Glossary
Chapter 6: Valuing the Environment

A
avoided cost(s) costs avoidable through environmental preservation or improvement.

B
benefit/cost ratio the ratio of total benefits to total costs; a ratio greater than one indicates net benefits.

bequest value value people place on the knowledge that a resource will be available for future generations.

C
contingent valuation an economic technique that surveys people regarding their willingness to pay for a good or service such as preservation of hiking opportunities or air quality.

cost-benefit analysis (CBA) a tool for policy analysis that attempts to monetize all the costs and benefits of a proposed action to determine the net benefit.

cost-effectiveness analysis a policy tool that determines the least-cost approach for achieving a given goal.

D
direct use value the value one obtains by directly using a natural resource, such as visiting a national park.

discount rate the annual rate at which future benefits or costs are discounted relative to current benefits or costs.

E
ecological value the value of ecosystem resources and services not expressed in markets.

economic value/valuation the value of a good or service, expressed in monetary terms.

engineering cost method an approach to economic valuation that determines the monetary costs of duplicating or replacing environmental services.

existence value the value people place on the continued existence of a resource, such as the benefit one obtains from knowing an area of rainforest is preserved even though one will never visit it.

expected value an estimate of the value of an event or outcome whose likehood is uncertain, calculated by mutiplying its probability by its cost or benefit. (But you don’t need to know the equation and won’t be asked to do a calculation)

F
feedback loops/effects the process of changes in a system leading to other changes that either counteract or reinforce the original change.

H
hedonic (demand) pricing the use of statistical analysis to explain a good’s price or service as a function of several components, such as explaining the price of a home as a function of the number of rooms, the caliber of local schools, and the surrounding air quality.

I
indirect use values ecosystem benefits not valued in markets, such as flood prevention and pollution absorption.

intergenerational equity the distribution of resources, including humanmade and natural capital, across human generations.

irreversibility environmental damage that cannot be reversed, such as the extinction of species.

M
maximum net present value criterion a decision rule stating that policies should be designed to maximize net present values; the maximum net present values occurs when the marginal benefits of an action just equal the marginal costs.

N
net present value the present value of a stream of benefits minus the present value of a stream of costs.

nonmarket values the values people place on goods or services not traded in markets.

nonuse values values people obtain without actually using a resource; nonuse values include existence and bequest values.

O
opportunity cost of capital the rate of return available for alternative investment projects.

option value the value people place on maintaining future resource use options.

P
positional analysis a policy analysis tool that combines economic valuation with considerations such as equity, individual rights, and social priorities; it does not aim to reduce all effects to monetary terms.

positive net present value criterion a decision rule stating that projects should be undertaken if they provide positive discounted net benefits (present value of benefits minus present value of costs).

precautionary principle the view that policies should account for uncertainty by taking steps to avoid outcomes that are damaging to health or the environment, especially when such outcomes are irreversible.

present value the current value of a stream of future costs and/or benefits, calculated through the use of a discount rate.

production function method an approach to economic valuation that determines the monetary costs of duplicating or replacing environmental services.

R
risk aversion the tendency to prefer certainty instead of risky outcomes, particularly in cases where actions may cause significant negative consequences.

S
safe minimum standard the principle that environmental policies on issues involving uncertainty should be set to avoid possible catastrophic consequences.

sensitivity analysis an analytical tool that studies how the outputs of a model change as the assumptions of the model change.

social discount rate a discount rate that reflects social rather than market valuation of future costs and benefits.

social rate of time preference (SRTP) a discount rate that attempts to reflect the appropriate social valuation of the future; the SRTP tends to be less than market or individual discount rates.

strategic bias the tendency for people to state their preferences or values inaccurately in order to influence policy decisions.

T
travel cost method the use of statistical analysis to determine people’s willingness to pay to visit a natural resource such as a national park or river; a demand curve for the resource is obtained by analyzing the relationship between visitation choices and travel costs.

U
use value the value that people place on the use of a good or service.

W
willingness to accept (WTA) the minimum amount of money people would accept as compensation for an action that reduces their utility.

willingness to pay (WTP) the maximum amount of money people are willing to pay for a good or service that increases utility.