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Chapter 7

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Karen Huff

EC238 Chapter 7 – Benefit-Cost Analysis: Benefits Week 5 Introduction -The loss of one unit of a market good due to pollution can be valued at its price because the market price represents marginal willingness to pay for the good -Valuing the loss of a non-market good due to pollution requires methods of inputting the marginal willingness to pay for damage reduction/EQ improvement because market prices do not exist Method Environmental Application Direct Approaches (market prices used) 1. Changes in productivity Health effects of pollution Pollution impact on agriculture, natural resources 2. Health-care costs Health effects of pollution 3. Loss of human capital Health effects of pollution 4. Replacement/restoration of damaged property, Pollution damage to structures businesses Ecosystem damage Ex. Oil spills Indirect Approaches (willingness to pay imputed) 1. Preventive/mitigating expenditures Noise, visual, air, water pollution effects on consumers, industry, ecosystem damage 2. Hedonic estimation Property values Air pollution, toxic waste sites, noise pollution Wage differentials Health effects on pollution 3. Surrogate markets Recreational benefits of improved environmental quality Travel Cost Environmentally friendly goods as substitutes for pollution intensive goods (Ex. Recycled paper) “Green Goods” 4. Contingent valuation Environmental quality – current and future All types of pollution Estimation of Economic Damages -Direct measures typically do not fully reflect the person’s WTP for EQ improvements -Consumer surplus measures the net benefit a person derives from consuming a good, what is gained over and above the total expenditure on the good -Consumer surplus for a private good is measured as the area under the demand curve above the price of the good between zero and the amount of the good consumed -The change in consumer surplus resulting from an increase in EQ – a public good can be measured in the same way as the change in consumer surplus for a private good Methods of Imputing WTP for Improvements in Environmental Quality -Steps in a hedonic estimation: 1. Define and measure the environmental attribute 2. Specify the hedonic price function 3. Collect data across a region or industries and/or for each city/industry over time 4. Use multiple regression analysis to val
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