Environmental Valuation

What is value?
• First, the economic view of “value” is anthropocentric.
• This means value is determined by people and not by either natural
law or government.

• Second, value is determined by peoples’ willingness to make trade-

offs.
• When an individual spends money on one good, there is less available
for other goods.
What is value?
• For market goods, the inverse demand curve represents a marginal
willingness to pay function.
• Each price on the curve represents a marginal willingness to pay for a
specific quantity of the good.
• The area under the curve at each price/quantity combination
represents the total willingness to pay.
Marginal WTP Function
Marginal Cost Function
• Marginal willingness to pay does not measure the total benefit
associated with producing a good.
• Resources used to produce the good could be used to produce other
goods that would benefit society, these benefits must be subtracted
from total value to yield net value.
• Total resource costs can be examined with the aid of the marginal cost
function.
Marginal Cost Function
• The relevant resource cost associated with a specific output level is
given by the area under the marginal cost function at that output
level.

• This area represents the opportunity cost of these resources (the

productivity of these resources in their next most productive use).
Marginal Cost Function
Net value
• Net value for a market good is equal to the sum of CS + PS.
• Consider the following example where the impact of air pollution on
the productivity of agriculture causes less economic output per acre.
• This impact is represented by a leftward shift in the MC function and a
resulting change in net value equal to area ABCD.
Net value for a market good
Net value for a market good
• The measurement process for determining the
change in net value is much more complicated.
• In the previous example, farmers may elect to
plant a different crop or change quantity of
planted acreage in response to the changing
productivity.
• Economic models consider the connectivity of
markets when determining changes in net value.
Value and Non-market Goods
• This process not as easy for non-market goods (nutrient cycling, clean
air, clean water, biodiversity, etc.)
• We do not observe prices for non-market goods, so hard to estimate
supply/demand functions
• Instead, look at WTP or willingness to make tradeoffs to obtain non-
market good
Value and Non-market Goods
• While money is one thing that people give-up or trade-off to obtain
goods, it is not the only thing.
• Time and other opportunities are sacrificed in order to obtain both
market and non-market goods.
• Examining these trade-offs can serve as a basis for valuing non-market
goods.
Direct use values
• Non-market goods may have both direct use and indirect use values.

• Direct use values are associated with tangible uses of environmental

resources, such as use in manufacturing processes, recreational
activities, or when environmental quality affects human health.
Indirect use values
• Indirect use values are those associated with more intangible uses of
the environment, such as aesthetic benefits or satisfaction derived
from the existence of environmental resources.
• Indirect use values are also called passive use and nonuse values.
• Indirect use values include existence value, bequest value, altruistic
value, option value and the value of ecological services.
Indirect Use Value –
Bequest Value
• Bequest value refers to the fact that an individual values having an
environmental resource or general environmental quality available for
his/her children or grandchildren to experience.

• It is based on the desire to make current sacrifices to raise the well-

being of one’s descendents.
Indirect Use Value –
Existence Value
• Existence value refers to the fact that an individual’s utility may be
increased by the knowledge of the existence of an environmental
resource even though the individual has no current or potential direct
use of the resource.
• An individual may never have opportunity to see a whale but places
value on preserving the species.
Option value
• Option value is commonly interpreted as the value of preserving
threatened natural resources so that they might be available for use
in the future.
• Option value is the value given a resource when there is a risk
associated with future supply and demand (Dziegielewska, 2009).
Indirect Use Value –
Altruistic Value
• Altruistic value occurs out of one individual’s concern for another.

• A person values the environment not just because that person

benefits from the environmental quality but because the person
values the opportunity for other people to enjoy high environmental
quality.
Not mutually exclusive
• A person who has a direct use value for preserving old-growth forests
(e.g., backpacker) may also have option, bequest, altruistic, and
existence values for old- growth forests.