Environmental Damage Assessment (University of South Carolina at Columbia-School of Business Administration)

Environmental Damage Assessment

University of South Carolina at Columbia-School of Business Administration
Columbia, South Carolina

Instructor: Harrison, Glenn
Subject area: Economics
Department: Economics
Course number: 589E
Year taught: 1997
Level: Graduate

Instructor's email: harrison@darla.badm.sc.edu
For additional information: http://theweb.badm.sc.edu/glenn/eceda.htm
Please note that the copyright for this syllabus is retained by the instructor.

Objective

One way to protect the environment is for society to place a monetary value on it, and then sue any firm or individual that damages it. But how can society measure the economic damage caused by environmental injury? The traditional tools of benefit assessment used by economists do not readily apply here, mainly due to the non-market nature of the damaged good. This course reviews the controversies that arise in the assessment of damages for such goods, with particular emphasis on the use of the Contingent Valuation Method (CVM).

The course has three themes:

One theme is a general discussion of the policy issues involved in undertaking cost-benefit analysis for non-market goods such as the environment, and how one can bring traditional microeconomic theory to bear on them. The second theme is a detailed case-by-case study of major efforts at environmental damage assessment in recent years, particularly in the context of significant pieces of litigation such as followed the Exxon Valdez oil spill. The third theme is an evaluation of implications for corporations operating under current U.S. law and accounting regulations with respect to environmental liabilities. The potential impact on corporations of pending changes in those laws and regulations will also be discussed.

Reading

This is a course that requires a considerable amount of reading. It also requires the student to work at reading material from different perspectives. That is, some of the readings have technical sections, which rely on more formal economics or statistics than is expected. It is important to be able to read material like this and to try to ascertain the main message and the main theme that is being expounded. This course is set up for non-economics majors, so I do not expect everyone to be able to follow every step of every argument. But some intellectual maturity is expected, or else the readings will become a major burden.

I will be happy to briefly review the detailed readings listed for each class a few weeks prior to that class. This will help students with different backgrounds know how to approach the topic. No "reading packet" is provided, but I will try to put most of the less-accessible readings on 2-hour reserve in the BA library, listed under this course ID. Contact me in good time if you are having difficulties obtaining some piece.

All students should purchase a copy of R.J. Kopp and V.K. Smith (eds.), Valuing Natural Assets: The Economics of Natural Resource Damage Assessment (Washington, DC: Resources for the Future, 1993). The paperback version of this book has been ordered at the USC Bookstore, and should be about $25. This book will be assumed background reading.

Depending on your background, you might be well advised to buy one or more additional books. If you think that "environmental economics" is an oxymoron, you should quickly read Frances Cairncross, Costing the Earth (Boston: Harvard Business School Press, 1992 paperback edition). If you want to see a good set of applications of intermediate-level microeconomics to contemporary U.S. environmental policy issues, see Frank Arnold, Economic Analysis of Environmental Policy and Regulation (New York: Wiley, 1995). If you want some anecdotes about how sensible economics can help protect the environment in developing countries, look at Theo Panayotou, Green Markets: The Economics of Sustainable Development (San Francisco: Institute for Contemporary Studies, 1993).
Further Reading

Class Schedule

The dates listed below are not likely to change, but if you are just attending selected classes I would advise you to check back here closer to the date of the class you are coming to. Please let me know if you plan to attend occasional classes, and have not enrolled for the class for credit or audit, so that we can be sure of sufficient space.

Class notes are also going to be on the web, and can be obtained by clicking on the link to each class if one is provided. I will tend to put something up as a class note even if it is more technical than I plan to cover in class (e.g., some proofs of claims), since some advanced economics students will want this material. Also, some of these class notes are incomplete, and will be updated regularly. I will discuss these in class.

The class notes are web-versions of a WordPerfect 6.1 for Windows file which you can download directly by FTP as a self-extracting archive from the server. This link lets you save the files as one big self-extracting archive ECEDA.EXE. Just save it someplace on your hard disk, drop down to DOS and give the command ECEDA in that subdirectory and the WPD files will "explode" in front of you (calm down, your hard disk will survive). You can then read these into WordPerfect or some other word-processor that can convert them, and edit them as you like. Most students like to change the line spacing so that it is easier to add their own notes in class.

Class 1 (1/15): General introduction and review of the major issues in environmental damage assessment. This class will briefly review the various components of a CVM study. It will also review current and pending legal and accounting responsibilities of corporations operating under U.S. law {Coller and Harrison [1995]}. What are we measuring? Non-use values: their economic meaning and measurement. How should we allow for altruism and moral judgements in benefits assessment? {Cummings and Harrison [1995]}. How have we been measuring it? Critical review of the older CVM literature {Cummings and Harrison [1994]}.

Class 2 (1/22): The Exxon Valdez oil spill {Carson et al. [1994a]}.

Class 3 (1/29): The Kakadu Conservation Zone study {Carson, Wilks and Imber [1994]}. The Nestucca oil spill {Rowe, Shaw and Schulze [1992]}. The Montrose PCB Contamination study {Carson et al. [1994b]}.

Class 4 (2/5): Statistical interpretation and analysis of responses to CV surveys {Harrison and Kriström [1996]}. Must CV surveys cost so much? {Harrison and Lesley [1996]}.

Class 5 (2/12): A critique of the NOAA Panel report {Arrow et al. [1993]}.

Class 6 (2/19): Mid-term exam!

Class 7 (2/26): Is there evidence of "hypothetical bias" in the CVM? {Cummings, Harrison and Rutström [1995], Cummings, Elliot, Harrison and Murphy [1997]}. Statistically calibrating CVM responses for hypothetical bias. Are the responses to hypothetical surveys informative, but biased, measures of true valuations? {Blackburn, Harrison and Rutström [1994]}. Is there evidence of "free rider bias" in the CVM? Can we calibrate the survey instruments to reduce biases? {Harrison [1996]}.

Class 8 (3/5): Environmental regulations as "takings." The common law logic of the "just compensation" requirement. The economic logic of the "compensation criteria" for judging government policies. Notes on environmental law in the United States, especially CERCLA ("Superfund").

Class 9 (3/19): Valuing life and limb? The valuation of risk. {Gerking, Haan and Schulze [1988], Viscusi [1991; ch.5], Moore and Viscusi [1990; chs. 5, 6]}.

Class 10 (3/26): Discounting lives and monetary damages? {Cropper, Aydede and Portney [1992], Kopp [1994]}.

Class 11 (4/2): Environmental damage assessment, poor countries, and environmental priorities on a global scale {Harrison [1994], Dixon and Hufschmidt [1986]}.

Class 12 (4/9): Environmental equity and environmental racism {Cutter [1995]}.

Class 13 (4/16): Inter-generational equity and global warming {Schelling [1995]}.

Class 14 (4/23): Should Sweden increase it's existing carbon taxes? (Harrison and Kriström [1996]}. Should the United States impose carbon taxes?

Related Meetings

Honors students taking this class will also be required to attend several additional meetings that have been arranged in conjunction with the Honors College. The dates for these meetings are 1/31, 2/7, 3/21, 3/28, 4/11 and 4/18. In each case the first meeting (in Gambrell 151 at 3.30pm) is to prepare for the public lecture by some non-USC guest in the following meeting (usually a Thursday evening at 8pm). The public lectures are indicated in bold. All students are welcome to attend the public lectures, which will be announced more broadly on campus. Non-honors students are also welcome to attend the additional meetings mentioned above.

Finally, there will be a full-day conference for honors students to be held on 4/26 from 9-4. Our session is at 1-2, and there will be lunch served from 12-1. This will be in the Gambrell Hall Auditorium. The entire day is open to the public.

Assessment

One mid-term exam, a class presentation, and a final exam, with equal weight. Doctoral students that are writing a related thesis may substitute one long essay for both exams at the discretion of the instructor.

Mid-Term Exam

The mid-term exam will consist of one question selected by me from the following:

Critically evaluate the valuation of the Exxon Valdez oil spill.
Was the NOAA Blue Ribbon Panel correct in their assessment of the reliability of the
Contingent Valuation Method?
Why is the Contingent Valuation method so controversial?

Final Exam

The final exam will consist of one question selected by me from the following list. You will have three hours:

Critically evaluate the valuation of the Exxon Valdez oil spill.
Explain how economics allows us to estimate the value of "a statistical life." After you explain how this is done, critically evaluate these estimates and their use.
What is discounting and why is it regarded as so important by economists for environmental damage assessment? Are they right?
Critically evaluate the claim that "Environmental burdens are shared unequally, both domestically and internationally."

The official exam time for this class is Wednesday May 7 at 9.00am in BA 434, where the class meets.

Review Session

There will be one review session for the final exam, to be held Wednesday April 30 at 10am in the Economics Conference Room. This room is just opposite my office. I will be in my office from 10-12 if there are no students there for the review. I do not plan to lecture, just to answer questions.

References

Do not be alarmed! These readings are more extensive than required by all students, but I want to have these collected here for some students doing specialized study in some topics. I will also be updating this list, adding further web links where they area available. References that are on 2-hour reserve in the BA library, since they might be harder to find in the USC libraries, are marked with a .

Arrow, Kenneth; Solow, Robert; Portney, Paul; Leamer, Edward E.; Radner, Roy; and Schuman, Howard, "Report of the NOAA Panel on Contingent Valuation," Federal Register, 58(10), January 15, 1993, 4602-4614.

Blackburn, McKinley; Harrison, Glenn W., and Rutström, E. Elisabet, "Statistical Bias Functions and Informative Hypothetical Surveys", American Journal of Agricultural Economics, 76(5), December 1994, 1084-1088.

Carson, Richard T., "Kakadu Conservation Zone", in K.M. Ward and J.W. Duffield (eds.), Natural Resource Damages: Law and Economics (New York: Wiley, 1992).

Carson, Richard T.; Wilks, Leanne; and Imber, David, "Valuing the Preservation of Australia's Kakadu Conservation Zone", Oxford Economic Papers, 46, 1994, 727-749.

Carson, Richard T.; Mitchell, Robert C.; Hanemann, W. Michael; Kopp, Raymond J.; Presser, Stanley; and Ruud, Paul A., A Contingent Valuation Study of Lost Passive Use Values Resulting From the Exxon Valdez Oil Spill (Anchorage: Attorney General of the State of Alaska, November 1992).

Carson, Richard T.; Mitchell, Robert C.; Hanemann, W. Michael; Kopp, Raymond J.; Presser, Stanley; and Ruud, Paul A., "Contingent Valuation and Lost Passive Use: Damages from the Exxon Valdez", Discussion Paper 94-18, Resources for the Future, Washington, DC, March 1994a.

Carson, Richard T.; Hanemann, W. Michael; Kopp, Raymond J.; Krosnick, Jon A.; Mitchell, Robert C.; Presser, Stanley; Ruud, Paul A.; and Smith, V. Kerry, Prospective Interim Lost Use Value Due to DDT and PCB Contamination in the Southern California Bight (Washington, DC: National Oceanic and Atmospheric Administration, September 1994b, two volumes).

Coller, Maribeth, and Harrison, Glenn W., "On the Use of the Contingent Valuation Method to Estimate Environmental Costs", in P.M.J. Reckers (ed.), Advances in Accounting (Greenwich, CT: JAP Press, volume 13, 1995).

Coller, Maribeth, and Williams, Melonie, "Eliciting Individual Discount Rates," Economics Working Paper B-95-01, Division of Research, College of Business Administration, University of South Carolina, 1995. (see www.gams.com/dk/projects/idr.htm).

Cropper, Maureen L.; Aydede, Sema K., and Portney, Paul R., "Public Preferences for Life Saving", Discussion Paper CRM 92-01, Center for Risk Management, Resources for the Future, May 1992.

Cummings, Ronald G.; Elliott, Steven; Harrison, Glenn W., and Murphy, James, "Are Hypothetical Referenda Incentive Compatible?" Journal of Political Economy, 105, 1997 forthcoming (see theweb.badm.sc.edu/glenn/refer.htm).

Cummings, Ronald G., and Harrison, Glenn W., "Was the Ohio Court Well Informed in Their Assessment of the Accuracy of the Contingent Valuation Method?", Natural Resources Journal, 34(1), Winter 1994, 1-36.

Cummings, Ronald G., and Harrison, Glenn W., "The Measurement and Decomposition of Nonuse Values: A Critical Review", Environmental and Resource Economics, 5, 1995, 225-247.

Cummings, Ronald G.; Harrison, Glenn W., and Rutström, E. Elisabet, "Homegrown Values and Hypothetical Surveys: Is the Dichotomous Choice Approach Incentive Compatible?", American Economic Review, 85(1), March 1995, 260-266.

Cutter, Susan L., "Race, Class and Environmental Justice", Progress in Human Geography, 19(1), 1995, 107-118.

Dixon, John A., and Hufschmidt, Maynard M. (eds.), Economic Valuation Techniques for the Environment: A Case Study Workbook (Baltimore: Johns Hopkins University Press, 1986).

Gerking, Shelby; Haan, Menno; and Schulze, William, "The Marginal Value of Job Safety: A Contingent Valuation Survey", Journal of Risk and Uncertainty, 1, 1988, 185-199.

Harrison, Glenn W., "Environmentally Sensitive Industries and an Emerging Mexico", North American Journal of Economics and Finance, 4(1), 1994, 109-126.

Harrison, Glenn W., "Experimental Economics and Contingent Valuation," Economics Working Paper 96-10, Division of Research, College of Business Administration, University of South Carolina, October 1996 (see theweb.badm.sc.edu/glenn/eecv.htm).

Harrison, Glenn W., and Kriström, Bengt, "On the Interpretation of Responses to Contingent Valuation Surveys", in P.O. Johansson, B. Kriström and K.G. Mäler (eds.), Current Issues in Environmental Economics (Manchester: Manchester University Press, 1996a).

Harrison, Glenn W., and Kriström, Bengt, "General Equilibrium Effects of Increasing Carbon Taxes in Sweden," Economics Working Paper 96-06, Division of Research, College of Business Administration, University of South Carolina, August 1996 (see theweb.badm.sc.edu/glenn/sweden.htm).

Harrison, Glenn W., and Lesley, James C., "Must Contingent Valuation Surveys Cost So Much?", Journal of Environmental Economics and Management, 31, 1996, 79-95.

Imber, David; Stevenson, Gay; and Wilks, Leanne, A Contingent Valuation Survey of the Kakadu Conservation Zone (Canberra: Australian Government Publishing Service for the Resource Assessment Commission, 1991).

Kopp, Raymond, "Discounting for Damage Assessment", Discussion Paper 94-31, Resources for the Future, Washington, DC, May 1994.

Mitchell, Robert C., and Carson, Richard T., Using Surveys to Value Public Goods: The Contingent Valuation Method (Baltimore: Johns Hopkins Press, 1989).

Moore, Michael J., and Viscusi, W. Kip, Compensation Mechanisms for Job Risks (Princeton: Princeton University Press, 1990).

National Oceanic and Atmospheric Administration, "Contingent Valuation Panel, Public Meeting, Wednesday, August 12, 1992," Certified Official Transcript, 283 pp. plus attachments, Department of Commerce, Washington, DC., 1992.

National Oceanic and Atmospheric Administration, "Natural Resource Damage Assessments; Proposed Rules", Federal Register, 59, no.5, January 7, 1994 (Part II).

Neill, Helen R.; Cummings, Ronald G.; Ganderton, Philip T.; Harrison, Glenn W., and McGuckin, Thomas, "Hypothetical Surveys and Real Economic Commitments", Land Economics, 70(2), May 1994, 145-154.

Rowe, Robert D.; Schulze, William D; Shaw, W. Douglass; Schenck, David, and Chestnut, Lauraine G., Contingent Valuation of Natural Resource Damage Due to the Nestucca Oil Spill: Final Report (Boulder, CO: RCG/Hagler, Nailly, Inc., June 1991).

Rowe, Robert D.; Shaw, W. Douglass; and Schulze, William, "Nestucca Oil Spill", in K.M. Ward and J.W. Duffield (eds.), Natural Resource Damages: Law and Economics (New York: Wiley, 1992).

Schelling, Thomas C., "Intergenerational Discounting," Energy Policy, 23(4/5), 1995, 395-401.

Viscusi, W. Kip, Reforming Products Liability (Cambridge, MA: Harvard University Press, 1991).

Whittington, Dale; Lauria, D.T., and Mu, X., "A Study of Water Vending and Willingness to Pay for Water in Onitsha, Nigeria", World Development, 19, 1991, 179-198.