Valuing The Environment Essay Research Paper INTRODUCTIONEnvironmental

Valuing The Environment Essay, Research Paper

INTRODUCTION:

Environmental economists argue that environmental degradation has resulted from the failure of the market system to put any value on the environment (Dobson, 1991; Beder, 1996). According to the theory of supply and demand, if a good is provided at a zero price, demand would be higher than if it had a positive value, with the danger of being overused. Thus, as Costanza et al. (1997) argue, ecosystem services are not fully captured in commercial markets or adequately quantified they are often given too little weight in policy decisions. Yet as environmental assets are seen as free goods and have no markets it is necessary to impute a value, for which a number of methods have been developed over the years.

Due to the multidimensionality of the topic, this essay will focus on the debate surrounding the current methods of direct monetary valuation. After briefly presenting these methods, the essay will discuss the various criticisms and problems surrounding these valuations methods. It will conclude by attempting to answer the question: Are the present valuation methods useful .

VALUATION METHODS

According to Jacobs (1991), there are two broad approaches measuring what people would be willing to pay for the environment in non-market situations: the revealed preference and the hypothetical preference approach.

The underlying principle of the revealed preference approach is that the value of the environment is devised from the analysis of consumer behaviour with respect to goods associated with the environment (Jacobs, 1991). The consumption of various environmental resources often leaves behavioural footprints from which revealed preferences can be recovered using statistical methods (NCEDR, 1998). These methods, as shown in chart 1, include the travel cost method, the hedonic pricing method and the wage risk premia and all rely on the notion that the price of a good is related to its characteristics (Jacobs, 1991, p.204).

Direct Monetary Valuation Methods

Revealed preference approach Hypothetical preference approach

Ú Travel Cost method Ú Contingent Valuation method

Ú Hedonic Pricing method Ú Contingent Ranking method or

Ú Wage Risk premia Stated Preference

Chart 1: Methods for the direct monetary valuation of the environment

For example, by using the travel cost method one can estimate the value of specific locations to which people travel, in terms of the expenditure – time and costs – incurred in reaching their destination. The travel cost method is usually used in appraising recreational benefits such as fishing, hunting, or forest visits (Hanley & Spash, 1993; Barde & Pearce, 1991).

The hedonic pricing method attempts to evaluate environmental services, the presence of which directly affects certain market prices (Turner et al., 1994,p. 120). The most common application of this method is to the property market. By controlling the non-environmental factors – size, garden size, number of rooms, etc. the difference in house prices would reflect the value people place on the variation in environmental features. For example, in a study undertaken in Gloucestershire it was estimated that the presence of open water near a house was responsible for a 5% rise in house prices (Turner et al, 1994). In addition, a 1% increase in air pollution around Los Angeles has been estimated to cause a 0.22% reduction in property prices (Jacobs, 1991).

The revealed preference approached can also be used to identify the value of health and safety risk in the workplace. As put forward by Pearce (1993) and NCEDR (1998), individuals involved in high risk jobs or generally occupations with undesirable attributes may receive wage premia. The value associated with the extra risk of death or injury is sometimes seen as the value of life , yet the term is surrounded by controversy and is usually disregarded by economists (Barde & Pearce, 1991).

However, since there are circumstances where there are no behavioural footprints from which to infer value, the hypothetical preference approach is used. In this case, surveys are carried out placing consumers in hypothetical situations and asking them to express directly their environmental valuations (Pearce, 1993; Jacobs, 1991).

As Chart 1 shows, there are two main hypothetical preference methods. The first, the contingent method, amounts to asking people how much they are either willing to pay or willing to receive for the conservation or loss of a particular environmental feature. The advantage of the contingent method is that it can evaluate environmental assets for which the public are willing to pay to preserve but most probably will never encounter. An example of this approach is provided by Turner et al. (1994), regarding the Flow Country, an important natural wildlife habitat and wetland area in Northern Scotland. A firm revealed its intentions to drain and plant the area and conducted a contingent valuation method survey. The results showed that even though a limited number of people visit the area, individuals were willing to pay a higher sum to preserve the area than could ever be produced from growing timber there (Turner et al., 1994, p.123).

The stated preference method or contingent ran

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