Measuring benefits, environmental goods Benefits of goods such as clean air, water are hard to measure Should be estimated when determining public policy Immediate way to estimate benefits of environmental good is estimate cost generated by pollution For example: benefit of clean water may be estimated by calculating explicit cost of dirty water Example of cost estimates: 1. 2. Cost of pollution on economic output Lost farm output due to air pollution One study on crop losses over 6-state area, estimated loss at 7 billion/year Cost of illness caused by pollution Table on asthma costs (split in direct/indirect) Air pollution blamed for triggering asthma attacks Limitations of estimating environmental benefits by accounting for costs of pollution: A. Explicit costs do not fully account for what people willing to pay not to be in present circumstances Implicit costs of asthma, or cold B. Explicit costs do not capture change in behavior induced by pollution Change in behavior is a cost to many people Certain groups found to respond to heavy smog days by staying indoors In the 90’s people avoided going to LA zoo during smog alerts What would people pay to live in world where didn’t have to avoid zoo? Costs of averting pollution largely unmeasured Benefit of environmental good Measured by how much people are willing to pay for it Difficult to measure because there is no market for most environmental goods People aren’t normally observed explicitly paying for the good Value of environmental good: (Example: Value of Flower in Wetlands article) 1. 2. 3. 4. Use value Benefits people get from direct use of good o Recreation o Health (eating clean fish etc) o Aesthetic appreciation Non-use value People willing to pay for some environmental goods they will never use Example: wildlife in Alaska (drilling) Option Value Amount people willing to pay to preserve the option of experiencing good Example: Grand Canyon Bequest value Willingness to pay to leave behind environmental good for future generations Example: Grand Canyon’s value to grandkids How do we measure willingness to pay? 1. 2. Revealed preference Value taken from actual observed choices people make Stated preference Value of environmental goods taken from survey data Stated preference sometimes measured by contingent valuation method Asking people how much they value a good Spotted Owl Considered endangered species Habitat in logging areas in Pacific Northwest Cost of protecting species is lost timber production Benefits? Survey was conducted of 1000 households across US asking WTP to keep spotted owl Total WTP found to be greater than cost Non-use benefits were broad whereas costs were to a specific area Problems with contingent value: 1. strategic bias: respondents may lie to try to influence particular outcome 2. Information bias: respondents valuing good that it has little information on 3. hypothetical bias: respondents not making actual choices Suppose spotted owls discovered to be a delicacy? Would market have protected owls? Revealed Preference Estimated mainly for use value Has some of the same limitations as explicit cost estimates of pollution 1. travel cost method Calculate expenditures by households travelling to places such as beaches, lakes Can be used to estimated lost benefits from beach closures due to oil spill Does not account for value by non-users 2. Housing price differences Controlling for other factors, housing prices found lower in more polluted areas Relationship implies value of clean air 3. Differences in wages across areas Wages should be higher in more polluted areas Measured difference in wage implies the benefit of eliminating pollution 4. Efforts to avert pollution Expenditure on air conditioning, bottled water etc.