UNIT 1 - VALUING THE ENVIRONMENT

Environment defined as a sum of all the living and non-living elements and their
effects that influence human life.

Environmental valuation refers to a variety of techniques to assign monetary values

to environmental impacts, especially non-market impacts.

It s helps in understanding how valuable the goods and services provided by the
environment are to people.

simplest way of expressing is - how much a person is willing to pay for something.

Need to valuing the environment

• to illustrate the kinds of economic damage done to the society by resource

depletion and pollution.
• to integrate the valuable functions of natural environments into project.

Methods of valuing the Environment

Expressed Preference Methods

• ask individuals explicitly how much they value an environmental good.

• avoid the need to find a complementary good or a substitute good to derive a
demand curve.
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Contingent Valuation Method (CVM)

• elicits information on willingness to pay or willingness to accept

compensation for an increase or decrease in some usually non marketed
goods or services.
• This method puts direct questions to individuals to determine how much
they might be willing to pay for environmental resources.
• This method is more effective when the respondents are familiar with the
environmental good or service.
• 3 types

1. trade-off game method

2. costless-choice method, and
3. Delphi method

1. Trade-Off Game Method

• set of contingent valuation techniques that rely on the creation of a

hypothetical market.
• is a variant of the bidding game wherein respondents are asked to
choose between two different bundles of goods.

2. Costless-Choice Method

• whereby people are asked to choose between several hypothetical

bundles of goods.
• this approach may be more useful in settings where barter and
subsistence production are common.

3. Delphi Method

• survey-based techniques wherein experts are interviewed.

• specialized survey technique designed to overcome the speculative nature
of expert opinions.

The Revealed Preference Methods

 • The demand for environmental goods can be revealed by examining the
purchases of related goods.
• 3 types

1. travel- cost method

2. hedonic price method and
3. property value method.

Travel-Cost Method

• widely used surrogate market approach.

• relies on information on time and travel costs to derive a demand curve for a
recreational site.
• determine the demand for a recreational site as a function of variables like
price, visitors’ income, and socio - economic characteristics.

Criticism

• most successful only where there is wide variation in the travel cost of
various users.
• is of limited value if congestion is a problem.

The Hedonic Price Method

• the price of a property is related to the stream of benefits to be derived from

it.
• The method relies on the hypothesis that the prices which individuals pay for
commodities.
• attempts to identify how much of a property differential is due to a particular
environmental difference.
• The demand for goods, say housing can, therefore, be considered as a
derived demand.

Criticism

• no relevance when dealing with many types of public goods.

Preventive Expenditure Method

• a cost based valuation method

• uses data on actual expenditures made to alleviate all environmental
problems.
• assess the value of non-marketed commodities such as cleaner air and water.
• costs may be incurred to mitigate the damage caused by an adverse
environmental impact.
• For example, if drinking water is polluted, extra purification may be needed.

Surrogate Markets

• When no market exists for a good or service and no market price is

observed, then surrogate (or substitute) markets can be used to derive
information on values.
• Eg: travel-cost information can be used to estimate value for visits to a
recreational area.
• The effects of environmental damages on other markets like property values
and wages of workers are also evaluated.

Property-value Method

• a surrogate market approach is used to place monetary values on different

levels of environmental quality.

Wage-differential Approach
 • The wage-differential approach is a surrogate market approach that uses
information on differences in wage rate for similar jobs in different areas to
estimate monetary values.

Cost-Based Methods

3 types

• Opportunity Cost Method - values the benefits of environmental protection.

• Relocation Cost Method - used to estimate the monetary value of
environmental damages based on the potential costs of relocating a physical
facility.
• Replacement Cost Method - that measures the expenditures that would be
required to replace or restore an asset that would be damaged by some
development.

Other Methods

2 types

Dose-Response Method

• the valuation of health damage

• The main effort of the analysis is devoted to identifying the link between
dose and the response.

Human Capital approach

• values environmental attributes through their effects on the quantity and

quality of labour.
• valuing life in terms of the value of labour.

VALUING THE ENVIRONMENT: PROPERTY RIGHTS

• Property rights define the theoretical and legal ownership of resources and
how they can be used.
• Property can be owned by individuals, businesses, and governments.
• These rights define the benefits associated with ownership of the property.
EXTERNALITIES

• A benefit or cost borne by an individual or group who is or are not

responsible for making a specific decision.
• Generally a benefit involuntarily received by people who did not pay for it.
• To value externality costs
(1) impacts must be identified and quantified and
(2) values for these impacts must be developed.
• Values have been applied to
(1) the costs of environmental damage -- the costs of the damages
inflicted on society by pollutants.
(2) the costs of technology control -- the costs of controlling or mitigating
pollution damages.
• environmental externalities have focused specifically on the impact of
(1) Humans (morbidity and mortality)
(2) Crops, forests, and fisheries (losses and damages)
(3) Materials (corrosion and soiling)
(4) Climate (change)
(5) recreation (diminishment)
(6) visibility (impairment)