| How is the Environment Valued? |
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Source of cartoon: Bowers 1990
Willingness to pay (contingent valuation) Market demand can be derived from surveys to find out how much people are willing to pay to preserve or improve the environment, how much they are willing to pay to visit a particular environment, or how much monetary compensation a person is willing to accept for loss of environmental amenity ('willingness to sell'). Both methods - 'willingness to pay' and 'willingness to sell' - have problems associated with them. They are based on surveys that are likely to be inaccurate, because people may inflate or deflate the amounts they are willing to pay or accept. With willingness to pay (also known as 'contingent valuation'), it is thought that people will understate the amount they would pay if they think there is a chance they might actually have to pay that amount. This is because people know that, if others pay and they do not, they will get the benefit anyway - they can become 'free riders'. On the other hand, if people believe they will never be asked to pay up, they may exaggerate the amount they are willing to pay. Nevertheless, willingness to pay tends to reflect the minimum value that people put on a given level of environmental quality. Naturally, it will be limited by a person's income, assets and ability to borrow. It will also be shaped by his or her perceptions of monetary value; for example, $1000 is a lot to someone living on $3 a day in a poor country. Even in a single community, people's willingness to pay may be dependent on their incomes, and this may distort the outcomes in favour of the choices of rich people. (One could argue that this is the way a market always works, because the wealthy by definition have greater purchasing power.) The results of surveys on willingness to pay will also depend on the level of physical information a person is given and on what he or she is told by the person doing the survey. People might be given photos of the area in question and have the specific threat to it explained. They may even be told what is required to save the area and how the money is to be raised. This will influence their answers, as will their general knowledge about the state of the environment and the principles of ecology. The concept of willingness to pay assumes that the environment does not already belong to the community, but that they must buy it. Willingness to sell, on the other hand, assumes that the environment belongs to the community. Surveys based on willingness to sell tend to obtain a maximum figure for what the environmental quality is worth (assuming people want a maximum price for something that they are selling). However, economists tend to prefer willingness to buy, because willingness to sell surveys 'tend to generate very high dollar values, to the point where many people find them implausible' (Streeting & Hamilton 1991, p. 76). A way to get around this tendency for people not to give truthful answers is to ask more indirect questions and therefore infer what people are willing to pay from indirect evidence concerning their behaviour. For example, by asking people in a park how far they have travelled to get to the park and how often they come each year, economists hope to find out what the park is worth to them. This method assumes that people travel to the park as long as the cost of getting there is less than the benefits they get from being there. It also assumes that use of the park for recreation constitutes its sole value, and that the cost of travel reflects how much people are prepared to pay for the park. However, the park may be valuable for other reasons; and people may be restrained from going there more frequently not because of the cost of travel but because of other commitments. Moreover, although they may be willing to spend more money in getting there if they have to, they do not need to do so at current prices. For all these reasons, the cost of travel is likely to underestimate what people are willing to pay. Opportunity costs can be used to put a value on an area of the environment which is to be preserved from development. To work out the opportunity cost for such an area, economists list all the possible alternative activities that could take place in that area. For example, the value of preserving a wetland may be estimated by working out what the land would be worth if it were used for agriculture or housing. For each alternative activity, the economist works out what benefits would have been gained that could not be gained in any other way and then subtracts the costs that would be involved in getting these benefits. So, for the housing alternative, the cost of building the houses and providing services for them would be subtracted from the value of the houses. And if those same houses could just as easily be built somewhere else, the opportunity cost would only consider the additional benefits from building them on the wetland. The highest amount of net benefits (the amount left after subtracting costs) that one can get from any alternative course of action that has been foregone is the opportunity cost of preserving that area. This indicates the minimum value placed on the area, since the decision to preserve it has meant that those making the decision were willing to forgo those benefits at least, and maybe more. This method can be used before a decision is made, so that decision-makers or the public can decide whether they believe the area is indeed worth what has been worked out as the opportunity cost. If they decide not to preserve the area, environmental losses can be worked out in terms of the amount it would take to restore the environment to its original state after development has occurred - for example, after mining or logging. As was seen in chapter 4, environmentalists do not believe some areas can be restored in this way, and therefore would reject this as being a full measure of the environmental loss. Opportunity cost can only be a partial measure of environmental value. The value of the area for housing may have no relationship whatsoever to the actual value of the wetland, which probably provides a breeding ground for fish and other aquatic organisms, as well as performing a cleansing function, filtering out pollutants that flow through the area. Using proxies (hedonic pricing) This method assumes that the value of environmental assets can be found by considering the prices of the closest market substitutes. For example, a lake that is used for fishing, boating and swimming might be valued by calculating what people spend on private fishing, boating and swimming facilities. Another market substitute commonly used is property values. The idea is that houses in a polluted area will be worth less than houses in a non-polluted area, and that part of the difference in house prices will reflect the value the market puts on clean air or, alternatively, the cost of pollution. Differences in property values will also arise for other reasons, such as the quality of accommodation and accessibility to the central business district or public transport routes. The analyst must be able to work out what part of the difference is due to the environmental factors, and must be able to infer from that how much people are willing to pay for improved environmental quality. Other proxies might include differences in water rates where higher rates are levied to cover better waste water treatment of effluent going into a river. The extra cost to ratepayers is a proxy for the value of a cleaner river. The value of the time environmentalists spend fighting to protect an area can also be used as a proxy for what they think it is worth. However, this can be problematic; if one bushwalker earns more money in his or her job than a fellow bushwalker, does that mean one person's spare time is worth more than another's?
Source: Sharon Beder, The Nature of Sustainable Development, 2nd edition, Scribe, Newham, Vic.,1996. |
© 2001 Sharon Beder