Chapter 7
Economic Valuation of Environmental Goods and Services
Chapter Summary
This chapter addressed one of the most challenging and critically important subject matter in
environmental economics. The challenge arises from the arduous nature of methodological and
conceptual tasks involved in imputing values to the many aspects of environmental services. The
contents of this chapter include detail discussion of the following two subjects: (i) the specific and
pertinent methodological issues associated with the ‘valuation’ of the environment, and (ii) the
major alternative direct and indirect methods (techniques) standard economists are using to elicit
willingness-to-pay for various aspects of the environmental services. This chapter also included a
‘critical’ assessment of the standard approaches of environmental valuation.
Review and Discussion Questions
1. Do you fully understand how the marginal damage cost (MDC) represents the demand for
environmental quality (service)? This is a very basic and crucial concept to understanding the
discussion in Chapter 7. Make sure you understand the explanation provided by Figure 7.2, page
119.
2. Do you fully understand how demand price represents consumers’ willingness-to-pay (WTP)?
Make sure also that you have a good understanding of how WTP represents individuals’
preferences for goods or services in question.
3. On page 120, an effort is made to explain the difference between willingness to pay (WTP) and
willingness to accept (WTA). Do you fully understand the fine differences between these two
concepts? Why is it important to know the difference between these two concepts?
4. It is said that when economists attempt to measure the benefits from improved environmental
quality, they are measuring not the value of the environment but the preference of people for
an environmental good or environmental bad. Why is it very important to know this? Answer
this question using specific example(s) of your own to illustrate the point you are making.
5. What are the three obvious limitations that are pointed out in your textbook (p. 120) when
economists use valuation of environment on the basis of individuals’ WTP? Make sure you have
a good understanding of these limitations.
6. To elicit individuals’ willingness to pay (WTP) for incremental changes in environmental quality,
economists cannot completely rely on market information, that is, prices directly obtained from
the market. Why is this so? Explain.
7. The various methods economists use to elicit WTP for environmental services (such as flood
control, decrease in respiratory illness due to improved air quality, or biodiversity) are generally
put into two major groups, namely, revealed preference and stated preference. What is the
important or key distinction between these two groups, that is, revealed versus stated
preference? Make sure you know the answer to this question (see p. 121).
© 2014 Ahmed Hussen
8. In what way, if any, did you find it helpful in the distinctions economists are making between use
and nonuse values of environmental resources?
9. The contingent valuation method (CVM) works with the premise that it is possible to create
‘artificial’ market-like condition and elicit individuals’ WTP through well-designed survey
questions. What are the steps needed to create the ‘artificial’ market-like condition? Be specific.
What are your thoughts about CVM, in general? Discuss.
10. Imagine an attempt is being made to put money value on the Yosemite National Park (please use
Google’s search to learn more about this park). The gate (entrance fee) as of 2012 is $20 per car.
This fee is valid for unlimited entries to the park for seven days. There were 4 million visitors to
the Yosemite and assuming 4 people on a car, this amount to 1 million cars.
a) Suppose someone suggested valuing the Yosemite on the basis of the entrance fee.
According to the data given above, the Park will generate a total fee of $20,000,000 per
year. The perpetuity value of this sum of money at 5% annual interest will be $400 million.
Do you think this is a good assessment of the value of Yosemite? Why or why not?
b) Suppose someone argued for an alternative way of assessing Yosemite and recommended
the valuation of this Park using the travel-cost method. You are told that the average
traveling cost per person who visited Yosemite during the 2012 was $1050, and as given
about there were a total of 4 million visitors during this particular year. Thus, according to
this approach, the total annual value of Yosemite will be $4.1 billion. The perpetuity value of
this annual receipt at 5% annual interest rate will be $82 billion. This value will be 20.5 times
more than the estimate given using the entrance fee. What does the value of $82 billion
actually represent (Hint: think in terms of use versus nonuse value)? Do you think this new
estimate adequately represent the value of Yosemite Park? Why or why not?
c) Why do you think society will get a more realistic estimate by using a well-constructed
contingent valuation method to arrive at the dollar value of the Yosemite National Park?
Explain.
d) Someone proclaimed that attempting to put money value on Yosemite National Park is
simply unthinkable. The Yosemite is a priceless national treasure and as such it is
incommensurable—it cannot be measured or priced. What would be your position on this
kind of argument? Explain.
11. Refer to the Review and Discussion Questions section of Chapter 7, p. 145–46. Answer question
8.
12. In Table 7.2 (p. 140) a grand summary of the economic methods for valuing ecosystem services
discussed in Chapter 7 is provided. Based on what you see in this table, what can you say about
economists’ effort to the valuation of the environment in general? Could you say it has been
commendable; or a work-in-progress; or completely useless and even dangerously misleading.
Defend your position. This question assumes that you have read the entire chapter.
13. Your textbook pointed out four major criticisms (see page 140) that have been raised against the
economists’ efforts to value the environment using a methodology that is based on individuals’
willingness-to-pay. Do these criticisms completely invalidate the economists’ effort to put value
on the environment? What do you think economists should learn from their critics? Be specific.
14. ‘Stewardship derives from value. The reason we have jewelry boxes is because diamonds are
expensive. The value drives the care. The same is true with natural resources. We can wring our
hands and ask for legislative relief all we want, but in the end, what really derives stewardship is
© 2014 Ahmed Hussen
value.’ (Joel Salatin, Folks, This Airn’t Normal, p. 165). What does this say about economists’
effort to put value on nature? Discuss.
15. ‘The price of anything is the amount of life you exchange for it.’ What does this quote from
Henry David Thoreau say about valuing nature? Speculate.
© 2014 Ahmed Hussen