Exam (elaborations)
ECS2606 - Environmental Economics (ECS2602) Assignment 01 s1 2022
- Institution
- University Of South Africa (Unisa)
Exam (elaborations) ECS2606 - Environmental Economics (ECS2602)
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Assignment 01Answer ALL the Questions
1. What is contingent valuation and what are the potential problems of
this method? [10]
There are different methods to calculate the value of an environmental entity
by calculating the willingness to pay (WTP) for that entity. One such method is
contingent valuation, but it is not perfect and has some faults. This is a
method in which individuals are asked to make WTP responses when placed
in contingent situations.
Contingent valuations ask individuals directly to state their WTP for a certain
environmental entity. If we were interested in measuring people’s willingness
to pay for something like potatoes, we could station ourselves at stores and
see them choosing in real situations. But when there are no real
markets for something, such as an environmental quality characteristic, we
can only ask them to tell us how they would choose if they were faced with a
market for these characteristics.
Contingent valuation (CV) methods have been utilized in two different types of
situations for instance to estimate valuations for specific features of the
environment, for example, the value of view-related amenities, the
recreational quality of beaches, preservation of wildlife species, congestion in
wilderness areas, hunting and fishing experiences, toxic waste disposal,
preservation of wild rivers, and others; and to estimate the valuations people
place on outcomes that are related to environmental quality.
In fact, the use of contingent valuation methods has also spread into non
environmental areas, such as estimating the value of programs for reducing
the risks of heart attacks, the value of supermarket price information, and the
value of a seniors companion program. Over time, the method has been
developed and refined to give what many regard as reasonably reliable
measures of the benefits of a variety of public goods, especially
environmental quality.The basic steps in a CV analysis are the following:
1. Identification and description of the environmental quality characteristic or
health outcome to be evaluated
2. Identification of respondents to be approached, including sampling
procedures used to select respondents
3. Design and application of a survey questionnaire, interview, or focus group
4. Analysis of results and aggregation of individual responses to estimate
values for the group affected by the environmental change.
The nature of CV analysis can best be understood by looking more closely at
the questionnaire design phase. The questionnaire would normally have three
components:
1. A clear statement of exactly what the environmental feature or amenity is
that people are being asked to evaluate
, 2. A set of questions that will describe the respondent in economically
relevant ways, such as income, residential location, age, and use of related
goods
3. A question, or set of questions, designed to elicit WTP responses from the
respondent.
The contingent valuation method is referred to as a ¡¦stated preference¡¦
method, because it asks people to directly state their values, rather than
inferring values from actual choices, as the revealed preference methods do.
The fact that CV is based on what people say they would do, as opposed to
what people are observed to do, and is the source of its greatest strengths
and its greatest weaknesses.
The problems with contingent evaluation, namely, contingent valuation is
highly hypothetical, respondents might not be used to expressing their WTP
for an environmental entity thatrdoes not have a formal market price. Also
respondents are only asked what they are willing to pay and do not have to
pay the amount so respondents could try to influence the value of an entity by
overstating its value.
Other problems include discounting, the difference between WTP versus
willingness to accept (WTA) and the omission of non-use values.
From the above Contingent Valuation to calculate the value of an
environmental entity by calculating the willingness to pay (WTP) and has its
advantages however it also has disadvantages as clearly indicated above
which includes contingent valuation is highly hypothetical and make use of
shadow prices.Most of these are fully explained above.
2. Use a graph to explain how the equimarginal principle can be applied
to minimise production costs.
[10]
The equimarginal principle states that if a firm has multiple factories to
produce a given product, it should distribute production in such a way that the
marginal costs of the factories are equal in order to minimise the total cost of
producing a given quantity of that product.
The equimarginal principle says that If you have multiple sources to produce a
given product or achieve a given goal, and you want to minimize the total cost
of producing a given quantity of that output, distribute production in such a
way as to equalize the marginal costs between the production sources.
We can explain the eqquimarginal principle with a case, take the case of a
firm producing a certain product and assume that the firm’s operation is
divided between two different plants. For example, suppose there is a single
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