Lecture note 7

Lecture note 7 Economics of Non-renewable Resources Non-renewable Resources are geological resources of which only a fixed supply and non/or non-increasing stocks exits on the planet Require geological time spans to regenerate. The rate of stock creation overtime is zero Not been completely discovered by humans Mineral fuels: oil, coal, natural gas, other fossil oils Metallic minerals: iron, gold, aluminium, copper Non-metallic minerals: natural phosphate, potash Economists define the value of change in terms of How much of something else an individual is willing to give up to get this change/or How much they would accept in order to permit the change to occur How can we know? Experiment Ask people ‘How much they would be willing to pay’ Surrogate markets/ hedonic property value model Damage function approach Benefit transfer approach Perspectives on measuring economic values of the env. good/ service, and the usefulness of such information for policy making Can be measured Accurately and reliability Can not be measured Accurately and reliability Useful for policy making Not useful for policy making A D C B Choice among valuation techniques Use more than one technique and compare the results Different techniques may measure different things Considering the needs of the users of valuation studies And the needs of the public The cost of carrying out a valuation study Components of a CV questionnaire A hypothetical description of the term under which the goods/services to be offered Question’ how much an individual is willing to pay for Or ‘ how much he/she is willing to accept in compensation to forgo a loss A series of questions about socioeconomic and demographic characteristics of the respondents and his/her family A hypothetical description of the term under which the goods/services to be offered When the service will be available How the respondent will be expected to pay How much others will be expected to pay What institutions will be responsible for delivery The quality and reliability of the service Question’ how much an individual is willing to pay for Or ‘ how much he/she is willing to accept in compensation to forgo a loss: Yes/No questions and open-ended questions A series of questions about socioeconomic and demographic characteristics of the respondents and his/her family: age, sex, income, job, education,… Options for asking CV questions Direct/ open-ended question: Max. WTP___ A single YES?NO Question {200,…..500} YES/NO Option 2 and option 1 Two YES/NO questions: divided respondent into two groups: Group 1 :from low value to high value Group 2: from high value to low value Two YES/No questions followed by an open-ended question Three YES/NO questions: for two groups of respondents Analysis of willingness-to-pay responses Mean, frequency and other descriptive statistics of WTP Cross tabulations of WTP with socioeconomic (SE) and demographic (DC) characteristics Multivariate analysis of the determinants of WTP WTPi = f(SEi, DCi , PSi) PSi: prices and availability of substitute goods and services Determinants of WTP (for yes/no question): Logit/ probit model Surrogate market techniques (revealed preference) Indirect approach to monetary valuation of env. benefits by looking at observed market behaviour and choices (i.e. market for some other goods/services related to env. benefits and costs of concern. The goods/services bought and sold in these surrogate markets will often have as complements (or attributes) the env. benefits and cost in questions and these will influence the decision to buy or sell. Travel cost method and Hedonic pricing The Travel Cost Method (TCM) Widely used to measure the demand and benefits of recreation site facilities and characteristics Information on money and time spent by people in getting to a site is used to estimate WTP for a site’s facilities/ characteristics By looking at how different people respond to differences in money travel cost The travel cost demand function is the derived demand for a site’s services and depends on the ability of a site to provide the recreation activity Required data: variation in prices, consumption, quality characteristics Procedural steps The site is divided into concentric circles (zones) Visitors to the site are sampled using a questionnaire: Zone of origin and other demographic/attitudinal information Frequency of visits to the site Frequency of visits to substitute sites Trip information: length, nights stayed, travel paths, meal Visitation rates are then found for each zone (visitor days per capita) Measurement of travel costs to and from the site Set up the relationship bt. visitation rate and travel cost Vi = a + bTCi + cINCi + dEDi + ….+ STCi Travel cost, income, education, TC to substitute sites The observed total visitation for a site from all zones represents one point on the demand curve for the site Travel cost: entrance fee, direct money cost, time cost Hedonic pricing method (HPM) Widely used to measure benefits and costs relevant to air and noise pollution Define the market commodity (Property in this case) and the environmental good/service which is an attributes of the market commodity (e.g. air pollution) Set up Hedonic Price Function : the determinants of the price of the commodity. P= f (S, N, E) P: Property price; S: structural characteristics; E: air quality Using cross-sectional data Marginal implicit price: dP/dE Damage Function Approach Does not aim to measure individuals’ preferences for better levels of environmental quality directly. Establishing a dose-response relationship between environmental damage (response) and some cause of this damage such as pollution (the dose) Damage function relates physical/biological changes in the ambient environment to the level of the cause of the change Procedural steps Setting up a physical damage function R= f( P, other variables) P: physical damage, P is the cause of the damage Estimate the function to find dR/dP Calculate the actual change in pollution due to the environmental policy change Calculate V.dP. (dR/dP)=V.dR=dD dR: the actual change in pollution V: monetary value per unit of physical damage (V) To give the ‘damage avoid’ or benefit of the environment effect