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Valuation of ecosystem
services III&IV
Charit tingsabadh
25 September 2007
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Revised Schedule, 25/9/07
Lecture No./date
Topic
Remarks/readigns
1st, 17-9-2007
Natural systems: coral reefs and other
marine ecosystems
Udomsak’s Phi Phi Study
2nd , 18-9-2007
Natural Systems: Forest ecosystems -
Direk’s Khao Yai Study
3rd , 19-92007(cancelled)
Natural Systems Biodiversity (TBA)
Simpson
4th , 20-9-2007
Practical work: survey design: case
based on Bangkok
TBA
5th , 25-9-2007
Environmental resource: air quality and
health impacts
Class discussion and group
work
6th , 26-9-2007
Environmental resource: water qualityhealth and recreational values
7th , 28-9-2007
Revision exercises: Assignment
presentation 1: air and water quality
cases
8th , 24-9-2007
(cancelled)
Revision exercises: Assignment
presentation 2(TBA)
Open book
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outline
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Environmental attributes
Price as sum of values of attributes
Hedonic price method
Implicit price from price function
Examples
House price and environmental attributes
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Environmental attributes
• Goods seen as a bundle of attributes,
including environmental ones
• Give examples:
– House near airport– House near garbage dump site
– House near park with good view
– House near BTS
– Etc.
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Price as sum of values of attributes
• When we buy a house, we buy the whole bundle
• But how does each attribute give value to the
total price
• Think of a computer- specifications differentiate
cheap and expensive computers
• Imagine a price function for a cimputer
• Same with other goods, involving environmental
attributes
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Hedonic price method
• Price function called Hedonic price
function
• Can have various specifications (forms)
• See example:
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valuation with hedonic price model
• From price function, derive implicit price
function
• Use this to derive demand curve
• Apply standard demand theory to find
consumer surplus
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Valuation 5: Hedonic Pricing
• A partial equilibrium model of prices,
wages and pollution
• The hedonic price equation
• From hedonic prices to welfare
• Applications: Forests and earthquakes
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Last week we looked at
• The travel cost method, which assumes that
certain observable behaviour is a complement
(e.g., travel to recreate) or substitute (e.g.,
airbag for road safety) to unobservable
consumption of an environmental good or
service
• Before that, we looked at restricted demand
theory and welfare measures, and contingent
valuation: stated preferences
• This week: The other revealed preference
method, looking at household consumption
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The Price of Land
• The asset price equals the value of the
stream of services that the parcel can be
expected to provide in the future, netted
back to the present
• The rental price of land is the value of
renting for a short period, e.g., for
agricultural land, the difference between
expected yield times prices minus the costs
of labour, seeds, pesticides etc
• Pollution degrades value and thus price
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Starters
• Consider agricultural land in a valley, half of
which is upwind a polluting plant, the other
half downwind – the difference between land
value is only an indication of the value of
pollution if this is a small valley in a large
market
• Consider an open city, with free mobility –
utility must be the same everywhere, so land
prices exactly compensate for pollution; in a
closed city, reducing non-uniform pollution
would affect property values as well as utility
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Wages, Land Prices and Pollution
• Arguably, pollution should suppress land prices
– but we see that urban land is worth more
than rural land
• Urban wages are also higher than rural wages
– do wages compensate for pollution?
• We will construct a model of urban land
prices, wages and pollution -- first,
analytically and then we‘ll derive a function
that can be estimated
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Wages, Land Prices and Pollution -2
• Consider a number of cities that have
different levels of pollution p; firms produce
a composite good X (at price 1) and move
about freely; the wage rate is w and the land
rent r vary between cities
• Consumers are identical, purchase X and land
for housing L
maxU (Xfree
, L, p )movement,
s.t. w  X utility
 rL is the same
• Assuming
X ,L
everywhere: V(w,r,p)=k
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Wages, Land Prices and Pollution -3
• In a constant cost industry, average
production costs equal marginal production
costs equal price, so that for all cities
c(w,r,p)=1
• Pollution may affect costs in different ways
– Unproductive (pollution hinders production)
– Productive (pollution regulation hinders prod.)
– Neutral (but wages and rents affect prod.)
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Wages, Land Prices and Pollution -4
• Higher pollution must be compensated by
either higher wages or lower land rents
• V=k, p  w, r
• If pollution is productive, pollution raises
wages but has an ambiguous effect on land
rents c=1, p  w, r
• If pollution is unproductive, pollution
depresses land prices but has an ambiguous
effect on wages c=1, p  w, r
• If pollution is neutral, pollution decreases
land prices and increases wages
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Hedonic Price Theory
• Consider an homogenous area that can be
considered a single market from the point of
view of, say, houses
• Each house is characterised by a single
characteristic, z, say, air pollution
• We are interested in the relation between
price and air quality, p = p(z)
• We look at the partial equilibrium, and assume
that the market is perfect
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Hedonic Price Theory -2
• The consumer buys exactly one house as well
as other goods x
maxU (x , z ) s.t.
x
 p (z ) the
y budget for
• Alternatively,
we
consider
x ,z
buying the house, guaranteeing a certain level
of utility
U (yisknown
 , z )  as
Uˆ 
y , zfunction
,Uˆ)
• This
the (bid
– it tells you
the maximum amount a consumer is willing to
pay as a function of income and air pollution
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Hedonic Price Theory -3
• The producer maximises profits
ˆ )function – it tells
 is known
 c (r , zas
)
 (offer
r,z , 
• This
the
you the minimum amount a producer is willing
to accept as a function of costs and air
pollution
• In the equilibrium, the marginal bid, the
marginal offer, and the house price are
identical – all parties in the market value the
house the same, at the margin
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Hedonic Price Theory -4
• The hedonic price function tells you how price
varies with environmental quality and other
factors (income)
• Take the derivative of the price to
environmental quality – this gives the price of
environmental quality
• Do this for various income levels
• This gives the price of env. quality as a
function of income – that is, an inverse
demand function
• Sometimes direct, sometimes statistical
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Theory and practice
• Theory and practice differ substantially
• Niceties such as the difference between
compensated and uncompensated demand
functions are typically ignored
• Only one market (housing) is analysed
• Market distortions are ignored
• The reason: data; although wages and
house prices are known, it is hard to get
data because of privacy – one can readily
get ask prices for houses that are
currently on offer, but not actual prices
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Application: Earthquakes
• Does earthquake risk affect house prices?
• California designated Special Study Zones
(SSZs) which are risky; house owners know
and tell potential buyers
• The price of house in these zones is $4650
($2490) lower than that of identical house
outside those zones in Los Angelos (San
Francisco)
• This is half the price of a swimming pool, a
third of a view
• Before notification, risks were irrelevant
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Ln(home sale price)
LA
Age of home
SF
-.002
.0005
.00003
.00005
# Bathrooms
.098
.260
Pool
.093
.067
View
.143
.128
SSZ
-.056
-.033
School quality
.020
.012
Percent black
-.00004
-.006
-.001
-.004
-2.313
-.401
-.016
-
.79
.69
4865
5438
Size
Air pollution
Distance to work
Distance to beach
R2
# Obs
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Application: Forests
• Do green areas affect house prices?
• The city of Salo, 32,000 inhabitants, in
Finland
• About 10% of the area is green
• 590 appartments in terraced houses were
sold between 1984-1986
• The sale price was regressed on size, distance
to city centre, distance to Nokia, age, forest
view, type of house, and distance to nearest
green area (based on satellite images)
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example
Leggett&Bockstael,1998:
Evidence of the Effects of
Water Quality on
Residential land Prices
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Another Example
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Lecture IV: Green GDP
• From valuing ecosystems to including
them into GDP accounts
• What to do?
• Green GDP:
Concept
Measurement
Results
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Green GDP:
Concept
• GDP measures flow of value-added from
activities
• Capital measured for GDP as investment (+/change in capital stock) on expenditure side
• Green GDP should measure what?
• Flow: ecosystem services
• Stock: change in the stock of natural capital that
produces the ecosystem services
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Measurement (1)
• For flows, may be already accounted for
as part of operating surplus, overstating
the rate of profit if natural capital is used
• This can be considered resource rent
• Example: raw water is not costed for
production of tap water, so profit of water
company includes rent from use of raw
water
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Measurement (2)
• For Stock: value of change in stock of natural
capital is not included in GDP estimate
• Example: conversion of forest land to farm land
counts as +investment for land, but as –
investment for forest
• Water quality deterioration implies loss of
amenity values, but cost is not counted
• MANY PROBLEMS!!
• See SEEA by the UNSNA
• Also paper on ENRAP
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Results
• This will be an interesting class
assignment, for someone to
present in the presentation
sessions.
Thank you
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