Selectively Applicable Techniques of

Valuing
Environmental Impacts
Introduction
Techniques and approaches which have been used to place
values on the environmental impacts of development
projects.
These techniques are 'selectively applicable' either because
They need greater care in their use, make more demands on
data or on other resources, or because they require stronger
assumptions than directly operational techniques.
These techniques can add to project appraisal (evaluation)
by explicitly incorporating the monetary (financial) costs of
environmental impacts.
The seven techniques presented in this chapter fall
into two broad categories:

 Those that use surrogate (replace/represent) markets to

determine values (either the travel cost approach or the
use of marketed goods as environmental surrogates)

 Those techniques that are usually classified as Contingent

Valuation Methods (CVM), largely based on the use of
surveys to elicit (reveal) values.
Many aspects (particular thing) of the environment have no
established market price. Things like clean air, unobstructed
views, and pleasant surroundings are public goods; therefore
direct market prices for them are rarely available.
In many cases, however, it is possible to estimate an implicit
(indirect) value for an environmental good or service by means
of the price paid for another good which is marketed.

Surrogate-market techniques, therefore, offer approaches which

use an actual market price with which to value an unmarketed
quality of the environment.

The basic assumption is that the price differential, arrived at

other variables except environmental quality have been
controlled for, reflects a purchaser's valuation of the
environmental qualities at issue.

While there are some limitations to these techniques, they can be

very useful in valuing a wide range of environmental qualities.
 TRAVEL COST Method (TCM)
 The travel cost method estimates the economic value of recreational
sites or other concentrated environmental amenities (e.g. wildlife
observation) by looking at the full travel costs (time, out-of-pocket, and
any applicable fees) of visiting the sites.

 First implemented in the late 1950s and 1960s.

 It is based on a simple proposition by a renowned resource economist

Harold Hotelling which considers that, behavior can be used to derive a
demand curve and to estimate a value (including consumer's surplus)
for an unpriced environmental good by treating increasing travel costs
as a surrogate for variable admission prices.

 Ward and Loomis (1986) provide a comprehensive review of theoretical

refinements and empirical applications of the travel cost method.
REASON OF USING TRAVEL COST METHOD

The transaction price for most goods can be considered to be

an expression of willingness to pay for the right to consume the
good or the utility received from it. But some goods and services
(recreational, cultural, historic or scenic) are, however, a
different case.

For example, the value of the benefits or utility derived from a

park, is often much larger than the fee, with the difference being
equal to consumer's surplus.
 TRAVEL COST METHOD

Collecting data
from survey
Frequen Travel Time Variety
Demog of other
cy data cost and spent
raphic socioeco
of other travelli
informa nomic
individu expendi ng to variables
tion
al visits tures the site .

 The frequency of people’ visiting the site ∝

 TRAVEL COST METHOD

Assumptions required for deriving a demand curve

Individuals can be grouped into residential People will react to increasing travel costs in
zones where the inhabitants have similar much the same way as they would react to
preferences. increased admission charges at the site.
 TRAVEL COST METHOD
Steps

• A regression equation is derived from the demand curve which relates

trip rates to the cost of travel (considering the other variables related to
income, cost of travel and other elements.)

• The area of consumer's surplus for site users in each zone is determined
from the equation.

• A demand curve for the zone is traced out and the 'admission
price' at which the demand for the site from that zone would equal
to zero is determined.
 TRAVEL COST METHOD

Steps

 The area under the demand curve

and above the cost curve is used as
an estimation for the consumer's
surplus of present visitors from that
zone.

 This calculation is repeated for each

zone and the consumer's surplus
from all zones are added together to
estimate the total consumer's surplus
(total economic benefit) for visitors
of that site.
 LIMITATION OF TRAVEL COST
 The travel cost method assumes that people perceive and
respond to changes in travel costs the same way that they
would respond to changes in admission price.

 It can only capture use values, shedding no light on non-use (or

passive) values.

 If a trip has more than one purpose, the value of the site may
be overestimated.

 The availability of substitute sites will affect values.

 TCM at Mantadia National Park in
Madagascar
To estimate the addition to consumer's surplus from
diversifying and enhancing facilities

The average increased willingness to pay per trip was about

$24 per visitor
Conservative assumption of annual foreign visitors is 3,900
Annual benefit of about (24×3900) = $93,600
At a 10 percent discount rate annual benefit of about
(0.9×93600) = $84240 or, $80000 (around)
So, a net present value associated with the park of about
$800,000 over a 20-year period
 "Marketed goods as environmental
surrogates"

Marketing goods, by definition, have

quantities and market prices associated
with them. The analytical difficulty is to
determine to what degree the marketed
good is acceptable environmental
surrogates.
For example, In the case of fresh water for
use in an industrial process, it may matter
little whether or not the water comes from a
clean river flowing by the factory or from a
treatment plant that extracts & purifies
polluted river water.
For other environmental goods & services
however, the marketed substitute will
provide only a portion of the total value
offered by the original environmental
resource.
Therefore, In the case of perfect substitutes, the problem is
reduce to the carefull specifications of the situation and the
identification of the changes in use that might be expected.
For imperfect substitutes, the value of the new environmental
good may be somewhat different from that of the existing
private substitute, making the valuation process more difficult.
 This approach would appear to have most potential when
the focus is on & environmental good or service that is an
input into some other production system. The case of
industrial water supply mentioned earlier is one example.
For natural ecosystem values, the use of the
surrogate market approach varies. For example,
one of the benefits of coastal wetland such as
mangroves is there role as a nursery for fish & as
a source of shrimp larvae.
If the environmental good in questions is a
recreational resource, this approach again
provides useful but limited information.
In conclusion, surrogate marketed goods can
provide minimum estimates of the benefits from
mainly environmental surface,but great care must
be taken to ensure that other non-marketed or
intangible benefits are not ignored
Contingent Valuation Method (CVM):

The contingent valuation method (CVM) is a way of

determining the economic values for all kinds of ecosystem
services and environmental goods which are not traded in the
market and hence have no market price.

CVM is first used in developed countries for the valuation of

public goods like access to parks, clean air or water,
endangered species or unobstructed views.
CVM is used to estimate both use and non-use economic values.

Use values: The values which are derived from actual use of a good or service
(such as-visiting a national park or using a beach for recreation). They also
involve non-consumptive uses like basic life support functions associated with
ecosystem, health or biodiversity or event having an option to fish or watch birds
in the future.

Non-use values: They do not involve direct use of a resource or ecosystem

service. They comprise several forms of philanthropic relation to nature (such as-
existence value, the value people place on simply knowing that giant pandas,
whales, a certain protected area or a beach exists, even though they will never see
or visit them). It also includes the bequest value, the satisfaction of preserving
the natural environment for future generations.
But it is typically used to estimate the intangible ( view on an experience)
benefits/ costs of a change in the level of provision/ quality of a public good that
relies on surveys of people interested in it.
Method:

These techniques involve the direct questioning of consumers to determine how they would
react to certain situations.

Unlike markets and surrogate market techniques, estimates are not based on observed or
presumed behaviour but instead by inferring what an individual‘s behaviour would be from
the answers he/she expresses in a survey framework.

The contingent valuation method is often used to assign a monetary value to an

environmental benefit, such as a national park or pollution-free river.

The CVM techniques start with the individual and his/her perception of change by defining
the contingency, the willingness to pay for its existence and the compensation required for
its loss. Once values for a representative sample of the population have been determined,
they are aggregated to a total value directly dependent on the number of individuals
affected.

Whether or not an individual is benefitted or hurt by the proposed change in environmental

quality, will have an impact on the valuations reported in a CVM.
CVM techniques rely on standard neoclassical economic principles and use
either of two Hicksian measures of consumer’s surplus-

1. Compensating Variation (CV): It is the amount of payment or change in

income necessary to make an individual indifferent between an initial
situation and a new situation with different prices. CV uses the initial level
of utility as a reference point.

2. Equivalent Variation(EV): It may be viewed as a change in income equal

to a gain in welfare resulting from a change in price. It may be considered
as the minimum payment needed to persuade an individual voluntarily to
forgo a price decrease. In the case of a price increase, EV is the maximum
amount that an individual will pay to avoid that increase. Ev evaluates the
change from the ex-post-hoc level of utility.

Ordinary Marshallian consumer’s surplus is sometimes used as an estimate of

the more technically correct CV and EV.
Willingness-To-Pay (WTP) & Willingness-To-Accept-Compensation (WTAC):

The contingent valuation method is applied through conducting a survey in which people are directly
asked how much they would be willing to pay (WTP) for a (change in) specific environmental service.
It is also possible to ask people the amount that they would be willing to accept as compensation
(WTAC) to give up an environmental service.

WTP is constrained by income while WTAC is not.

WTAC far exceeds WTP for goods without close substitutes and for which individuals have legal or
customary property rights.

WATC should be used when individuals are forced to give up something or suffer some damage (from
increased air or water pollution). Similarly WTP is the appropriate measure when an individual is
being asked about an improvement from the present state.

The mere granting of ownership will cause individuals to value a good more highly than they would
willing to pay to obtain the same item. The consistent asymmetry between WTP and WTAC for the
same item always dependent on the state of initial ownership.
Uses:

 The obtained information from the survey of a CVM can then be used in
a cost benefit analysis, which assesses the impacts of government
project/ policy.

 It can also be useful in evaluating components of development projects

which can’t be measured using other methods.

 Although they may not always yield precise estimates, they do provide
an order-of-magnitude estimate which can be very valuable
Some Types of CVMs:

There are various types of Contingent Valuation Methods that

are being used currently-

 Bidding games
 Take it or leave it experiments
 Trade off games
 Costless choice
 Delphi technique etc.
Bidding Games
 A method to estimate a monetary value of environmental
issues.
 Value estimated by surveying community members.
 Concept of ‘willingness to pay’ and ‘willingness to accept
compensation.”
 Two types:
 Single bid games.
 Iterative bid games.
Single Bid Games
Respondents asked how much they would pay to for a service
(maximum value) and how much they would be willing to accept
as compensation in exchange of losing the service (minimum
value.)
Eg. How much one would be willing to pay for cleaner water and
how much they would be willing to accept lack of water services.
This maximum and minimum value is then averaged to calculate
an aggregate value of WTP and WTAC
The aggregate WTP and WTAC value are then used to bring in
changes in service policies such as increasing service charge to
use the added profit into further maintenance and improvement.
Iterative Bid Games
 Respondents asked if they would pay $x amount for a
service.
 The value of $x is then changed until a maximum value is
obtained.
 Similarly asked if they would accept $X amount for the
discontinuation of a service as compensation and the value
is changed until a minimum amount is obtained.
 Has a disadvantage over single bid games as single bid
could be organized through mail or up front while iterative
bid games can only be performed through face to face
surveying.
 Delphi Method

•The Delphi method is a structured communication

technique, originally developed as an interactive forecasting
method which relies on a panel of experts

•Delphi method is highly used in collective intelligence.

•In Delphi decision group , a series of questionnaires, surveys,
etc . Are sent to selected respondents through a facilitator who
oversees responses of their panel of experts.

•The group does not meet face to face. All communication is

normally in writing .

•Members of the groups are selected because they are experts

or they have relevant information.
The Process
 Trade off method
In economics trade-off is expressed in terms of
the opportunity cost of a particular choice, which is the loss
of the most preferred alternative given up. A tradeoff, then,
involves a sacrifice that must be made to obtain a certain
product, or service rather than others that could be made or
obtained using the same required resources.

Opportunity cost: is the value of the next highest valued

alternative or foregone cost.

The Production Possibilities Curve: A basic economic

model which shows the tradeoffs society or an individual
faces in how to use scarce resources.
Production Possibilities Curve
Increasing Opportunity Cost
 Costless Choice Method
• The Costless Choice method is a contingent valuation
technique whereby people are asked to choose between several
hypothetical bundles of goods to determine their implicit
valuation of an environmental good or service.

• Since no monetary figures are involved , this approach may

be more useful in settings where barter and subsistence
production are common.
Take-it-or-Leave-it Method
•In a take-it-or-leave-it experiment, respondents are
randomly divided into sub-samples or cells.

•Each sub-sample is then asked the same question.

•Respondents are offered something at a given price

and can then decide whether or not to 'purchase' it.
 The Limitations of Contingent Valuations

Contingent valuation methods do not analyze actual behavior so most

important question concerns their accuracy in simulating the
conditions of the real world
Surveys are by nature hypothetical
Furthermore people have little experience in making explicit decisions
about the value of environmental goods
Survey techniques are subjected to a number of biases:
-Information Bias: As a result of providing too little info
-Instrument Bias: If the respondent is hostile to the means by
which payment would be collected
One last problem is how to decide whether compensating variation of
equivalent variation is the most appropriate measure of consumers
surplus
 How to eliminate the limitations

Properly planned and conducted surveys

Decision about sample size must weigh the benefits of
greater accuracy from larger samples against the
additional costs
Care must be taken so that sampling technique is
statistically valid
Choosing a Technique

Choice of technique depends on

1. Data Availability
2. Resource Availability
3. Particular Context
Choosing Surrogate Marketing
 Valuing amenity benefits among other environmental goods
and services
 Travel cost approaches are can be useful in estimating
consumer surplus from visitation to parks and protected areas.
It will become increasingly useful with the increase in tourist
both within regions and between regions.
 Provides valuable information that can be used to set user fees
which can improve management and protect natural resources
 Other surrogate market based techniques frequently give
partial valuation and useful in providing a minimum estimate
of the value of the resource in question
Choosing CVM
1. Bidding games reflect the growing confidence in the use
of this approach and its ability to provide initial answers
for difficult valuation questions
2. CVM are useful in-
When one wants to estimate willingness-to-pay for
improvements in concrete social services
Used in identification of the WTP by individuals or
societies to protect or preserve ill defined or very difficult to
value benefits. In some cases CVM is about the only way
that economists can estimate WTP to protect and preserve.
 In economic or cultural settings where such
hypothetical surveying is less familiar it may be
harder to use this approach. Still, this is one of the
exciting 'frontier areas' in the valuation field.
THE END