Environmental Economics

Valuing Environment

Andrea Bauer-Gáthy, PhD

Assistant Professor
University of Debrecen
Faculty of Econimics and Business
Institute of Economics

bauerne.gathy.andrea@econ.unideb.hu
 Importance of Environmental valuing

• Valuation plays important roles

in environmental management and control in the areas of
policy issues relating to environmental protection, ecosystem
services, establishment of price for environmental goods,
providing strategy planning of environmental resources as
well as a tool in performance measurement of projects ...
 Introduction to Valuing Environment

• It refers to the assignment of money values to non marketed

assets , goods and services.
• Non marketed goods and services refer to those which may
not be directly bought and sold in the marketplace.
• Examples are scenic views , Coral reefs , mountain vistas ,
biodiversity.
 Introduction to Valuing Environment

• If a good or service contributes positively to human well

being, it has an economic value.
• Environmental values are measured in money terms through
the concept of individuals willingness to pay (WTP) or
willingness to accept ( WTA) compensation for alternations
in environmental conditions.
• An Individuals well being is determined by whether or not it
satisfies that individuals preferences .
 Total Economic Value

• Total Economic Value ( TEV) , which explicitly recognizes

that the economic value of a good or service is composed of
different parts some of which are tangible and directly used ,
some of which are intangible or very remote.
•
Total Economic Value = Use Value + Nonuse Value
Total Economic Value
 Techniques in Environmental Valuation

• Hedonic Pricing (HP)

• Travel Cost Method (TCM)
• Contingent Evaluation Method( CVM)
• Production Factor Method (PFM)
• Averting Behavior Method (ABM)
 Hedonic Pricing

• It can be used to estimate economic benefits or costs

associated with:
• environmental quality, including air pollution, water pollution, or
noise
• environmental amenities, such as aesthetic views or proximity to
recreational sites
 Hedonic Pricing
• The basic premise of the hedonic pricing method is that the
price of a marketed good is related to its characteristics, or
the services it provides.
• For example, the price of a car reflects the characteristics of that car—
transportation, comfort, style, luxury, fuel economy, etc.
• Therefore, we can value the individual characteristics of a car or
other good by looking at how the price people are willing to pay
for it changes when the characteristics change. The hedonic
pricing method is most often used to value environmental
amenities that affect the price of residential properties.
 Travel Cost
• The travel cost method is used to estimate economic use
values associated with ecosystems or sites that are used for
recreation.

• The method can be used to estimate the economic benefits or

costs resulting from:
• changes in access costs for a recreational site
• elimination of an existing recreational site
• addition of a new recreational site
• changes in environmental quality at a recreational site
 Travel Cost

• The basic premise of the travel cost method is that the time
and travel cost expenses that people incur to visit a site
represent the “price” of access to the site. Thus, peoples’
willingness to pay to visit the site can be estimated based on
the number of trips that they make at different travel costs.
This is analogous to estimating peoples’ willingness to pay
for a marketed good based on the quantity demanded at
different prices.
 Contingent Valuation Method
• The contingent valuation method is a direct approach using
a hypothetical market,
• CVM is a survey method in which respondents are asked
how much they are willing to pay for the use or conservation
of natural goods.
• It is the only environmental valuation technique that
considers nonuse values.
• However using this method can lead to potential biases
( values can be under or over estimated)
• There are also high costs involved as it is expensive to
interview people individually.
 Product Factor Method
• PFM is since many natural resources , processes and
qualities are used as production factors.
• Improvement of natural quality may lead to a reduction of
production costs for the sector making use of the relevant
quality.
• The PFM tries to value natural qualities by valuing their
impacts on production.
• The PFM has been applied to value the effects of water
quality on agriculture , fishery and industry and the effects
of air quality on building , crops and livestock.
• This method is meant to determine the value of changes in
natural qualities on the economic production system.
 Averting Behavior Method
• ABM is especially suited for valuing natural qualities .
• This is done by looking at expenditures made to avert or mitigate the
negative effects from the reduction of natural quality .
• ABM relies on the assumption that people perceive the negative
effects of environmental deterioration on their welfare and that they
can adapt their behavior to avert or reduce these effects .
• This means, that people experience the negative effects of ozone
depletion and that they will buy products such as hats and sunscreen
to prevent damage to their health.
• The willingness to pay for a clean environment is deducted from
peoples purchases of products and services to avert the negative
effects of pollution.
 Averting Behavior Method
• ABM is cost based method, since the costs of purchasing these items
are used to value environmental qualities , even though the social
preferences for a healthy environment may be much greater than the
expenditures on these products,
• Buying such products means that they have less money spend on the
environment .
• People may not react to small changes in environment quality .
• They may only react when a certain threshold has been passed.