Valuation

The topic for this week is non-market valuation.

Valuation means estimating what something is worth (to people, usually in dollars).

Non-market means that the goods or services that we are attempting to value are not traded in markets. That is, these are things of value, but we do not have prices to serve as signals of what they are worth.

There are a lot of misconceptions about the non-market valuation of natural resources of environmental goods and services.  The first and perhaps biggest misconception is that economists want to go around estimating the monetary value of things for no particular reason. This is far from true. We only attempt to understand the value of environmental goods and services when there is a reason to do so. For example, we might wish to understand the the tradeoffs that society faces for a development decision or a conservation project. Understanding the opportunity costs of lost environmental quality helps decision makers understand the worth of what stands to be lost.  Understanding the benefits of conservation (again, in dollar terms) helps us see if conservation initiatives are "worth it". In short, understanding the value of things can be useful for informing policy.

Another misconception is that if and when the monetary value a natural resource is estimated, this somehow "cheapens" the resource.  Again, I do not think this is true at all. Indeed, the default value of many environmental resources is zero, because many goods and services provided by the environment can be obtained for free. Valuation helps remind society that just because something is free, this does not mean it is not valuable.  

Finally, its important to consider that the process of non-market valuation is simply formalizing something that we do (implicitly) every day. For example, when you decide to drive your car instead of walking, you are implicitly stating that you value your own convenience more than you value the pollution that you cause by driving. On an aggregate level, when we vote for policies or politicians that favor other spending opportunities over spending on the environment, we are implicitly stating that we value those other things more than we value the environment. We even implicitly value human lives, including our own. When we choose to spend less money on road repair or highway safety, we are implicitly valuing human life. We could spend more money and have fewer people die, but we choose not to because it's "too expensive". When someone chooses to look at their phone when they are driving, they are revealing that they value that bit of information over their own safety and the safety of others. Our actions (individually and collectively speaking) reveal what we value.
The process of economic valuation makes the tradeoffs easier to understand and compare by expressing them in dollar terms.

Here are links to some good sources:

Why Economics Matters for Endangered Species Protection (Shogren et al., 1998)

The Role of Economic Valuation in the Conservation of Tropical Nature (Naidoo, 2008)

Conservation Pays (Yuskavitch, 2007, Defenders of Wildlife)

Marine Conservation: How Economic Valuation of Ecosystem Services Can Help (Environment Matters, 2008)

Can Environmental Economic Valuation Techniques Aid Ecological Economics and Wildlife Conservation? (Loomis, 2000, Wildlife Society Bulletin)

Of additional interest:

Economic Incentives and Wildlife Conservation (Bulte et al., 2003)

Tons of references and links here:  Economic Valuation References WRI

Information on coral reef  valuation can be found here and here and here and here.

Valuation and the endangered species act here.

More on the economics and value of endangered species here and here.


This is a tiny fraction of what's out there. What are your thoughts on valuation?  I'd especially like to see if students from different backgrounds look at valuation differently. When you post a reply, let us know your primary field of study. 

Memorial Day

Today is Memorial Day.  I hope you enjoy time with family and friends. Take time to not only consider, but celebrate our collective and individual freedom. Freedom to pursue happy and productive lives, to express our thoughts, to worship as we choose and to move about our lands unimpeded. Celebrate these amazing things that you have been gifted by the ultimate heroes, the more than 1.1 million men and women that gave their lives so that we could.

Externalities

Externalities are a type of market failure that occurs when the costs or benefits of a good sold in a market are not entirely paid or received by the market participants. When this happens, the market fails to produce the best outcome for society. That is, the market fails to be efficient in the sense that total economic surplus is not maximized.

Negative externalities occur when someone other than the buyer or seller of a good incurs a cost when that good is produced or consumed. Many forms of pollution can be classified as generating negative externalities. If the pollution is unregulated (i.e. there is no government intervention into the market), then the market that produces the pollution is inefficient. 

When visualizing negative externalities from pollution, students often think of a factory emitting harmful substances from a smokestack, or an industrial agricultural facility creating water pollution from pesticide runoff. That is, we tend to conceptualize pollution externalities as the result of production (the supply side of the market), and place blame on "big corporations". 

But we must keep in mind that as consumers we are largely responsible for pollution impacts, because if we didn't demand those goods and services, they would not be produced. Here is a link to a story at EurekAlert regarding pollution from consumption. The main takeaway is that consumers are mostly responsible for pollution, albeit indirectly. Which country's citizens have the biggest impact via consumption?  Which products that you consume every day generate the most pollution? 

When we speak of "external costs", what types of costs are we talking about?  The first thing that comes to mind for me is loss of human health. Here is a story about the health effects of air pollution. The numbers are staggering. 

I'm often asked to comment on the idea that environmental regulations make the economy less productive. My reaction is typically that it's exactly the opposite. There is a vast amount of evidence suggesting that reducing air and water pollution can make the economy more productive, not less. 

Here is an article at The Atlantic outline the healthcare costs savings of the Clean Air Act. 

Here is a good description of the benefits of clean water from David Brodwin at US News.

Here is a brief outline of negative externalities associated with air pollution from transportation from Hofstra University. 

Here is some good background reading on negative externalities and public goods from the IMF.

What are we going to study in natural resource economics?

What are we going to study in natural resource economics?  

 

Students new to economics or new to environmental studies may be unsure about how these topics come together.  

Generally speaking, economists try to solve problems using a combination of theory, empirical analysis (data, statistics, math), and intuition. For example, macro economists try to address issues such as how to keep an economy growing without significant inflation.  Micro economists might try to find the best way to maximize profit for a particular firm or industry. Natural resource economists try to solve problems associated with scarce natural resources. 

Some examples from my work include:  

 

How can we manage fisheries in a way that balances the competing needs of commercial and recreational fishers and maintains a biologically sustainable stock?   

  

Is pollution bad for an economy?  Do dirty beaches prevent tourists from returning?

 

Tradeoffs between development and conservation...  How much are scuba divers willing to pay for healthy coral reefs and marine turtles?  

 

How to best manage wildlife populations?  What hunting regulations would maximize the net gains to society from white tailed deer populations?   

 

If we continue to use marine resources in unsustainable ways, will we lose potentially lifesaving medicines? 

 

Obviously, these are complex issues that require interdisciplinary effort. One of the things that I really love about what I do is that I work side-by-side with biologists, policy makers and resource users to address these problems. 

It should also be obvious is that these are potentially contentious issues. It is easy to get caught up in the emotion that surrounds any debate about environmental issues. Please remember that an economists job is to provide objective analysis (i.e. without personal opinion or bias). In short, our job is to search for the truth, or as close to it as we can get.

Below are links to an overview of environmental economics and two excellent essays that provide a nice perspective on the economic view of the environment.  The second essay covers non-market valuation, which we will cover in detail later in the summer. It makes a good read now however, as it sets the stage for much of what we're covering at the beginning of the class (e.g. the economic view of value).

 

What is environmental economics?  (The Economics Network at the University of Bristol) 

How do Economists Really Think About the Environment (Fullerton and Stavins, RFF, 1998)
 
Economic Values without Prices (Loomis, Choices, 2005)

What are your thoughts on economics and the environment?  At the beginning of the course, do you see a role for economics in the environmental policy debate? 

Welcome UNCW Summer School Students!

Hello! This blog is primarily used by students of Professor Schuhmann. Others may find it useful...
The purpose of this blog is to provide a forum for extra discussion about topics related to natural resource economics. 

Thoughts on the course?

What topics did you find most/least useful? 
Most/least interesting?
What were your main takeaways from the course?
Was resource economics what you expected?

No need to answer all of these....

Free electricity?

Check out this interesting story from the NY Times.  Lots of economics in there. 

Bag-and-tag

This week we move into a discussion of mineral extraction and a related topic: trash and recycling.

Below are links to some examples of formal bag/tag (pay-per-throw) systems in the US.

Dover, NH,
Charles County, MD
Mount Pleasant, MI
Sunnyvale, CA
Houston, TX
Duluth, GA
Tompkins County, NY
Malden, MA
Grafton, MA
Shrewsbury, MA

This is just a few. 

Here is a link to details on the success of a bag/tag program in Worcester, MA.

Success in Maine

Variations on pay-per-throw in RI


Can anyone provide international examples of pay-per-throw systems?

Good reading on the topic of waste in NC from NCSU

The idea behind these systems is a fairly straightforward application of internalizing a negative externality:  Impose Pigouvian taxes on things that cause external damage and society will be better off, because raising marginal costs creates an economic incentive for people to reduce quantity.

Here's a writer in Washington DC lamenting the lack of pay-per-throw trash disposal.

A related issue: plastic grocery bags. 

What do you think about this approach versus this approach? 

More valuation readings

Here is a great website for additional reading on valuation: 
Ecosystem Valuation

This article by john Loomis is also a good read for the "big picture": 
Economic Values without Prices (Loomis, Choices, 2005)

Here is another good summary article from Robert Mendelsohn and Sheila Olmstead:
The Economic Valuation of Environmental Amenities and Disamenities 

Settlement with BP to Resolve Civil Claims Over Deepwater Horizon Oil Spill

This came out on Monday, while most of us were engaged in watching the storm and ensuing flooding...

Attorney General Loretta E. Lynch Delivers Remarks at Press Conference Announcing Settlement with BP to Resolve Civil Claims Over Deepwater Horizon Oil Spill

Washington, DC

United States

~

Monday, October 5, 2015

Read the full Remarks as prepared for delivery 

Here are some parts that pertain to non-market valuation:   

...  The Gulf was flooded with oil.  And the Gulf coast way of life – a uniquely American way of life – was hanging by a thread.  Over the course of nearly three months, the Gulf region was inundated with more than three million barrels of oil.  And by the time the torrent stopped, it had inflicted unprecedented harm on the economy, the environment and the population of the Gulf region.  Ecosystems were disrupted, businesses were shuttered and countless men and women lost their livelihoods and their sense of security.  

... in December of 2010, the Department of Justice filed a lawsuit against BP to hold the company accountable and to provide vital relief for the people of the Gulf region.

... we have secured a historic resolution of our pending claims against BP totaling more than $20 billion – making it the largest settlement with a single entity in American history.  The resolution includes civil claims under the Clean Water Act, for which BP has agreed to pay a $5.5 billion penalty – the largest civil penalty in the history of environmental law.  It includes natural resources damages claims under the Oil Pollution Act, for which BP has agreed to pay $7.1 billion – on top of the $1 billion it previously committed to pay for early restoration work.  And it includes economic damages claims, for which BP has agreed to pay $4.9 billion to the five Gulf states and up to $1 billion to local governments.

... In addition, BP’s payments for natural resources damages will help fund Gulf restoration projects that will revitalize damaged habitats, such as coastal wetlands and support the revival of wildlife populations, including marine mammals, sea turtles, oysters and birds.  

---

I hope you see the role of non-market valuation in natural resource damage assessment. BP caused damage and should pay a fine. Many goods and services that are not traded in markets were damaged, impaired or ruined.  In order for the fine to be commensurate with the damages, we need to do the non-market valuation work.  

 

The Oil Pollution Act is an interesting piece of legislation. Enacted in the wake of the Exxon Valdez oil spill, it combines command-and-control (e.g. mandating double-hulled tankers) with Pigouvian taxation. The Valdez spill had a big impact on the subject of non-market valuation, especially as it pertains to the estimation of non-use values via the Contingent Valuation Method. 

I was an undergrad at UNCW when Valdez happened in March of 1989. Like the 2010 BP spill, it was big news.  You can see some of the images here at the Atlantic.  26 years later, while some of the natural resources in Prince William Sound have recovered, many have not.