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ECON 3220 (17)
Ali Kamar (17)

Chapter 7-1.docx

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ECON 3220
Ali Kamar

Chapter 7 Valuing Benefits How to estimate benefits in CBA?  Recall example from chapter 6. o At unregulated market emissions E M  TDC (area under MD curve) is max  TAC is zero as there is no abatement M o By reducing emissions (by moving from E to E’ ) we avoid some damage or generate benefits by the area (C+D)  This is where the benefits come from o If we had MD curve for human health, etc. the area under those curves for reducing emission would be the avoided damage or benefit estimates How to estimate damage curves?  Notice that these are upward sloping curves  General form = y=bx+a where o Y= dependent variable (health effect) o X= independent variable (tonnes of emissions per year) o A= vertical intercept o B= slope of marginal impact  Multivariate form is: o Y= a +b1x1+b2x2+bx3…..  Where x1= age x2=gender x3 = working conditions, etc.  Regression analysis is conducted to estimate them Types of values  There are three types of values o benefits we derive from environmental resources: o Use value  The willingness to pay for direct use of the environmental resource o Option value  The willingness to pay for the Future ability to sue the environment o Non-use value  Individuals willingness to pay to preserve a resource that he or she will never use  Total willingness to pay (TWTP) o TWTP = Use value + Option Value + Non-use value  Chapter 7 will only focus on Use Values only. Methods of valuing benefits  Direct method: Can use market prices to measure benefits (consumer surplus or producer surplus or both) of environmental quality improvements o Dispose-Response method (DRM)  Indirect methods: if there are no actual market and therefore no market prices. Use other ways to impute or estimate WTP for environmental quality improvements o Preventative/ Defensive Expenditure Method (PEM) o Hedonic Pricing Method (HPM) o Travel cost method (TCM) o Contingent Valuation Method (CVM) Dose-Response Method (DRM)  Definition: It is a method for valuing benefits due to environmental quality improvements under which a direct casual relationship is established between the level of pollution (dose, x-variable) and the level of damage (response y-variable) it may cause.  So the DRM relationship takes the general form of y=bx +a  DRM is applicable for valuing benefits form: o Human health decrease pollution= decrease morbidity/ mortality= decreased health care costs  consumers benefit  gain in consumer surplus o Soil fertility: decrease pollution may improve soil fertility through reduced acid rain  decreased crop production cost  producers benefit  gain in producer surplus o Water quality= decrease pollution may improve water quality = increase fishery output and water based recreation values = both producers and consumers benefits  gain in producer and consumer surplus o Buildings and physical structures: decrease pollution = decrease deterioration = decrease maintenance  producers benefit  gain in producer surplus How to implement DRM?  Step One: Describe a policy to program specifying the pollution reduction or environmental improvement target from tis current level  Step two: Formulate the dose (pollution, x-variable) and response (health/productivity/water quality impact, y-variable) relationship, one for each response variable o Collect data on the dose and response variable also on other x- variable that may influence the response variable o Estimate the D-R relationship with regression analysis o Slop of this relationship will be the marginal impact  Step 3: Estimate the $-value of the marginal impact using data on treatment costs or remedial costs  Step 4: Multiply the marginal $ value by the total reduction in pollution specified in the target. This will be the $-value of the proposed environmental policy DRM example #1 : Human morbidity  Step 1: Describe a policy or program o Suppose we want to reduce Alberta’s sulfur emissions from its current level 365 kilotons to 265 kilotons 
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