A Comparative Study of Real Options Valuation Methods: Economics
Environmental Economics { Lecture 12 Valuation
Transcript of Environmental Economics { Lecture 12 Valuation
ECON 4910, L12. Slide 1/ 14
Environmental Economics – Lecture 12
Valuation
Florian K. Diekert April 18, 2013
Perman et al (2011) ch. 12
ECON 4910, L12. Slide 2/ 14
Review last lecture
1. A heuristic definition of cost-benefit analysis
2. Detour: The moral of choosing A over B
3. Cost-benefit analysis in a static and certain world
I Tests for marginal and non-marginal projects
I CBA and social welfare functions
4. Dynamic aspects
5. Accounting for uncertainty, risk, and irreversibility
ECON 4910, L12. Slide 3/ 14
Preview this lecture
1. Theory
I Categories of environmental benefitsI WTP and WTA
2. PracticeI Stated preference methods
I The method of “contingent valuation” (CV)I Discussion: (http:
//www.aeaweb.org/articles.php?doi=10.1257/jep.26.4)
I Revealed preferences
I Travel cost methodI Hedonic pricingI Production function based techniques
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Valuation: Theory
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Categories of environmental benefits
In the old edition of the Perman book (2003), there were a lot ofacronyms, summarized in two equations:
EC = UV + EV + OV + QOV
TV = CUV + NCUV + NUV
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Willingness-to-pay & willingness-to-acceptEnvironmental valuation theory 1
Assume that quantity/quality of environmental good e can be treated as an argument in a well-behaved utility function. The individual cannot choose level of e. y is income.
u = u(y, e)
e0 e1
At A, WTP for e improvement = BC is Compensating Surplus, CS
At A, WTA in lieu of e improvement = DA is Equivalent Surplus, ES
e1 e0
At B, WTP to avoid deterioration = BC is Equivalent Surplus, ES
At B, WTA compensation for deterioration = DA, Compensating Surplus, CS
Figure: Slide taken from Perman’s webpage http://personal.strath.ac.uk/r.perman/ppts.htm
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Willingness-to-pay & willingness-to-accept
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Compensating and Equivalent variaton
I Compensating variation is the change in income that wouldcompensate for the price change
I Equivalent variation is the change in income that would beequivalent to the price change
Two necessary conditions for environmental quality changes to beapproximately identified by price changes in demand functions:
I Non-essentialness
I Weak complementarity
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Compensating and Equivalent variaton
I Compensating variation is the change in income that wouldcompensate for the price change
I Equivalent variation is the change in income that would beequivalent to the price change
Two necessary conditions for environmental quality changes to beapproximately identified by price changes in demand functions:
I Non-essentialness
I Weak complementarity
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Valuation: Practice
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Stated preference methods: Contingent Valuation
Excerpt of NOAA-panel recommendation:
I Sample from entire affected population
I Personal interview
I Pre-testing
I WTP instead of WTA
I Referendum format
I Reminder of undamaged substitutes
I ‘No-answer’ option available
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Contingent Valuation: Discussion
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Revealed preference methods
1. Travel cost method
2. Hedonic pricing
3. Production function based techniques
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Revealed preference methods
1. Travel cost method
2. Hedonic pricing
3. Production function based techniques
ECON 4910, L12. Slide 12/ 14
Revealed preference methods
1. Travel cost method
2. Hedonic pricing
3. Production function based techniques
ECON 4910, L12. Slide 13/ 14
Review this lecture
1. Theory
I Categories of environmental benefitsI WTP and WTA
2. PracticeI Stated preference methods
I The method of “contingent valuation” (CV)I Discussion: (http:
//www.aeaweb.org/articles.php?doi=10.1257/jep.26.4)
I Revealed preferences
I Travel cost methodI Hedonic pricingI Production function based techniques
ECON 4910, L12. Slide 14/ 14
Preview next (and last) lecture
1. Private contributions to public goods (Nyborg & Rege, 2003)
I Discuss theoretical predictions and empirical evidence forvarious alternative behavioral models
I Special focus on the role of public policy (“crowding out” /“crowding in”)
2. Course synopsis