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5
Attaching Value to Costs and Benefits
A
dded to the challenges of identifying and then quantifying environ-
mental, health, and other impacts of the food system is the challenge
of attaching monetary value to those impacts. Two speakers were
invited to share their thoughts on the methods and challenges of valuation.
This chapter summarizes their presentations. (See also Chapter 3 for a
summary of James Hammitt’s explanation of how economists attach value
using either willingness to pay, or WTP, or another measure known as the
quality-adjusted life year, and how both valuation methods are challenged
by social aggregation problems.)
Based on his experience as a member of the National Research Council
(NRC) committee that defined and evaluated the external costs and benefits
associated with the production, distribution, and consumption of energy
(NRC, 2010), James Hammitt discussed challenges to quantifying and mon-
etizing external costs and benefits and issues to consider when conducting
a similar study on the cost of food. Anna Alberini, associate professor of
economics in the Department of Agricultural and Resource Economics at
the University of Maryland, College Park, discussed how economists attach
value to external costs and benefits using estimates of WTP and “value of
a statistical life” (VSL), and identified several factors to consider before
transferring estimates of monetary value from one context to another (e.g.,
using VSL estimates obtained in manufacturing or other nonfood contexts
in a study on the cost of food). She cautioned that monetizing the costs and
benefits of food will probably require multiple valuation exercises, with
different effects considered separately.
53
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54 EXPLORING HEALTH AND ENVIRONMENTAL COSTS OF FOOD
LESSONS FROM THE HIDDEN COSTS OF ENERGY:
UNPRICED CONSEQUENCES OF ENERGY
PRODUCTION AND USE1
In 2010, the NRC released a report on the externalities of energy pro-
duction and use (NRC, 2010). The study was requested by Congress in the
Energy Policy Act of 2005, with funds appropriated to the U.S. Treasury in
the Consolidated Appropriations Act of 2008. According to Hammitt, the
study was conducted under a very tight time schedule, with the first of six
committee meetings held on September 11, 2008, and a 473-page report
released on October 19, 2009. Hammitt discussed major challenges to
completing the statement of task for that report; described key results; and
highlighted questions to consider for a study on the cost of food.
Statement of Task
Key components of the statement of the task were to (italics added
by Hammitt for emphasis): “define and evaluate key external costs and
benefits . . . associated with the production, distribution and consump-
tion of energy from various selected sources that are not or may not be
fully incorporated into the market price of such energy” and to “carry out
its task from a U.S. perspective,” but also “consider broader geographic
implications of externalities when warranted and feasible.” Among other
activities, Congress requested that the committee “identify key externali-
ties . . . in the categories of human health, environment, security (including
quality, abundance, and reliability of energy sources), and infrastructure
(such as transportation and waste disposal systems not sufficiently taken
into account by producers or consumers)”; “consider externalities associ-
ated with . . . energy imported from foreign sources”; “develop an ap-
proach for estimating externalities related to greenhouse gas emissions and
climate change”; and “present qualitative and, to the extent practicable,
quantitative estimates of externalities and associated uncertainties.” (See
Box 5-1 for the NRC, 2010, definition of externality.)
Major Challenges
Hammitt discussed three major challenges faced by the NRC (2010)
committee: (1) identifying internalized externalities; (2) quantifying and
monetizing all endpoints; and (3) exploring the disproportionate amount
of effort focused on already well-understood externalities.
1 This section summarizes the second presentation of James K. Hammitt.
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ATTACHING VALUE TO COSTS AND BENEFITS 55
BOX 5-1
The NRC (2010) Definition of Externality
The NRC (2010) report defined externality as follows: “an externality, which can
be positive or negative, is an activity of one agent (for example, an individual or an
organization, such as a company) that affects the well-being of another agent and
occurs outside the market mechanism.” Assuming that people respond to prices
and nothing else, a logical extension of that definition is, as stated in the report,
“In the absence of government interaction, externalities associated with energy
production and use are generally not taken into account in decision making.”
SOURCE: NRC, 2010, p. 29.
Identifying Internalized Externalities
One key component of the statement of task was to evaluate key ex-
ternalities “that are not or may not be fully incorporated into the market
price . . . or into the federal tax or fee.” Without knowing whether an
externality has been internalized or not, it is impossible to know whether
a policy change could improve the situation. According to Hammitt, this
component of the task was especially challenging because of the difficulty
in determining, in some cases, whether an externality is internalized or not.
It is not always clear.
For example, the following scenario was used in the report to illustrate
the concept of externality: “A coal-fired electricity-generating plant, which
is in compliance with current environmental regulations, releases various
pollutants. . . . The damage from this pollution is . . . a ‘social cost.’ If these
social costs were not adequately taken into account in selecting the plant’s
site or the air pollution control technology that it uses, the true costs . . .
have not been reflected in these decisions.” Hammitt observed that while
damage from this pollution is clearly a social cost, whether that cost has
been internalized is not clear. If the social cost was not considered during
selection of the plant location or when deciding which air pollution control
technology to use, then it has not been internalized. But how does one know
if that cost was adequately taken into account at the time those decisions
were made? That it is a very difficult phenomenon for a committee to judge.
Compounding the challenge is the likelihood that science has evolved since
that time, so knowledge about harm from pollution is different than it
was when those decisions were made. So in that case, the committee was
able to estimate both total damages (compared with zero emissions) and
marginal damages (the damage that arises from the last unit of emission
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56 EXPLORING HEALTH AND ENVIRONMENTAL COSTS OF FOOD
or other type of burden). But without knowing whether those costs had
been accounted for during the decision making about location, technology,
etc., the committee was unable to judge whether the externalities had been
internalized or not.
Quantifying and Monetizing All Endpoints
The scope of the study spanned across a range of major or rapidly
growing energy sources and carriers, with major endpoints being human
health, climate change, and infrastructure and security. Although environ-
mental and ecological endpoints were part of the committee charge, the
lack of data and good analytical frameworks for evaluating those endpoints
made it impossible for the committee to quantify or monetize them.
Exploring All Externalities
Hammitt’s personal view on the scope of the study was that too much
effort was focused on well-understood damages—that is, quantifying basic
human health effects associated with fossil-fuel combustion—and too little
effort focused on describing other externalities. He said, “We had the op-
portunity here to try and do something more innovative—less quantitative,
but potentially pushing the field further along.” For example, in Hammitt’s
opinion, there could have been more effort directed toward describing
security and infrastructure, or unconventional power (wind, solar, etc.).
There was also some inconsistency across sectors, with health damages
from fossil fuels being quantified, but health damages from infrastructure
and security not being quantified. Arguably, many of the external costs as-
sociated with infrastructure and security are either too difficult to quantify
or already fully internalized. For example, many attack scenarios (i.e.,
attacks on facilities) are internalized through corporate liability and other
measures. With respect to dependence on foreign oil, which was explicitly
in the charge, there might be some costs associated with military activity
in oil-producing regions of the world. But those constraints are difficult to
estimate, and the marginal effects of U.S. oil consumption on those activi-
ties may be negligible.
Use of Graphics
Graphics used in the energy report included flow charts showing which
elements of the system were examined; pie charts and bar graphs show-
ing consumption by source and use by sectors; and tables showing which
components of the system were examined using quantitative versus quali-
tative methodologies (see Figure 5-1a-d). Hammitt referred to Heller and
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ATTACHING VALUE TO COSTS AND BENEFITS 57
Net Electricity (Quadrillions of Btus)
Imports 0.10
Solar
0.08 8.41 12.67
Nuclear 7.04 Electricity 27.77
8.41 Generation
40.46 Rejected
2.44 20.83 Energy
Hydro
2.46 58.47
4.74 2.28
Wind 0.31
0.31 Residential
0.31 0.07 11.43 9.14
Geothermal 0.02
0.35 1.28
0.46
4.84 1.69
4.58
0.01
Natural Commercial
Gas 8.47 6.78
23.63 Energy
3.08 0.63 Services
0.02 43.04
3.43 4.96
0.06 0.10
Coal 8.00 Industrial
22.76 24.84 19.87
9.52
1.86
0.42
Biomass 2.00
0.02 21.77
3.61
0.66 0.66 0.62
Trans-
27.71 portation
Petroleum 29.03
39.81 7.25
(a) Energy flows in the U.S. economy, 2007
Hydro
Coal Power
22% 2.4%
Nuclear
Power Biomass
8% 3.6%
Natural Gas
23%
Petroleum Geothermal 0.4%
39%
Wind 0.3%
Solar 0.1%
(b) 2007 U.S. energy consumption by energy source.
Total consumption = 101.5 quadrillion Btu
FIGURE 5-1 Examples of graphics used in The Hidden Costs of Energy: (a) the
flow of major energy sources and uses; (b) energy consumption by energy source;
(c) primary energy use by sector; (d) analytical methods used to examine various
source/sector combinations.
NOTE: The focus of the energy report was on four major carriers or users of energy:
electricity (Chapter 2), transportation (Chapter 3), industrial heat (Chapter 4), and
Figure 4-1 (part 1)
R02326-True Cost of Food continued
(a) editable vectors taken from R01203 (America’s Energy Future),
the source for the figure in Hidden Costs of Energy
(b) is editable vectors
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58 EXPLORING HEALTH AND ENVIRONMENTAL COSTS OF FOOD
45
40 Nuclear
Renewables
Quadrillion Btu (Quads)
35 Coal
Natural Gas
30 Petroleum
25
20
15
10
5
0
Residential Commercial Industrial Transportation Electric Power
Sector
(c) U.S. primary energy use by sectors (2007)
Buildings—
Electricity Transportation Industry—heat heat
Energy Source (Chapter 2) (Chapter 3) (Chapter 4) (Chapter 4)
Oil MA QE QE
Coal MA
Natural
MA MA QE MA
Gas/Liq
Uranium QL
Biomass QL MA
Wind QL
Solar Power QL QE
Other Fuels MA
Electricity - MA QE QE
(d) Methods used to examine source/sector combinations
FIGURE 5-1 Continued
commercial/residential heat (Chapter 4). Even though climate change is associated
with all of those carriers/users, it was treated separately (Chapter 5), as was infra-
structure and security (Chapter 6). Btu = British thermal unit, MA = quantitative
modeling analysis conducted by the committee, QE = qualitative evaluation, QL =
quantitative information from the literature.
SOURCE: NRC, 2010. Figure 4-1 (part 2)
R02326-True Cost of Food
(c) editable vectors taken from R01203 (America’s Energy Future),
the source for the figure in Hidden Costs of Energy
(d) is editable vectors
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ATTACHING VALUE TO COSTS AND BENEFITS 59
Keoleian’s (2003) schematic of material flow of the U.S. food system as a
similar kind of graphic that might be useful for communicating results of a
study on the cost of food (see Figure 5-2).
Select Results of the NRC (2010) Analysis of the External Costs of Energy
Hammitt highlighted two key sets of findings from the NRC (2010)
study. First, the committee’s analysis of electricity, which was based partly
on a detailed modeling of air pollution mortality, revealed that the domi-
nant outcome is particulate matter mortality associated with coal and natu-
ral gas plants, but with a great deal of heterogeneity among plants. Average
damage among the 406 coal-fired electric plants across the United States is
$160 million per plant, but with plants in the top decile causing an average
$666 million per plant (in 2007). It was likewise with natural gas plants.
Average damage among the 498 gas plants in the United States is $1.5 mil-
lion per plant, but with plants in the top decile causing $9.73 million per
plant on average (in 2007). The heterogeneity is not just per plant, but also
geographic, with most of the higher decile coal plants (i.e., those causing the
FIGURE 5-2 Material flow in the U.S. food system (1995).
NOTE: Flows in millions of pounds.
SOURCE: Heller and Keoleian, 2000.
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60 EXPLORING HEALTH AND ENVIRONMENTAL COSTS OF FOOD
most damage) in the Ohio Valley and most of the higher decile natural gas
plants on the west coast, in Texas, and along the eastern seaboard.
Second, the committee’s analysis of on-road transportation, which in-
volved using life cycle analysis to examine a wide range of fuels and engine
technologies, revealed that total damages were remarkably similar across
different fuel/engine technologies. For example, health damages caused by
light-duty automobiles were nearly 1.5 cents per vehicle mile traveled for
almost all fuel/engine technologies, with liquid hydrogen being the only
outlier. It was likewise with greenhouse gas (GHG) emissions associated
with light-duty automobiles. Again, there was not much difference among
various types of fuel/engine technologies, except with biofuels (dry corn,
wet corn, herbaceous, and corn stover), where some withdrawal of carbon
from the atmosphere offsets emission. “This is pretty interesting,” Hammitt
said, “to have these 20 different technologies and such small differences
among them.”
A summary of the monetized health and climate effects for electricity
and on-road transportation are shown in Table 5-1, along with the health
and climate effects of heat. Hammitt highlighted the “big” effects: damages
from coal-fired electricity, at $62 billion per year; damages from light-duty
transportation, at $36 billion per year; and damages from heavy-duty trans-
portation (i.e., trucks), at $20 billion per year.
TABLE 5-1 Monetized Health and Climate Effects Associated with
Electricity, On-Road Transportation, and Health, Based on the 2010
(NRC) Report on the External Costs of Energy
Total Damage Climate Damage
Source/Use of Energy per Year Health Damage per Unit per Unit
Coal-fired electricity $62 billion 3.2[<0.5-12] cents/kwh 3[1-10]cents/kwh
Natural gas-generated $0.74 billion 0.16[<0.05-1] cents/kwh 1.5[0.5-5]cents/kwh
electricity
Light-duty on-road $36 billion 1.2-1.7 cents/VMT 0.5[0.05-5]cents/VMT
transportation
Heavy-duty on-road $20 billion
transportation (trucks)
Natural gas–generated $1.4 billion 11 cents/MCF 0.7[0.07-7]cents/MCF
heat
NOTE: kwh = kilowatt hour; MCF = 1,000 cubic feet; VMT = vehicle mile traveled. The
numbers in brackets are uncertainty ranges.
SOURCE: NRC, 2010.
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ATTACHING VALUE TO COSTS AND BENEFITS 61
Questions to Consider When Planning a Study on the Cost of Food
The NRC (2010) study on the external costs of energy raises several
questions to consider when planning a study on the external costs of food:
• Is the goal to estimate total or marginal externalities? Hammitt sug-
gested analyzing both total and marginal effects. Both are useful for
different reasons.
• Will an effort be made to deal with the extent to which externalities
have been internalized? Hammitt cautioned that determining the
extent to which externalities have been internalized can be espe-
cially challenging and suggested avoiding the challenge altogether if
possible.
• Should pecuniary externalities be included in the analysis? Pecuni-
ary externalities are effects that are transfers of income, or costs,
between different parties. They do not impact total welfare, but they
do impact distribution.
• Should the analysis consider externalities associated with foods that
are imported from foreign sources? A related question is, should the
analysis incorporate externalities that occur elsewhere but that harm
the United States, such as GHG emissions and habitat/biodiversity
loss?
• To what extent should the analysis consider heterogeneity of effects
by location and other factors?
VALUING AGRICULTURAL EXTERNALITIES
AND PUBLIC HEALTH IMPACTS2
The notion of valuing the many different types of health effects associ-
ated with food production and consumption is “complex and complicated,”
Anna Alberini stated. The notion is this: If something is important to you,
then you should be willing to pay for it—either to obtain it or, if it is some-
thing that is causing a negative effect, to get rid of it. Alberini discussed how
economists attach value using WTP assessments; how economists quantify
WTP for a marginal change in mortality risk (i.e., VSL); and factors to
consider before using VSL and other WTP estimates typically measured in
nonfood contexts in a study on the costs of food.
Willingness to Pay
WTP is the maximum amount of money that an individual would
voluntarily exchange to obtain an improvement or avoid an undesirable
2 This section summarizes the presentation of Anna Alberini.
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62 EXPLORING HEALTH AND ENVIRONMENTAL COSTS OF FOOD
outcome. When evaluating the benefits of a policy, economists consider
the sum of all beneficiaries’ WTP for that benefit. Payment can be made in
many ways, including via higher taxes, higher food prices, or by incurring
costs or changing behaviors in order to protect oneself from the risk(s).
The simplest food-related example is the willingness to pay to reduce
the risk of minor food poisoning or another acute illness. Economic theory
indicates that the willingness to pay to avoid that risk is a function of sev-
eral factors, including the medical expenditure to alleviate the symptoms
that were actually experienced, any income that was lost to that illness (e.g.,
if a person did not have any sick days but was too sick to work), the cost
of averting illness, and the value of avoiding the discomfort of being sick.
According to Alberini, most public health and food safety policy is based
on a cost-of-illness approach that considers only the first two factors, and
it is unclear to what extent considering the additional two components
would impact total WTP. She suspects that consideration of those two ad-
ditional components could increase total WTP as much as twofold. “So we
are talking about relatively large numbers,” she said, “even for relatively
simple episodes.”
At the other extreme are mortality risks. When estimating WTP to re-
duce a mortality risk, economists typically use either the VSL or the value
of a statistical life year (VOLY). VSL is the willingness to pay for a small
change in the risk of dying. Alberini emphasized that the change is indeed
small. VSL estimates are widely used by many U.S. agencies. For example,
in 1999, the U.S. Environmental Protection Agency (EPA) calculated VSL
as $6.2 million. Adjusted for the cost of inflation, that amounts to about $8
million today. The U.S. Department of Transportation uses a smaller figure
within the $3.7-$5 million range.
VSL is estimated using any of a number of empirical methods (see “Es-
timating VSL” section below). VOLY is a derived estimate and is usually
inferred from VSL. Alberini said she was aware of only two studies where
researchers tried to estimate VOLY from empirical data (Chilton et al.,
2002; NEEDS, 2006). In Alberini’s opinion, both of those studies were so
problematic that the estimates are unreliable. The challenge with empiri-
cally estimating VOLY stems from the difficulty in asking people whether
they would be willing to pay for a gain in life expectancy. It is unclear
whether the question can be conveyed effectively and whether people really
understand what they are valuing when they answer the question.
Estimating VSL
Estimates of VSL are based on empirical data, using any of a number
of different approaches. Alberini listed four major types of approaches: (1)
compensating wage studies (e.g., Viscusi, 1993; Viscusi and Aldy, 2003); (2)
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ATTACHING VALUE TO COSTS AND BENEFITS 63
consumer behavior studies where one measures expenditures on safety de-
vices (e.g., a bicycle helmet that will reduce the risk of dying) (Jenkins et al.,
2001) or observes the tradeoffs people make to reduce risks (Blomquist,
2004); (3) housing price hedonics (e.g., Gayer et al., 2000, 2002); and (4)
stated preference methods (e.g., Alberini et al., 2007; Krupnick et al., 2002;
Tsuge et al., 2005).
Compensating Wage Studies
Compensating wage studies involve collecting data on wage rates and
everything that might be a determination of that compensation (e.g., age,
experience, type of profession) plus the risk of a fatal accident and the
risk of a nonfatal injury on the job. The assumption is that people are
compensated for taking riskier jobs, that workers know the risks, and that
the researchers are measuring those risks correctly. While many U.S. agen-
cies use this approach to estimate VSL, Alberini opined that it is “hard to
believe” that all of the assumptions are met. She referred to Steve Wing’s
presentation on health inequalities and the unlikelihood that workers in
certain types of animal processing facilities are actually compensated more
for working in those high-risk conditions. In fact, Alberini argued that it
is probably the opposite, that is, those workers are probably paid less for
taking riskier jobs, partly because they are not aware of the risks. There are
a number of examples where VSL calculated using this approach is actu-
ally negative or insignificant. Also, compensating wage studies are typically
conducted for the manufacturing industry, not food, and many researchers
would be uncomfortable using the approach to evaluate food system risks.
Housing Price Hedonics
Housing price hedonics is similar to the approach that real estate agents
use when estimating the value of a home. It involves regressing the price of
homes on structural characteristics (e.g., square footage, number of floors),
neighborhood characteristics, and the risk of experiencing a negative out-
come in the area (e.g., as a result of exposure to pollution). VSL estimates
derived from housing price hedonics are typically comparable to those es-
timated using compensating wage values. But again, the assumption is that
the risks are known and that the researcher is measuring them correctly. For
example, many neighborhood characteristics impact risk but have no data.
As with compensative wage studies, housing price hedonics is an ap-
proach not typically used with food. The hedonic pricing approach, how-
ever, could be used for food. For example, one could regress the price of a
certain type of egg on characteristics of the egg and the risks associated with
the production and consumption of that type of egg (e.g., risk of mortality
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64 EXPLORING HEALTH AND ENVIRONMENTAL COSTS OF FOOD
from a foodborne infection, risk of cancer associated with something in the
animal feed, climate change effects). However, again, one of the assump-
tions is that willingness to pay that price is based on people being aware of
all the risks. Also, too many of the risks are correlated, making it difficult to
disentangle the contribution of each. Alberini said, “It would be interesting
if we could actually inform people about the different types of risks associ-
ated with the different types of eggs and let them choose the [type of egg]
and indicate how much they are willing to pay for them.”
Stated Preferences
The stated preferences method involves asking people how much they
would be willing to pay for a reduced risk of dying by asking them to
choose between two alternative interventions for reducing risk. For exam-
ple, in one of her studies, Alberini and colleagues asked respondents which
of two interventions they preferred: (1) a nationwide public intervention
that reduces the risk of death from road traffic accidents (by 3 in 10,000
over 5 years) and costs each household 300 euros; or (2) a private interven-
tion that reduces the risk of death from cancer (by 2 in 10,000 over 5 years)
and costs each household 200 euros (Alberini and Scasny, 2011). One of the
concerns with conducting a study like this is making sure that respondents
understand the magnitude of the risks. There are visual tools that can be
used to educate respondents about risks (e.g., Corso et al., 2001).
The Challenge of Transferring Value
A key question to consider when planning a study that involves valuing
the environmental or public health costs of food is whether VSL estimates
from other (nonfood) contexts can be used. “I don’t have an answer for
you,” Alberini said. Researchers have expressed concerns about such prac-
tice, but there is little empirical work documenting resons for doing or not
doing such “transfers.”
To further elaborate, several factors affect the WTP for a mortality
risk reduction and, therefore, whether estimates of VSL measured in one
setting are appropriate for use in another setting. The same is true of WTP
for less extreme health risks. First, are the beneficiaries comparable? Most
work environments involve males ages 30 to 40. It is unclear whether VSL
estimates based on that context can be extrapolated to the rest of the popu-
lation. Second, is the nature of the risk comparable? For example, the risk
of cancer is a risk that comes with much dread and with suffering attached
to both the disease and the treatment. The mental anxiety associated with
cancer could be such that a person is willing to pay much more to reduce
their risk of dying from cancer compared to the risk of dying of something
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ATTACHING VALUE TO COSTS AND BENEFITS 65
else, such as an accidental death. Third, how does WTP for a reduced risk
compare between a risk reduction experienced now versus later? Fourth,
are there competing risks (e.g., Eeckhoudt and Hammitt, 2001; Evans and
Smith, 2006)? If a person thinks that a particular risk is a very small por-
tion of the overall risk of dying, they may not be willing to pay as much to
reduce that risk. Or, if a person thinks that a particular risk is not within
their control (e.g., cardiovascular disease associated with exposure to air
pollution, as opposed to cardiovascular disease associated with diet), his
or her WTP may be different to reduce that same risk. Fifth, are there
public programs in place to make it easier for private behavior to reduce a
risk, which has been shown in theory to influence WTP (Shogren, 1990)?
Finally, when thinking about risk, most people don’t just think about the
probability of the adverse event. They also think about a number of other
attributes that can impact WTP for the same risk reduction (the immediacy
of the effect, future generations, etc.) (Slovic, 1987).
Although the focus of her presentation was on health, Alberini said
there are several approaches to valuing environmental effects. Economists
favor what is known as the damage function approach, which involves
quantifying the physical effects and then attaching a value to those effects.
In addition to the methods discussed above, the monetary value of the
effects can also be estimated using the travel cost method (a method that
infers the value people place on visiting some site, generally for recreational
purposes), the hedonic housing price method, and stated preference and
other stated preference methods. Some of these methods are well suited to
estimating the effects of food production practices on ecological systems,
but do not lend themselves to valuing the human health effects of food
production practices or safety levels.
In conclusion, Alberini encouraged valuation of the health and envi-
ronmental effects of food production, but emphasized that a single valua-
tion exercise is unlikely to be sufficient. Different effects will likely require
different methods. “We are probably better off dividing up the chore into
different tasks and facing them separately,” she explained.
In the question-and-answer period following her presentation, Alberini
remarked that WTP includes ability to pay. That is, people are willing to
pay only what they can pay. She also mentioned that altruism is another
understudied topic, that is, the willingness to pay for other people. She
mentioned current focus group research on altruism being conducted by
the EPA and other scientists.
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66 EXPLORING HEALTH AND ENVIRONMENTAL COSTS OF FOOD
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