Thank You!

• Thank you, Professor Lin, for the opportunity to return to your “Beautiful Island”

• We are grateful to have the opportunity to visit and enjoy some of your nicest natural and cultural resources

• Our purpose has been to design a study of the non-use value of Taroko National Park

Professor Yann-Jou Lin

• Professor Yann-Jou Lin was one of our very best graduate students at Northwestern University

• I was supposed to help teach him, but he taught me some very important things about economics

My purpose and Plan• Professor Lin has asked me to talk about

nonmarket valuation in economics

• I will cover the following topics– Natural resource economics– What is nonmarket valuation?– Why is it needed?– Why and when should we do it?– How do we do it?

Level of Presentation

• You must decide how deeply we go into the subject

• How much do you know already?

• What questions do you have?

• Do you want to dig more deeply into some topics than others?

• Our “Primer” can answer most questions in more depth

Economics

• The study of the allocation of scarce resources

• Money as the parameter of exchange

• Economic value is the amount of money one is willing to give up or accept in exchange for a thing.

• Market price set by equilibrium between supply and demand

Not a Decision Machine

• Economics is just one of several important information systems, not a decision machine

• Policy makers need other kinds of information as well

• In most policy situations economic information is necessary but not sufficient

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Natural Resource Economics

• Economic Efficiency--maximize the net aggregate wealth and well-being of the people added by natural resource management

• Economic Equity--expose the distribution of costs and benefits among the people caused by natural resource management and disturbance. Is the distribution “fair”?

Economic Efficiency

• Economic efficiency is a technical question that economists can try to answer

• Benefit-cost analysis

• Cost-effectiveness analysis

• But, you must be able to measure all the costs and benefits

• Sometimes it is not possible

Equity

• Equity is a political question. There is no technical answer.

• Economists can try to show the distribution of costs and benefits among the people

• But, again, it is not always possible to identify and measure those costs and benefits in monetary terms

Two Concepts of Benefit

• Example: Nutritionist versus economist-- What is the value of a meal?

• Economist: What is the price of the meal and how much am I willing to pay for it?

• Nutritionist: What will the meal do to me if I eat it?

• We need both kinds of information

Natural Resource Application

• The “nutritional” approach explains how natural resources affect the quality of life

• The economic approach asks how much people are willing to pay to keep and use those resources or how much compensation they require for loss or damage (demand)

• Economic approach also asks the cost of management and conservation (supply)

Vitamin C Example

• Ancient mariners did not understand the need for vitamin C and were not willing to pay anything for it

• They died of scurvy

• Do we understand our dependence on natural resources, biodiversity, etc.?

• How well do economic values represent the value of things we don’t understand?

Economics is an Important Game

• Economics is an important information system--policy makers need to know the economic costs and benefits of their choices

• But, they and we also need to understand all the consequences of those choices

Economic Values

• Economic efficiency and impact analyses require information about both market prices and nonmarket values

• BCA, for example, will be biased if it does not include nonmarket values

• What is a nonmarket value and why is it important?

What is Nonmarket valuation?

• Estimating monetary values for important goods and services not traded in markets

• Estimating costs and benefits of non-marginal price changes

• For example, the value added to people’s lives by Taroko National Park– E. g., Use value, Bequest value, Non-use or

passive use value

Why is Nonmarket Valuation Needed?

• Taiwan’s economic success has proven the power of the free market system

• But markets don’t work well for some important goods and services and they don’t work well for non-marginal price changes

• Using only market-based information about natural resource value can mislead public policy

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The Theory of Market Failure

• Monopolistic diseconomy

• External diseconomy– Air pollution, Water pollution, Noise, etc.

• Public goods– Non-rival in consumption– Non-excludable in consumption– No private profit incentive

Monopolistic Diseconomy

• We will leave the discussion of this topic for another time

Non-marginal Price Changes

• Competitive market transactions generally are marginal--they do not cause the price to change

• Major supply change can be non-marginal and cause significant price change

• Market prices fail when major actions or disturbances cause prices to change

Properties of Public Goods

• Non rival: Consumption by one person does not reduce the amount available for other people.

• Non excludable: The owner cannot prevent others form consuming it and therefore cannot charge a price

• Non excluded: The owner chooses not to charge a price

Examples of Public Goods

• Air and water quality

• Scenic beauty

• Biodiversity

• Wildlife and endangered species

• Global climate change

• Flood protection

• National defense

Types of Public Goods

• Inherently market-evasive because of being non-rival and/or non-excludable in consumption

• Nonmarket by public policy such as a city park or national preserve

• Congestable public goods such as public swimming pools, hiking trails, movie theaters

Nonmarket Valuation

• Markets can’t set prices and therefore fail to measure the value added to people’s lives

• Unmeasured values will not compete effectively in economic policy analysis

• Nonmarket valuation tries to estimate the value as market-equivalent price– Willingness to pay– Willingness to accept compensation

Measuring Nonmarket Values

• Psychological--attitudes, preferences, trade-offs, opinion polls, political action, etc.

• Monetary economic measurement is required for the economic “game”– Revealed preference– Stated preference

Revealed Preference

• The choices people make in real markets reveal their values for non-priced things– Travel cost analysis, hedonic pricing, defensive

expenditures, etc.

• Stated Preference– People reveal their values by responding to

surveys or making choices in hypothetical markets, e.g., contingent valuation, paired comparison.

Must Be Done Right

• Both approaches require extensive training and experience

• What would have happened to the world’s tallest building if amateurs had designed it?

• Likewise, nonmarket valuation should be done by trained professionals

• Economics, like brain surgery, is a very complex subject

Getting the money to do the research can be a challenge

Primer on Nonmarket Valuation

• Economic valuation: What and Why

• Conceptual Framework

• Collecting Survey Data

• Stated Preference Methods

• Contingent Valuation in Practice

• Attribute-Based Methods

• Multiple Good Valuation

Primer on Nonmarket Valuation

• The Travel Cost Method

• The Hedonic Method

• Defensive Behavior and Damage Cost

• Benefit transfer

• Nonmarket Valuation in Action

• Where to from Here?

Integrating Economics and Ecological Assessment

• Pre-publication draft of a chapter for a book being prepared by the Society for Environmental Toxicology and Chemistry

– Introduction– Roles of economics in environmental policy– Economic valuation for environmental decision

making

With hard work, we can break through the barriers

Integrating Economics and Ecological Assessment

– Acting right and doing good• Figuring out the right thing to do

• Philosophical perspectives on economic valuation

• Philosophical perspectives on equity

• Populations outside the market system

• Enduring value, intrinsic value, and deep ecology

Natural Science Questions about Economics

• Must benefits always exceed costs?

• Do people acclimate to environmental impairment?

• Are there intrinsic environmental values that economics underestimates or fails to include?

• Does discounting lead to incorrect valuation of long run environmental costs?

• Can BCA and ecological risk assessment be combined in a meaningful way?

• What does substitution mean in an ecological context?

Must Benefits Exceed Costs?

• Economics is not a decision machine– Some values can’t or shouldn’t be monetized

• Exxon-Valdez example

– Economics looks at the investment perspective: what would happen if markets worked well for all aspects of the decision?

– Important but not sufficient– Other things must be considered

Do people acclimate?

• “Boiled frog” syndrome

• People’s preferences drive economics

• People’s preferences also drive politics

• Both systems are imperfect

• Ignorance of the consequences can misdirect preferences--vitamin C example

• Need for complementary “nutritional” info.

• Do some people have silly preferences?

• Dysfunctional institutional incentives

• Is the question about economics or about people?

• Statesmen versus politicians

Are there Intrinsic Environmental Values?

• So-called “intrinsic” values matter in economics only if people value them

• Existence value is the economic analog

• Santayana and Spinoza: “We do not value a thing because it is good. Rather, it is good because we value it.”

• Ethical arguments, as with religious arguments, are “normative” not “descriptive”

• If you have beliefs about the value of nature that others don’t share, then perhaps you have a responsibility to express those values through your market choices, political activism, and/or teaching and persuasion

Discounting and Interest Rates• Discounting assumes productive investment of natural

resources

• Does investment now grow into greater wealth later?

• Productive investment versus “cake eating”

• Natural versus human-made capital

• Precautionary principle--an ethical choice

• Non-renewable resources: Future options versus human-made capital growth

• Unknown preferences of future generations

Combining BCA and Ecological Risk Assessment

• “Continents” of the mind--different languages and different concerns--Kenneth Boulding

• ERA is a “nutritional” approach

• ERA information is a complement not a substitute. Bread + butter, not bread versus butter

• But, if economics is to include the findings of ERA, ERA must express its findings in terms that people can understand and for which they can express preferences

• John Krutilla’s statement of 24 years ago about natural resource economics

Substitution in Economics and Ecology

• Economics

– Higher prices for lost opportunities

– Sense of place

– Marginal vs. total value--diamonds and water paradox

– Do substitutes exist? Exxon-Valdez example

• Ecology

– Protecting the natural endowment

– Invasion and succession

– What about the non-human inhabitants of a degraded resource?

– Substitution of commodities for natural resources

Alternative Paradigms

• Three schools of ecological economics– Anti economic approach is normative and not

consistent with market or political reality– Apply economic models to ecological

phenomena– Explain ecological phenomena and outcomes to

inform people and complement economic

Energy as the Parameter of Exchange

• Not consistent with the reality of markets or politics. It’s not how most people make market or political decisions

• May be useful complementary information, however, to inform people, enrich their preferences, and help economics to do a better job

Deeper Concerns about Economics

• Recent Nobel prizes in economics awarded to behavioral scientists: McFadden, Smith, and Kahneman

• Read Rabin, Matthew. 1998. Psychology and Economics. Journal of Economic Literature XXXVI: 11-46.

• Read Amartya Sen, Herbert Simon.

• See my bibliography on “Thought Provoking Stuff about Economics”

• “Post Autistic Economics”: Go to http://www.paecon.net/

• Don’t try to drive screws with a hammer and trains are pretty good but they can’t take you to Australia--economics can answer some questions well. Stick to those.