The economic valuation of environmental costs and benefits Tim Capon

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The economic valuation of environmental costs and
benefits Tim Capon
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Lectures

• Property rights regimes and common pool resources
• Market pricing and nonmarket valuation
• Contingent valuation
• Hedonic pricing
• Travel cost
• Choice modelling and replacement cost

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The economic valuation of environmental costs and
benefits Property rights regimesand common
pool resources
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Lecture outline

• Market pricing of scarce resources
• Property rights and externalities
• Economic instruments
• Common pool resources
• Water

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Market pricing

• Freedom of choice based on self-interest and
  rational behaviour
• Perfect information
• Competition
• Mobility of resources
• Ownership rights

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Market pricing

• If these assumptions are met then in the long run
  the market will allocate resources efficiently.
• Market prices will measure the true scarcity of
  resources.
• Market failure

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Private goods

• Private goods are produced through a market
  system because they are divisible they are
  produced in small discrete units that can be
  consumed by individuals - and are subject to the
  exclusion principle - those who are unable or
  unwilling to pay for the good are excluded from
  its benefits.

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Property rights

• In markets, bundles of property rights are
  exchanged, not objects.
• Bromley (1991) defined property rights as a
  social relation over a stream of benefits.
• Economic institutions are the arrangements that
  govern the interactions of economic agents with
  regard to these benefit streams.
• In the world of Robinson Crusoe property rights
  play no role.

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Property rights regimes are the rules that
govern the rights and responsibilities of
individuals and the terms of their interaction.
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Non-attenuated property rights

• Completely specified property rights
• Externalities are costs or benefits imposed
  beyond the decision-maker.
• A lack of property rights is common in cases of
  environmental degradation, where the
  responsibility for decision-making often remains
  unclear.
• In the presence of externalities, private and
  social evaluations of costs and benefits will
  diverge.

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Example of an externality

• Violation of exclusivity
• Suppose there is a steel factory dumping waste
  into a river upstream from a resort hotel.
• The increased waste in the river imposes an
  external cost on the resort, a cost the steel
  firm could not be counted upon to consider
  appropriately in deciding the amount of waste to
  dump.

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MSC MPC MEC
per unit
S MPC
P
Pm
D MPB
Qm
Q
Quantity (units)
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Consequences

• The output of the commodity is too large.
• Too much pollution is produced.
• The prices of products responsible for pollution
  are too low.
• There are no incentives for the steel firm to
  find ways to reduce pollution per unit of steel
  output.
• Recycling and reuse of polluting substances are
  discouraged.

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Economic responses to market failure

• Establish property rights
• Imposition of taxes or subsidies
• Regulation

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The Coase Theorem

• Coase (1960) argued that defining property rights
  for environmental externalities can internalise
  costs or benefits and thereby increase economic
  efficiency.
• Assumes zero transaction costs.

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A bargaining solution

• Coase (1960) argued that regardless of who is
  assigned the initial property right to pollute or
  not to suffer the costs of pollution, bargaining
  can lead to the efficient outcome.

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MSC MPC MEC
per unit
S MPC
P
Pm
D MPB
Qm
Q
Quantity (units)
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Other property rights regimes

• Different property rights regimes create rather
  different incentives for resource use.
• State-property
• Common-property
• Res nullius or open-access

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Hardins Tragedy of the Commons

• man is locked into a system that compels him to
  increase his herd without limit in a world that
  is limited Hardin 1968. The tragedy of the
  commons. Science. 162,1244.

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Hardins solution

• mutually agreed upon coercion.
• Cannot be based on creating internalized norms or
  obligations between resource users
• Informal and non-state organizations cannot
  develop effective solutions
• Solutions have to be developed by the state.

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Critics of Hardin

• Confusion over the concept of common property and
  open access conditions
• common property is not everyones property
  Ciriacy-Wantrup and Bishop (1975, 715).
• Where common property existed, users had
  developed social contracts and rights between
  those with long term interest in the resource to
  avoid overuse.

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Common-pool resources

• Common-pool resources are characterized by
  non-exclusivity and divisibility.
• Examples include fish, bison, and water in a
  reservoir.
• In the presence of sufficient demand,
  unrestricted access will cause resources to be
  overexploited.

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Public goods

• Public goods have the properties of
  nonexcludability and are indivisible (also called
  nonrival).
• Examples include scenic amenity, clean air,
  clean water and biological diversity.

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The free-rider problem

• Because of these two properties, public goods are
  subject to the free-rider problem, where people
  can benefit from a public good without
  contributing to the cost of its production.
• This is an example of a social dilemma, where
  individual interests may conflict with the group
  interest.

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References on alternative institutions for
managing common property

• See the references at the end of the chapters in
  Tietenberg (2003) and Hussen (2004).
• For example
• Ostrom, Elinor. Crafting institutions for
  self-governing irrigation systems (San Francisco
  ICS Press, 1992)
• The work of Daniel Bromley

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Textbook references

• Hussen (2004) chapter 3 and Appendix A
• Tietenberg (2003) chapter 4

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Water

• Water supplies are inherently risky. Climate
  variability, variable water demands and the
  increasing economic and environmental values of
  water are significant sources of uncertainty in
  rural catchments.
• Water has many competing uses in irrigation,
  urban uses, recreational uses, habitat, ecosystem
  services etc

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Property rights for water

• Green (2000) characterized the point of view that
  it is a simple matter to define non-attenuated
  property rights for water and achieve allocative
  efficiency as the Panglossian approach.
• However, it is rarely that simple.
• For example, there are also distributional issues
  with the allocation of new property rights.

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Property rights for water

• Time-span of entitlements
• Method of accommodating the stochastic nature of
  water availability
• The time and place of delivery
• Return flows and the attendant obligations upon
  the owner
• The conditions of transferring entitlements

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Alternative property rights regimes

• Volume sharing
• Capacity sharing
• Systems of priority rights
• Prior appropriation
• General and high security water entitlements

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Reservoir Inflows
Reservoir Inflows
User 1 share
User 2 share
Reservoir Releases
User 2 Releases
User 1 Releases
Capacity sharing
Volume sharing
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Environmental concerns

• Changes in perceived costs and benefits have
  altered the legal foundations of property rights
  regimes for water.
• Historically, in the western US, the doctrine of
  prior appropriation only considered consumptive
  uses of water.
• However, courts have now recognised instream flow
  requirements as a legitimate property right
  because of a no-injury requirement in water
  law.