Monetary Values On Environmental Assets And Resources example essay topic

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 i related to its characteristics (Jacobs, 1991, p. 204). Direct Monetary Valuation Methods Revealed preference approach Hypothetical preference approach Travel Cost method Contingent Valuation method Hedonic Pricing method Contingent Ranking method or 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 ranking is the second method of hypothetical preference. In this case, the respondents are given a number of alternative situations and are asked to rank them.

The preferences are then valued by linking them to the real price of something traded in the market (Pearce, 1993). THE CASE FOR AND AGAINST MONETARY VALUATION Placing monetary values on environmental assets and resources can be useful, as it enables them to be compared directly with the financial benefits of a possible development. Environmental implications could be given the same weight as other financial impacts and may influence the decision making process so as to prevent environmental damage being inflicted. Furthermore, as it is unavoidable that resources will be consumed, monetary values can assist in deciding how to prioritise resource use. It also provides with a universal unit for comparing heterogeneous resources.

Above all, the mere act of seeking values for the environment, would assist in dissolving the belief that Mother Nature supplies everything for free. However, being incorporated into the economic system does not guarantee that environmental effects will not be ignored nor that they will be given the same importance. In order to reach a conclusion regarding the usefulness or suitability of valuation methods, it is essential to present the criticisms that have been put forward over the years. Although the travel cost method may seem straightforward in practice there a number of problems relating to this technique.

First of all, the value of time spent in travelling to and from the site is usually not included in the calculations due mainly to the difficulty of defining the value of time. How does time spent in travelling for the purposes of work compare to that of travelling for recreational purposes In addition, what if one enjoys travelling By omitting the value of time critics believe that the recreational value of a site is significantly underestimated. There have been attempts to calculate the value of time, however no consensus has been achieved. Furthermore, this method discriminates against those who value a site highly and choose to buy houses in close proximity to such a site. In addition, the method does not differentiate between two users that have travelled the same distance, but one because he / she particularly enjoys the site whereas the other simply because there is no substitute (Turner et al, 1994; Hanley & Spash, 1993). Furthermore, the isolation of particular characteristics of houses and the correlation to particular prices may prove to be an obstacle in the implementation of the hedonic pricing method.

In addition, this method requires the collection of a large amount of information which is sometimes inaccessible and too complex to analyse, of which the omission may influence considerably the results of the equations (Jacobs, 1991; Hanley & Spash, 1993). It also assumes that people are free to choose where they live and ignores the fact the housing markets are often segmented on grounds such as ethnic composition (Turner et al, 1994). In addition, Abelson (1979) argues that the logic of revealed preference is inadequate, as preferences cannot always be inferred from behaviour. As evidence he describes the story of the donkey that cannot choose between two haystacks and choosing neither dies of starvation.

One might say that the donkey chose death yet one could also suggest that the donkey made a mistake in taking so long to decide. Abes lon continues saying that if the donkey had made a choice, one could argue that the chosen haystack is preferable to starving and not preferable to the other haystack. However, the hypothetical preference approach bears the most criticisms due to its nature. The major concern surrounding this method is the existence of different kinds of bias that might distort the results. The figures are derived under hypothetical scenarios and refer to goods that the consumers have no real experience in dealing with, for example, the preservation of grizzly bears.

Since we learn by doing and exchanging information conditions that are absent in these surveys - one could argue that the preferences indicated would not resemble reality. If one agrees that a hypothetical market bias occurs, the question arises of whether these values have any meaning at all (Hanley & Spash, 1993; Jacobs, 1991). Moreover, analysts have revealed evidence of strategic bias, where survey respondents understate their willingness to pay for an environmental good in order to reduce or avoid any subsequent actual payment the free-rider problem (Jacobs, 1991; Hanley & Spash, 1993). For instance, each household surrounding a lake that is polluted by sewage works may understate its willingness to pay to have the works upgraded since it knows that any improvement will benefit all of the households equally and everybody else will pay. Furthermore, the design of the hypothetical preference study may affect responses. Firstly, it has been shown that the choice of starting bid influences the respondents final value.

An example illustrating starting point bias is given by Turner et al. (1994), where a number of households where asked what they would be willing to pay in extra taxes in order to maintain the current river quality rather than allow it to decline to a level unsuitable for any activity. One group of respondents were offered a starting bid of $25 and another group a figure of $125. The first group produced a final average bid of $27.50 whereas the second group averaged a $94.70 final bid. Secondly, the method by which respondents are asked to pay for an environmental asset may also have an effect on the result of a survey.

Payment vehicle bias was illustrated in a recent study regarding willingness to pay for recreation in the Norfolk Broads, where willingness to pay via a charitable trust was noticeably lower than willingness to pay via tax (Turner et al, 1994, p. 126). In addition, the respondents valuation may be affected by the amount of information they have been provided with on the subject. Hanley and Spash (1993) report that bids from respondents to preserve various animal species digressed according to the information they were provided with. In general terms, a major problem with valuing the environment according to individual preferences is that the preferences of future generations are not taken into account.

The values that count belong to those choosing, the present generation. As Beder explains (1996), individuals might prefer, in times of recession, to continue adding to the greenhouse emissions rather than cutback on energy use but taken to its extreme this could threaten future generations in a severe way. Another argument against these methods of valuing the environment is that the process is anthropomorphic (Pearce, 1993). In other words, the resulting values relate to preferences held by people and take no account of the intrinsic value of other living creatures. Economists defend themselves by defining values as the prices at which goods and services change hands in competitive markets; thus environmental assets derive their value through usefulness to people (Sagoff, undated; Hanley & Spash, 1993). For many environmentalists, however, especially deep ecologists, this is unacceptable and completely arrogant.

A further criticism of placing values on the environment is that a respondent's willingness to pay will depend upon the ability to pay, even under hypothetical circumstances. From data collected by Friends of the Earth, as part of their Pollution Injustice campaign, it was revealed that households with incomes of less than 5,000 p. a. are twice as likely to live close to a polluting factory as a household with an income of 60,000 p. a. Thus, the poorer families will regard a reduction in pollution levels very highly. However, their bids to protect or improve their environment would be lower compared to the bids made by the more affluent individuals that would like to exploit it.

Any survey, therefore, is likely to be distorted towards the values of those with the highest incomes (Beder, 1996). Finally, some believe that any attempt to value the environment is as absurd as trying to determine the value of family or freedom. As biology professor, David Ehr enfield states, it does not occur to us that by assigning value to diversity we merely legitimize the process that is wiping it out, the process that says: the first thing that matters in any important decision is the tangible magnitude of the dollar costs and benefits. People are afraid that if they do not express their fears and concerns in this language they will be laughed at, they will not be listened to. This may be true... But true or not, it is certain that if we persist in this crusade to determine value where value ought to be evident, we will be left with nothing but our greed when the dust finally settles.

(Quoted in Beder, 1996) CONCLUSIONS This essay has described a few of the valuation techniques that are now being used to establish monetary values on environmental assets in an attempt to place them on a level playing field. The environmental effects of a development can now be assessed at the design stage and measures can be taken to mitigate or avoid potential hazards. None of the methods of valuation discussed earlier is altogether satisfactory and each only measures some aspects of the environment. The opponents of these techniques believe that the environmental assets are beyond any sensible monetary valuation and that these techniques are bound to fail as they rely on the preferences of the current generation of people, disregarding any other living beings, present or future. As with any discipline that studies human behaviour, the valuations cannot and should not be expected to be 100% accurate (Barde and Pearce, 1991). These techniques can easily be manipulated by agencies and individuals having vested interests.

It is thus imperative that the public and decision makers realise that valuation techniques per se are not panaceas to the environmental problems we are facing. Despite their inaccuracies and other limitations the author believes that these techniques can have a positive role to play in protecting the environment, if carefully applied. As Turner et al. say: economic (monetary) valuation of non-market environmental assets may be more or less imperfect given the particular asset together with its environmental and valuation contexts; but, invariably, some valuation explicitly laid out for scrutiny by policy-makers and the public, is better than none, because none can mean some implicit valuation shrouded from public scrutiny (1994, p. 109).

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