We've written a lot about "environmental benefits" in the context of benefit-cost analysis. But what are they exactly? And how are they measured? In this geeky, academic post, I'll describe the theory behind environmental benefits. Someday soon I'll describe the methods used to measure these benefits.
Now, some context: Whenever an environmental policy is implemented there are winners and losers. The economic efficiency criterion requires that the gains to the winners exceed the losses imposed on the losers. Benefit-cost analysis is a method used to calculate and compare monetary gains and losses.
For example, when government pursues a water quality improvement policy, gains and losses are distributed to consumers and firms. The losses are relatively straightforward to measure. These are the lost revenues to firms from lost production and/or higher costs of production. The gains to those who benefit from clean water are more difficult to measure.
The concept of "economic surplus" is the basis for the theory of economic benefits. Considering a market good, for example a car, the consumer's economic surplus is the difference between what the consumer is willing (and able) to pay and the market price (amount actually spent) for the car.
The consumer may be willing and able to pay the manufacturer’s suggested retail price of $35,000, max. However, if the negotiated price is $31,000 then the consumer surplus is $4,000 – the difference between the consumer’s maximum willingness to pay and the market price. The consumer surplus is a monetary measure of the net benefit that the consumer gained from the transaction.
Goods that aren't sold in markets, such as water quality, also provide consumer surplus. Consider a recreational coldwater angler who is willing (and able) to pay $5 for each additional trout caught (and released) per trip. If an environmental regulation leads to a water quality improvement, and the improvement enables the angler to catch two additional trout beyond his usual take, then the consumer surplus per trip (i.e., the monetary measure of his enjoyment) increases by $10. However, since the angler did not directly pay anything out-of-pocket for the water quality improvement (i.e., there is no market price), the $10 increase in consumer surplus is difficult to measure.
The consumer surplus for market goods is generally associated with using or consuming such goods. In contrast, consumer surplus for non-market goods such as water quality improvements can arise from two sources: use value and non-use value. In the case of water quality improvements, use value is the increase in consumer surplus arising from on-site use of higher quality water. The angler mentioned above, for example, gained additional consumer surplus from the on-site use of higher quality water.
Non-use value (aka, passive use value, existence value) is the portion of consumer surplus that arises from sources other than on-site use. Non-use value may be motivated by environmental stewardship, altruism towards others, bequests to future generations, etc. Resources like the Arctic National Wildlife Refuge, Right whales, and piping plovers generate significant non-use values.
Someday soon I'll describe the methods used to measure these benefits. To get you relatively excited about the numbers, check out the New South Wales EPA's Environmental Valuation Database (ENVALUE). You can click around and get an idea of what some of the numbers look like. Also, there is some explanation.
