Module 6: Measuring Benefits

• “Non-market valuation”: to back out WTP
• WTP is a welfare measure (Total Benefits)
• Alternative measure: WTA
• WTP < WTA (income effects, behavioral abnormalies, etc.)

• Total Value = use value + option value + non-use value
• Method to evaluate benefits:
  • stated preference methods
  • Revealed preference methods

• Stated preference
  • Measures all three types of values, but suffer from potential biases
  • Contingent valuation
  • Choice experiments
• Revealed preference
  • Only measures use value, but are more accurate
  • Hedonic property price model
  • Hedonic wage model (VSL)

VSL

• The economic value of risk taken by one individual, not actual human life
• Should be decided by each individual, not by the govt
• VSL = wage differential / risk (1)
• Total WTP = VSL * risk * No. people affected (2)

Hedonic property method

• Measures environmental benefits through housing markets
• Total WTP = price diff * No houses affected (3)

Module 7: Measuring Costs

• Engineering costs vs. opportunity costs
• Env regulation is not a job killer
  • Job loss mainly due to automation/globalization
• Green jobs are not equal to net jobs
  • Need to calculate the opportunity cost of investment

• Pollution haven hypothesis
  • Firms move to places with lax regulation
  • Mixed evidence

Module 8: Benefit Cost Analysis

• Benefit-cost analysis provides a normative criteria to evaluate public policy decisions
  • Normative
  • Public policy
  • Decisions
• Decision rule: B - C > 0 (4)

• Inter-temporal decisions making:
  • Decision rule: PVNB > 0 (5)
  • Discounting

The discounting equation:

\[PV = \frac{CV}{(1+r)^t}\]

PV of an infinite stream of payoff = \(\frac{\text{CV of each year's payoff}}{r}\)

• Larger discount rate: values the current more
• How is discount rate determined:
  • Ramsey equation: discount rate = time preference + weighted growth rate
  • Public discount rate < private discount rate
• Decision making under uncertainty
  • Compare E(PVNB)

Module 9: Non-renewable Resources

• Difference between “economic scarcity” and “physical scarcity”
  • R/P does not capture the economy-wide feedbacks
• Higher market price induces:
  • New discoveries
  • Development of new technologies
  • Development of substitutes
• Why price of a resource does not increase over time?

Solving the two-period problem

• DEA rule: PVMNB should be equal between two periods (8)
  • The simultaneous equation
• Solution: Price = scarcity rent + MC (9)

Solving the N-period problem

• Hotelling’s rule: royalty increases at the rate of r

\[SR_t = SR_0 * (1+r)^t\] (10)

• Backstop prices for the substitute

Other implications

• Larger r, faster extraction, faster price increase
• Larger reserve, lower prices + more extraction
• Sustainability rule: weak, strong and environmental
• Hartwick’s rule
  • DEA could align with the weak sustainability goal

Module 10: Water

• Consumptive vs. non-consumptive use
• Water rights in the US:
  • Riparian rights
  • Prior appropriation rights

• Efficient allocation of water
  • MB for water is equalized for all users
  • Be able to apply this rule to determine who gets (how much) water
• Problems with PA doctrine
  • Not an efficient/fair education
  • High transaction cost prohibits water trades