Benefits of Environmental Protection

[Econ 2277](http://www.richard-sweeney.com/intro_env_econ)
[Prof. Richard L. Sweeney](http://www.richard-sweeney.com/)

[(print this presentation)](http://www.richard-sweeney.com/intro_env_econ/slides/Benefits.html?print-pdf)


Overview

Last class: Economic efficiency requires we set the marginal benefits from environmental protection equal to the marginal costs.

To do this, we need to measure benefits and costs

Outline for next two weeks


What are the benefits of environmental protection?

[list them]


Non-economic description of environmental benefits


How would you translate those benefits into dollars?


Private Good Example: Bird Scooters

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What are the benefits of these scooters?

[List them]


How would you place a dollar value on these benefits?


Bird already does this!


To get a measure of the total benefits, we’d just need the demand curve for scooters

Companies use demand curves to set prices and make investments.

Imagine we had internal projections from Bird:


This gives us an (inverse) demand curve

Two points (12, 50K) and (9, 100K)


How can we see the benefits of Bird on this graph?

Need to decide if we care about Bird profits or not.

[If Cambridge cared about Bird profits, they’d use marginal cost not price]


Let’s apply that logic to environmental quality


Two Conceptual Strategies

Revealed Preference Methods: Use people’s observed behavior in markets to infer their WTP for environmental goods/services

Intuition: Even if people don’t pay for environment, often spend money (incur real costs) to get access to clean environment (or avoid poor environment)

Stated Preference Methods - Design surveys that ask people what they would be WTP or WTA


Two types of environmental benefits

  1. Use Value: The benefits from using a good/service, directly or indirectly

    • For example, benefits of recreational swimming-day or benefits of clean air on your walk to school

Revealed preference methods preferred for measuring use values

  1. Non-Use Value: Utility people gain from environmental goods that do not benefit them directly or indirectly

    • What are some sources of this?

Sources of non-use value

For non-use value, we have no choice – must use stated preference methods (measure total value)


Household Production Models


Household Production Models

– people often combine a private good with an environmental good to produce another good, which is the real source of utility

[Not most useful method, but good introduction to revealed preference models]


Travel cost method


Intuition: Visiting a park takes time and money. – Time to drive, gas, etc. – Plus entrance fees.

Implications: – The more awesome the park, the more I’m willing to give up to visit it. – The closer I live to a park, the more likely I am to visit it.

We can use this to trace out a WTP curve for a park – Number of visitors from towns at different distances away – Distance to park gives variation in price – Variation in visitors gives variation in quantity


Example: Valuing Mt. Monadnock

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• 3165 feet high • Many hiking trails • Spectacular views of Boston and Eastern Massachusetts • Policy question: How much is Mount Monadnock worth?


Who visits Mt. Monadnock?

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Who visits Mt. Monadnock?

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Plot inverse demand curve

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Convert to per capita

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Use wage rate to convert to dollars

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[Time valued at the average hourly wage in each city (avg $27)]

To get total value, multiply by population in each city


Issues

  1. Is the wage rate an appropriate way of translating distance to travel cost?

– Hours may be fixed, so the tradeoff is with leisure time.

∗ Need to know the shadow price of leisure time.

– People may have different utility or disutility from traveling vs. working

  1. Other Factors Matter – Yes, of course: income, education, age, etc. – Not a problem: use multiple regression

  2. Multi-Purpose Trips

    • would this over or understate true value?

Takeaway: Travel Cost Method

– TCM very useful for understanding concept of revealed preference

– Sophisticated versions still used to value recreation sites

– But the method is going to be of limited value for estimating benefits of many environmental policies

Limited applicability: Only recreational sites or environmental quality associated with recreational sites


Public goods

Most economic goods are rival – if one person consumes something, no one else can.

Many environmental goods are non-rival, meaning if one person uses something, it doesn’t impact the consumption value for anyone else:

Non-rival goods commonly called public goods


Note:


Aggregate demand for a public good


Adding demand curves: private goods


Steps:

– solve for $q_{i}(P)$

– sum up over all $i$ at the same $P$ to get $Q$

– now invert again to get $P(Q)$


Example: Demand for apples

• A really likes apples: $P=20-Q_{A}$

• B likes them less: $P=10-Q_{B}$

Graph these. What does total (aggregate) demand look like?


  1. Solve for Q – $Q_{A}=20-P$ – $Q_{B}=10-P$

  2. Add curves if Q > 0 [Can’t have negative demand] – $Q_{T}=20-P$ if $P > 10$ – $Q_{T}=30-2P$ if $P \le 10$

  3. Now invert back to graph: – $P=20-Q_{T}$ if $Q < 10$ – $P=15-Q_{T}/2$ if $Q \ge 10$


What if we want demand for a public good?

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Imagine the good is instead a very rare animal

– neither A nor B ever see it, but get utility from its existence

– so $Q_{T}=Q_{A}=Q_{B}$

What does the aggregate demand curve look like now?


Calculating demand for a pure public good

Assume same demand curves: • A gets utility up to the point where 20 are saved: $P=20-Q_{A}$

• B only cares as long as there are 10: $P=10-Q_{B}$

Now we actually do want to add vertically

– $P=30-2Q$ if $Q \le 10$

– $P=20-Q_{T}$ if $Q > 10$


Summary on calculating total benefits

[this is useful for the problem set]


Hedonic Pricing Models


Hedonics and the environment


Price and location of houses easily observable

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As is information about local air quality

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Can use this information to figure out how much people value clean air


Key Assumptions


What would happen if areas with better air quality also had better schools?


You should think of this complication as the norm in public policy evaluation


Example 1: Valuing shoreline loss


Could look at house prices in areas with wide vs narrow beaches

What would be the concern here?


Ranson (2012)

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Paper here


Ranson (2012) results


Example 2: Hazardous waste


Still in the news

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Trump administration also recently proposed cutting this program


Love Canal, Niagara Falls, NY

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Love Canal timeline

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Superfund Program

The 1980 Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) gave the EPA the right to place sites that pose an imminent danger on the National Priorities List (NPL)

Can we use the hedonic method to value this program?

What other variables are likely correlated with polluted site locations?


Greenstone & Gallagher (2008) used budget limitations to estimate a causal effect of the program

– Cutoff: HRS> 28.5 were cleaned up; others weren’t


Insight: Sites with scores near cutoff very similar

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Greenstone and Gallagher summary


Causality wrapup


Hedonic property method summary


Averting expenditures


Motivating Example: WTP for clean water

[Source: Berck and Helfand]

Can these values be used to provide an approximation of the amount that people in the community, on average, would pay to reduce the risk?


Averting Behavior Method for Estimating WTP

Premise: people may change their behavior to avoid or lessen exposure to externalities

Intuition: Can infer WTP for risk reduction from expenditures for risk-averting activities

– What information / assumptions would you need?


Example: What is WTP for PM reductions in China?

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Thought experiment

Assume that air filters remove 50% of indoor PM

In Shanghai, where the price is $200, 25% of households have one

In Xian, closer to the factory, the price is $100 and 50% of hh’s have one


Natural experiment: Huai River Policy

For decades China gave heavily polluting boilers to communities north of the river

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This significantly reduced life expectancy

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Ito (2018) finds northern residents responded by buying air filters to protect themselves


Averting Behavior: Issues & Problems

  1. Difficult to separate risk-reduction benefits from other benefits of the product or activity

– Example: bottled water may taste better, be convenient, etc.

– So we may over-estimate WTP for risk-reduction

  1. Difficult to separate risk-reduction benefits from negative benefits (utility-reducing attributes of averting behavior)

– Example: bicycle helmets are uncomfortable

– We will under-estimate WTP for risk reduction


Averting Behavior: Issues & Problems

In another example, residents of the area around the Nak-Dong River in Korea faced industrial pollutants in the early 1990s. (Source: Berck and Helfand)

• By 1996, water quality was greatly improved and met safety standards

• Yet people still undertook risk avoidance measures.

– People were acting based on their perception of how polluted the water was.

• The estimated willingness to pay to reduce suspended solids was 3X that what would have been predicted based on safety alone


And what about “Cost-of-Illness Method?”

• Many pollutants result in doctor or hospital visits

• Assume we can perfectly observed all medical expenditures

• Can we use these to estimate willingness to pay?

• Chipotle example


And what about “Cost-of-Illness Method?”

• Does not estimate WTP/WTA, but change in explicit market costs resulting from change in incidence of illness:

– Direct health-care costs

– Indirect costs of loss of work time

– What’s left out?


Summary: “Cost-of-Illness Method?”

• May be considered a lower bound on WTP, but empirical evidence from comparisons suggests difference can be very large!

• Sometimes used in health economics to value morbidity changes (and by courts in wrongful death cases)

• Method is not theoretically correct nor empirically reliable, but two advantages:

– Cheaper than better approaches

– Easy to explain to policy makers and general public

• So, it’s inexpensive, easy to explain, and wrong.


Wrapping up

Up next:

Required Readings

KO pages 44-55
BH Ch 6