Research in Applied Econometrics Chapter 2. Valuation Theoryrisques-environnement.universite-lyon.fr/IMG/pdf/rae_2_valuation.pdf · Research in Applied Econometrics Chapter 2. Valuation

Research in Applied Econometrics Chapter 2. Valuation Theory

Research in Applied EconometricsChapter 2. Valuation Theory

Pr. Philippe Polomé, Université Lumière Lyon 2

M1 APE Analyse des Politiques Économiques

M1 RISE Gouvernance des Risques Environnementaux

2017 – 2018


Economic Theory of Value

Outline


Social Use of Economic Values



Utility

IValue is a word heavy with multiple meanings

IIn economics, it has one, formal, meaning : Value as a

di�erence in expenditures to reach a given utility

IThere is 2 approaches, that are dual

IThat is, 2 sides of the same idea

IUtility-based and Expenditure-based



Duality theory

IRecall that individual’s preferences

IFor anything from apple to social justice

ICan be represented by a Utility function U (.)

I That has certain propertiesI and depends on quantities x of goods & services

IIndividuals behave as if they are maximizing such function

IUnder a budget constraint px Æ y

Ip is the vector of prices (some of these prices are ficticious)

Iy is income (that comes, among others, from labour, so it isendogenous, but we take y as exogenous)

IIndividual’s choices lead to “optimal” demands x (p, y)

IThat have mathematical properties



Duality theoryI

Plugging such demands in the utility function

ILeads to the Indirect Utility Function

V (p, y) = max U (x) |px Æ y

IBut we can also look the income that would be needed

Ito achieve such utility level

Igiven preferences U (.) and prices p

IThis is the Expenditure Function

E (p, U) = min px |U (x) Ø U

IThe Duality Identity

y © E (p, v (p, y))

shows that the 2 approaches are equivalent



Values from Prices

IHicks, a famous economist,

Iasks a straightforward question

IWhat change in income would be equivalent to a given change

of the vector of prices p ?

I“Equivalent” means here “at the same level of utility”

IClearly the answer(s) must depend on individual preferences

I So on U (.)



Hicksian Measures of Value

Compensating Variation of a price change from p

0

to p

1

IReference Utility : initial p

0

ICV (p

0

, p

1

)I = E (p

1

, V (p0

, y)) ≠ E (p0

, V (p0

, y)) = E (p1

, V (p0

, y)) ≠ y

Is.t. V (p

1

, y + CV ) = V (p0

, y)

Equivalent Variation

IReference Utility : final p

1

IEV (p

0

, p

1

)I = E (p

1

, V (p1

, y)) ≠ E (p0

, V (p1

, y)) = y ≠ E (p0

, V (p1

, y))I

s.t. V (p1

, y) = V (p0

, y ≠ EV )



Hicksian Measures of Value

IAre the standard notions of value in applied economics

IOther measures lack a similar fundamental construction

ISo economic value

Iis about (individual) utility

I the value is the (individual) conversion of a price change in anincome change

Iis NOT a price or a cost

Iis NOT financial or accounting

IMay be purely immaterial, no actual (or future) transaction is

required to define a value



Non-market ValuesHicksian Measures of an environmental change

ILet z the “level” of environment (quality...)

IPublic good, pollution, externality

IStates of the world : wealth distribution, justice, equity...

IAll that is non-market

IIssues

ICommensurability

I Is the environment really amenable to a single quality indexmeasure ?

I e.g. what is air “quality” what pollutants ? How do youcombine them ?

IMeasurement, actually getting proper data

IInsert z in the previous functions

IV (p, z , y) Indirect Utility & E (p, z , U) Expenditure

ISimplify notation : remove p

I SInce we will not discuss changes of prices



Non-market Values : definitions

ICompensating Variation (Reference Utility = initial z

0

)

ICV (z

0

, z

1

)I = E (z

0

, V (z0

, y)) ≠ E (z1

, V (z0

, y)) = y ≠ E (z1

, V (z0

, y))I s.t. V (z

1

, y ≠ CV ) = V (z0

, y)I

Improvement z

0

to z

1

∆ Willingness To Pay to secure it (+)

IDeterioration z

0

to z

1

∆ Compensation To Support it (-)

IEquivalent Variation (Reference Utility = final z

1

)

IEV (z

0

, z

1

)I = E (z

0

, V (z1

, y)) ≠ E (z1

, V (z1

, y)) = E (z0

, V (z1

, y)) ≠ y

I s.t.V (z1

, y) = V (z0

, y + EV )I

Improvement z

0

to z

1

∆ Compensation To Support it (-)

IDeterioration z

0

to z

1

∆ Willingness To Pay to avoid it (+)



Which one to use ?

IProperty rights

ICompensating Variation : right to level z

0

IImprovement z

0

to z

1

∆ Willingness To Pay to secure it (+) :

The person must “buy” z

1

IDeterioration z

0

to z

1

∆ Compensation To Support it (-) :

Compensate the person for the deterioration

IEquivalent Variation : righ to level z

1

IImprovement z

0

to z

1

∆ Compensate the person to forfeit the

improvement (-)

IDeterioration z

0

to z

1

∆ To avoid the deterioration, the

person must “buy” z

0

(+)



Nonmarket Values

IAs for the change in prices : the values are not limited to

“fninancial” ones (price, cost, flows...)

IIn a public sector context, no transaction is necessary

Ie.g. a collectivity decides to set aside part of its forests w/o

exploitation

I Since the owner is the collectivity, it does not have to payitself for the un-realized sale of wood

I its members do not have to “buy” the ecological services thatthey obtained in return

I It is true that they forfeit the revenue from the sale of woods,this indicates that their value is at least as high

INonmarket Values are also not opportunity costs

IOr di�erences of commercial / industrial / agricultural yields



Nonmarket Values

IWTP are limited by the individual budget

I =∆ in this sense, they represent a capacity to pay

I There is an interpretation in terms of public finance : thebudget that a collectivity could levy to finance theenvironnemental corresponding to the WTP

I =∆ Other things equal, with the utility function, a rich

person’s WTP will be higher than a poor’s

I So that the rich person’s “opinion” will weight more in thecollectivity budget

IWTP and compensations are expressed in money

IThey are thus comparable between individuals and can be

added

IUsually not the case w/ non-economic notions of value



Understanding the sources of economic value : a typologySource Example in a forest contextDirect Consumptive Use(private goods)

Hunting and gathering productsWooden products / Cultivation

Direct Recreational Use(public goods)

Hunting and gathering practicesHiking / Nature watching

Indirect/functional Use

Water : Filter / Flood protectionAir : Filter / Fixing carbonSoil : Erosion / DesertificationLandscape

OptionUse : Preserve future / 3rd party useQuasi-use : Value of information

Non-use“Patrimonial” : Existence & Heritage“Moral” : Role of humanity wrt nature,Non-human rights



Outline





Public Cost-Benefit Analysis CBA

IShould a certain public project should be pursued ?

Ie.g. should we renovate Part-Dieu ? build a dam ?

IWhat are the indirect or non-market benefits/cost ?

IThis can be very di�cult

IThe project may span many years, have many uncertainties

IThere maybe loosers and gainers

IThis is currently a burgeonning industry

ICBA is frequently used in business

IBut business measures project according to the net revenue

they generate

I In the end, this is about sales generatedI

So the question of eliciting non-market values does not exist



CBA as a Social Decision RuleI

Inform (public) decision-makers

IPrecisely quantifying benefits & costs

IAssociating them to socio-econmic profiles

I e.g. is a certain project beneficial to the poorsor to the richpeople ?

I via econometric analysis

ILegal Contexts

IWestern countries legislation require evermore often that large

public projects demonstrate that their benefits > their costs

I Including all non-market benefits (or costs)I

EU Directives

I e.g. Water Framework Directive (“Cadre Eau”)I

US “Acts”

I e.g. Clean Air Act epa.gov/oar/sect812/



French Guidelines (Valeurs tutélaires) for the Transport 1

IContext of road infrastructure, mainly

IValue of Statistical Life VSL (VVS) : 3 MÄ 2010

IValue of a Year of Life VYL (VAV) : 115 000 Ä 2010

IValue of a seriously injured : 15 % of VSL, 450 000 Ä 2010

IValue of a lightly injured : 2 % of VSL, soit 60 000 Ä 2010

IValue of carbon

IValue 2013 : 32 Ä 2010/tCO2

IValue 2030 : 100 Ä 2010/tCO2

IValue of time depends on

IMotive (professional, holiday...)

IDistance (urban, <20km, 20-80km, ...)

IMode

IMultiples values in transport sector : Environment, noise...

1. Commissariat général à la stratégie et à la prospective, L’évaluationsocioéconomique des investissements publics , www.strategie.gouv.fr, sept.2013

French Guideline Values for Water

Commissariat général au développement durable, Service de l’économie, de l’évaluation

et de l’intégration du développement durable. Études & documents n°23 juin 2010



Environmental Public Goods Examples

IImprove air or (surface) water quality

IRisks reduction

IContaminants in tapwater, in food (incl. GMO)

ITransports

IJob-related accidents

IProtect/restaure natural areas (wetlands, forests, rivers,

beaches...), endangered species



Non-environmental Examples

IImprove public education, health services quality

IBasic services in developping countries

IWater or electricity distribution, garbage collection de

déchets...

IMedical and health care research

IFood research e.g. WTP for new food

ICulture

IProtect / restaure cultural heritage sites

IValue of a museum, an art company,...



Damages (dommages & intérêts) : Accidental Pollution

IThe other domain in which economic values are used

IFrench “dommages environnementaux”

IFairly new, relatively small amounts

IUS Damages

IRoutine, the EPA sues several times a year



Database of valuation studies : www.evri.ca

7000+ records

Benefit Transfert

EVRI by asset and by use

By environmental asset

By environmental use

EVRI by technique & area (older data)

By valuation technique

By continents



To conclude on economic value

IEconomic value

IDefined for market and non-market goods and services

I Following ecological or social functions (see the Forestexample)

IIndividualistic (depends on preferences)

I in a public finance contextI

Quantitative

I But we will see that estimation may su�er many biasesI

Its context is

ICBA, to inform decision-makers

IDamages

Research in Applied Econometrics Chapter 2. Valuation Theoryrisques-environnement.universite-lyon.fr/IMG/pdf/rae_2_valuation.pdf · Research in Applied Econometrics Chapter 2. Valuation

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