Appropriate payment vehicle Posing the CV question:  Bid game / Open ended qs / Payment card / DC Collection of supplemental data Analysis methodology Dr. Gauri-Shankar Guha ASU - Econ 635313

14. Dr. Gauri-Shankar Guha ASU - Econ 635314 CV steps 1. Construct hypothetical market (bid vehicle, payment rule, provision rule) 2. Seek bids (WTP/WTA; dichotomous choice/open ended, bidding game) 3. Average bids (identifying of protests; mean vs trimmed mean vs median) 4. Aggregate (how to: relevant population? representativeness of sample?) 5. Perform validity tests (bid curve, test/retest, conformity with design standards)

15. Dr. Gauri-Shankar Guha ASU - Econ 635315 NOAA guidelines Studies show that non-use values are a significant share of TEV Examples of CVM applications -Controlling acid rain, -Estimating an Appropriate “Conservation Tax” -Value of a Parkland -E.I. of a river valley project -The value of “mosquito control in Jonesboro”

16. Dr. Gauri-Shankar Guha ASU - Econ 635316 NOAA Guidelines (1994) 1. Use DC format, face to face interviews 2. Minimum response rate 70% 3. Measure WTP not WTA 4. Test whether WTP varies with scope of environmental damage 5. Calibrate with experimental tests or use 50% discount rule 6. Remind respondents of budget constraint 7. Provide "full information" and check for how well this is understood

17. Dr. Gauri-Shankar Guha ASU - Econ 635317 CVM Issues Strategic biases Design bias Hypothetical market bias Information Effects WTA vs WTP  Loss Aversion (Kahneman, Knetsch, Thaler)  Substitution effects (Hanemann)