Question

Short Answer:

In class I presented a simple model of non-market valuation and the willingness to pay (WTP) of the US population to not drill for oil in the Arctic National Wildlife Refuge (ANWR). In the model there were two main values to consider, the trigger price and willingness to pay star (WTP* ), where the WTP* increased as the discount rate decreased. Explain why this inverse relationship exists.

(Environmental Economics)

Answer 1

The Willingness to Pay is a component in the welfare economics where the consumer is willing to give up for something which gives a better option. It is a concept that is also well implemented in the environmental economics. The trigger price is such a price that is capable of trigerring the buying potential of the market and the willingness to oay would depend on that also. Discount rate is such a rate that refers to the interest rate charged on the loans taken.

The drilling of oil in the Arctic National Wildlife Refugee (ANWR) is a problem that is existing for much of the time. Although there are environmental cost of drilling, the major challenge is to put a value for such non-market costs. Here, the use values and the non-use values have to be considered and the market cost analysis has to be carried out with thr help of tge dta available. The most common method used in this scenario is the Willingness to Pay method and the studies have shown that the US citizens are willing to pay about $147 for not drilling.

In the above context, it cn be seen that as the WTP* increases, there would bbe reduction in the drilling and environmental effects which would result in the teduction of the discount rate.