Assessing Costs and Benefits of Environmental Policies & Regulations

How do we quantify costs?

How do we quantify benefits?

Whose costs and benefits?

Recall cookbook: want to account for all significant costs and benefits.

Also recall Tuolumne study – many environmental costs excluded, costs of dam still outweigh benefits (lesson: if you don’t have to rely on non-use values, then don’t)

Important to include costs & benefits over time – use NPV formulation (or E[NPV] if uncertainty).

Costs

Direct costsEg, equipment purchases

Indirect costsEg, consumers forced to buy lower quality low

emission vehicles (LEV’s)

Q, LEV’s

Price

. ...Subsidy

Loss from mandate

Costs (cont)

Lower productivity associated with requiring water based instead of oil based paints

Administrative and compliance costs

Benefits: Types of values

Market values: Commodities traded in

markets or values directly reflected in markets

Usually from direct-use Often “derived demand” Recall, markets ignore

externalities; may misrepresent public good

Non-market values Commodities that

have value to humans, but whose value cannot be measured within a market.

Includes Use and Non-Use Values

Use vs. non-use values

Use values Value from

consumption of a good Current use, expected

future use, possible use

Direct health impacts Non-health impacts

(e.g. smell) Damage to

ecosystems: pollution degrades performance

Non-use values Measurement is

controversial Existence value,

altruistic value, bequest value

Examples

Market values 1 mbf Douglas Fir 1 ton SOx in

RECLAIM 1 ton halibut in Alaska Red cockaded

woodpecker in south Pharmaceutical

potential of natural compounds

Non-market values Sea otters on south

coast Air/water quality Strong swell off Coal

Oil Point Oil spill off Spain Yosemite Nat’l park Golden trout in Sierras

Measuring demand

Revealed preference Observe a real choice

in market; infer value E.g. Value of living

near urban open space: Compare housing prices w/ and w/o urban open space.

Hedonics, Travel Cost, Household production

Stated preference Ask people (survey)

how much they value environmental goods

E.g. Would you accept a $0.05 increase in gas price to require double-hull oil tankers?

Contingent valuation

Some examples of measuring demand Demand for park recreation

Channel Islands MPA Demand for health risk reductions

Seeps off Coal-Oil PointMorbitityMortality

Using Benefits Transfer Methods

Example: Nat’l park fees

Yosemite National Park charges $20 entrance fee, 3 million visits.

Want to use bus to eliminate cars in the Valley to improve recreational experience.

Want to increased fee to pay for bus ($10 million per year).

Will increase to $30 pay for bus? Wrong calculation: $10*3 million = $30 mil

Change in nat’l park entrance fee

Demand for Park Visits

$

QQ20

20 D E

F

Revenue before fee increase: ODEF

O

EntranceFee

Change in nat’l park entrance fee

Demand for Park Visits

$

QQ20Q30

30

20 D

A B

E

C F

Revenue after fee increase: OABC

O

EntranceFee

Change in nat’l park entrance fee

Demand for Park Visits

$

QQ20Q30

30

20 D

A B

E

C F

Will a fee increasefrom $20 to $30 payfor the bus system?ABCO-DEFO > $10 mil?

O

EntranceFee

Human health values

How estimate monetary value of changes in health from environmental change?

2 steps: (1) environmental change to health impact,(2) change in health to $$ [where possible].

Distinguish between mortality (death), morbidity (illness)

Often disaggregate according to: age, sex, physical condition, etc…

Mortality

Crude mortality rate = # deaths per time/relevant population…interpreted as probability of dying.

How will change affect probability of dying? In expectation, how many more people will

die (or how many fewer will die) Total value = $/life * lives. Lead in water: $2.5 million per death

avoided, 2.5*622 = $1.6 billion.

Morbidity (sickness)

Chronic or acute, degree of impairment, type of symptom

“restricted activity days”, “bed disability days”, “work loss days”, “symptom days”

Clean Air Act: protect individuals from adverse health effects.

Lead: $1 million/non-fatal heart attack, $628/case reduced chance of hypertension

Benefits transfer approach

See Rosenberger & Loomis, 2000. The application of existing information &

knowledge to new contexts Useful when collecting primary data and

analysis is impractical (cost or time) 3 important features

1. Policy context must be well-defined2. Data must meet certain criteria3. Study site and new site should correspond

Example: Orange County Oil Spill

Oil tanker spills at Huntington Beach, 2001 Beaches in southern Orange County closed for

month+ Big loss: lost beach recreation days Benefits transfer: value of lost beach

recreation days at other beaches

Sample of other studies:

Policy context

Identify extent and type of impacts from proposed action

Identify affected population Identify data needs of assessment

Type of measure, kind of value, degree of uncertainty, etc.

Study site data requirements

Make sure study site data & analysis technique are sound

Study site analysis contains details (for comparison) of physical & socioeconomic characteristics, & reports statistics

Correspondence between sites

Similar expected change in resource quality and quantity.

Markets in two sites are similar; demographics are similar.

Condition and quality of environmental good is similar.

Limitations of benefit transfer Quality of original study The more primary studies, the better. Primary data vs. summary statistics

(may limit ability to conduct new analysis).

Characteristics of sites may differ, Assumptions made in original study

that do not apply.

Approaches to benefit transfer

Value transfer Point estimate(s) from

study site Identify change,

translate into physical impact (e.g. use), identify applicable study sites, select (range of) benefit measures, calculate $ value.

Function transfer Demand or benefits

function from study site. Identify change,

translate into physical impact, identify applicable study sties, determine if demand function available, adapt demand (benefit) function to fit new site.

Next 2 lectures

Revealed Preference Hedonics Travel Cost Household Production

Stated Preference/ Constructed Markets Contingent

Valuation