Measuring Environmental Measuring Environmental BenefitsBenefits

In principle, benefits can be represented by In principle, benefits can be represented by consumer surplus, or the area under the consumer surplus, or the area under the

demand curve:demand curve:

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quantity

price per unit

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price per unit

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Market good sold at price P0 Non-market good -- no “price”

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Two ApproachesTwo Approaches

• Willingness to pay (WTP): how much would people be willing to pay for an increase in environmental quality?

• Willingness to accept (WTA): how much would people have to be paid in compensation in order to induce them to accept a reduction in environmental quality?

• In practice, WTP and WTA might be different, with WTA ≥ WTP.

Averting Expenditure MethodAverting Expenditure Method• The value of an improvement in environmental quality

can be inferred from people’s expenditures on other things (such as air conditioning, water filters, or medical care) that help them cope with environmental problems.

• Examples: – Use of seat belts or smoke detectors measure the value of a

“statistical life saved”– Purchases of bottled water measure the value of avoiding

water pollution– Visits to the doctor or use of air conditioning measure the

value of avoiding respiratory illnesses– Farmers’ adjustments in fertilizer use or area under cultivation

due to air pollution can measure the damages associated with the pollution

Complementarity Method Complementarity Method

• The value of an improvement in environmental quality can be inferred from people’s expenditures on complementary goods, or goods that tend to be consumed along with the environmental amenity.

• Example:– Number of visits to a lake can be used to

measure the value of improved water quality

Travel-Cost Method Travel-Cost Method

• The value of a public park or recreational site can be inferred from data on the travel costs people incur to visit the site.

• Example:– Value of improved water quality – Value of hunting permits– Value of recreation sites

Hedonic Price (or Wage) Method Hedonic Price (or Wage) Method • The costs associated with pollution, proximity to a

landfill, or a health hazard might be reflected in the property values of people living nearby, so comparisons of property values between different locations can provide evidence on environmental damages.

• Alternatively, differences in wages between a risky occupation and a less risky one can measure the benefits of lower risks.

• Examples:– Value of improved visibility– Value of a location farther from a hazardous waste site– Value of a “statistical life saved” due to reduced exposure to a

toxic substance

Contingent Valuation Method Contingent Valuation Method

• Economists conduct a carefully designed survey to elicit information about people’s valuations of an amenity or a change in public policy.

• This is the only method that can measure nonuse values (which could include existence values or option values).

Contingent Valuation Method Contingent Valuation Method

• Examples:– Value of avoiding respiratory illnesses– Value of improved water quality, fish catch,

boating or swimming opportunities– Value of improved visibility– Nonuse value of clean air in the Grand

Canyon– Value of preserving threatened species:

whooping cranes, bald eagles