Sunday, June 1, 2014

Valuation

This week we begin our study of valuation. Valuation means figuring out what something is worth, usually in dollars.

It is important to note that economic value involves much more than market transactions. People value things that are not traded in markets and people value things that they never use.  Another important point is that economists don't just go around trying to place a value on things for no reason. We engage in valuation when understanding what something is worth can help inform the policy process. Any time there is a tradeoff involving environmental quantity or quality, valuation can serve an important role in terms of helping us understand what is at stake.

One situation where valuation is useful is in determining the monetary value of a fine or fee to impose on a responsible party in the case of natural resource damages. For example, BP will pay about $4.5 billion in criminal and civil penalties for the Deep Water Horizon spill.  Transocean (the owner of the rig) will pay $1.4 billion.
 
What are some other scenarios where valuation might be useful for informing policy?

Interestingly, I sometimes encounter hostility when I first present the idea of valuation to people who have never been exposed to it.  One line of reasoning is that valuation somehow "cheapens" the environment by expressing its worth in dollars and cents. My response to this objection is that the default value is typically zero. That is, most people treat the environment as if it were free, and you can't get much cheaper than that.  Valuation often helps people realize that the environment is extremely valuable, despite it being available for "free".

Another thing to realize is that we are constantly engaging in valuation anyway, through our actions and choices.  For example, when society chooses to spend a certain amount of money on highways, healthcare, and social security and NOT spend that money on environmental protection, are we not indirectly placing a value on the environment relative to those other things?  On a micro level, when you choose to drive your car instead of walking, are you not revealing that you value your own convenience more than you value the environmental damage from your emissions?

Here are some links to more reading about valuation:

The National Ocean Economics Program

NOAA's State of the Coast

Ecosystem Valuation

Economic Values without Prices (Loomis, Choices, 2005) (hint: read this!)
FAO Fisheries Valuation Summary
Here is a pdf version of a presentation that I put together for SocMon Caribbean

More tomorrow.

13 comments:

Grant Joiner said...

Honestly, I do not believe that the average person thinks about the environment when choosing to either walk or drive. They think about the cost of gas, however, and then decide if it is worth it to drive. People need to decide if convenience and saving time is more valuable than saving the gas money and getting exercise (if walking was chosen). Many people fail to take the environmental impacts into consideration because they think the environment is "free."

Nicholas Taylor said...

I agree with Grant in that most humans do not make decisions based on the environment, but rather make decisions based on the monetary effects that will occur (getting somewhere faster in a car rather than walking, buying more environmentally friendly things, etc.). As y'all both stated, the environment is regarded as "free", and this can have detrimental effects. With people not valuing the environment, this hurts the environment overall, and decreases its value.

Lisa Holbach said...

Valuation is probably one of the most important things an economist does. I think the amount of pollution a country produces directly correlates to the culture it houses. If putting prices on the ecosystem and the environment is what it takes to give it an understandable, comparable and measurable value in culture then that is what it takes. As time goes on, these valuations will most likely rise as scarcity of resources and environmental impacts of pollution become more obvious and severe.
I think it would be interesting to see how people’s valuations change when it comes to people who have traveled out of the country and people who haven’t. If people were more educated about how other countries can live with no air condition, with mass public transportation and not many private owned cars, or without clean drinking or swimming water for example, I am sure their own personal valuations for certain things would change.

Abi Shurtleff said...

I am definitely one of those people for whom the initial concept of environmental valuating strikes discord. The whole concept of placing a dollar value on fresh air, clean water, or how it feels to hike a mountain hits my gut as grotesque, quite frankly. However, I understand that I live a privileged life in a first-world country, so I am perpetuating and benefiting from the current economic system, so hopefully after this week's readings, lectures, and PowerPoint I will have a better appreciation for the topic of valuation. In order to save the environment in current society, it will be necessary to assign a value to these resources other than "free" because it is only leading to many people taking it for granted.

Jeremy Nicholson said...

I agree with Grant and Nicholas that humans do not think about the environment while tending to their day-to-day individual activities. If I were to take the time and valuate all my daily activities then I would be quite unproductive. We have, however, become more aware to the fact that we are making an impact on our environment and natural resources. With this awareness, non-market valuation has become a huge deal in the corporate world. While it may seem meaningless to many individuals, valuation and monetization of resources leads to better regulations, and stamping a value on provisioning and cultural services.

Dr. Peter Schuhmann said...

Abi, I understand the reaction because I have encountered it many times. But please keep in mind that you engage in valuation of natural resources every day of your life. When you choose to drive your car instead of walking you are placing a monetary value on clean air and clean water. You are proving that pollution is less important to you than your own comfort and convenience. Likewise, when you run your a/c (powered by coal) instead of being uncomfortably hot, you are placing a value on mountain ecosystems.

The process of valuation simply makes these tradeoffs more explicit so that everyone can actually see and understand what they/we are doing.

hapeterman said...


We can use valuation to assess our willingness to preserve different areas, such as national parks. Even though we can freely access these areas we pay for the areas’ maintenance, improvements, and preservation through taxes. Policy makers determine the budgets for our national parks and need to have accurate valuations of these areas to better make budget choices. If the areas are undervalued we would see the parks’ deterioration but if we overvalue the parks we would be channeling funds away from other important things, such as roads and schools.

hapeterman said...
This comment has been removed by the author.
Dr. Peter Schuhmann said...

Good points Hampton. One of the things that students sometimes fail to recognize is that valuation does not always show that conservation is the best choice. The results of a valuation study may suggest that the gains from development or extraction outweigh the gains from conservation.

Jessie Scofield said...

I had the same initial thoughts as Abi when I first began the week. I always thought my opinion was that the environment is "priceless" because I care a lot about protecting it in every way I can. My roommate calls me the recycle Nazi...and just thinking about having to put a price tag on environmental goods such as clean water and lush forests was strange to me. However, after reading about valuation it was interesting to learn that in order to make my life comfortable I use valuation every day. As Dr. Schuhmann said in his post I choose to drive a car, use air conditioning, and consume many other goods that produce pollution and therefore I am proving that convenience and comfort are more important to me in those situations than pollution. I never really thought about these decisions as tradeoffs, especially with something so natural as driving my car to work. I think this topic is interesting because it brings these simple tradeoffs, as well as larger ones, into the light where value can be determined. I now realize how important it is to place a value on environmental goods, even if it seems difficult, in order to maximize the total net gains to society.

Abi Shurtleff said...

I do believe it is important to assess the value of natural resources, so they do not get overlooked, and this class is definitely teaching me that that can be done, and economics can play a helpful role in conserving the environment. I am in ECO on campus (I'm actually the treasurer this year), and often times what is most frustrating is telling people that they can help by choosing not to engage in environmentally destructive habits each day, and have them not believe us because the problem is so big and overwhelming. People feel that they are somewhat helpless, or inconsequential in that things they do every day couldn't possibly make a difference. But, it's just that - what everyone does every day adds up. There wouldn't need to be such a drastic cut in carbon emissions from the EPA if Americans didn't demand such a great quantity of energy on a daily basis. I think more valuation studies need to be done on a smaller scale; really addressing the common person, and letting them know the impacts of each car trip, each day with a/c, each day of meat consumption. And, potentially, how much they could save by being environmentally sustainable. For the record, I actually don't use A/C in my flat downtown; my total electric bill for 3 people is about $40/month. And we definitely do sweat it out most summer days.

Dr. Peter Schuhmann said...

Check out this post Abi:

http://naturalresourceecon.blogspot.com/2013/10/micro-level-valuation-what-is-that-tree.html

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