Environmental Valuation

Environmental Valuation
Abdul M Khan
Natural Resources and Environmental Economics
Sundarban Oil Spill
Deep Horizon Oil Spill
Exxon Valdez
Alaska Spill
• Off the coast of Alaska on March 24, 1989, spilling approximately 11

million gallons of crude oil, the Exxon Corporation (now Exxon
Mobil) accepted the liability for the damage caused by the leaking oil.
• This liability consisted of two parts:
• The cost of cleaning up the spilled oil and restoring the site
insofar as possible
• compensation for the damage caused to the local ecology
• Approximately $2.1 billion was spent in cleanup efforts and Exxon
also spent approximately $303 million to compensate fishermen
whose livelihoods were greatly damaged for the 5 years following the
spill
• Interestingly, the Exxon Valdez spill triggered pioneering work
focused on providing monetary estimates of environmental damages,
setting the stage for what is today considered standard practice for
Why Value the Environment?
• While it may prove difficult, if not impossible, to place a completely
accurate value on certain environmental amenities, not making the
attempt leaves us valuing them by default at $0.
• Will valuing them at $0 lead us to the best policy decisions? Probably
not.
Types of Values
• Economists have decomposed the total

economic value conferred by resources
into three main components:
• use value,
• option value, and
• nonuse or passive-use values
Types of Values: Use
Value
• Examples include fish harvested
from the sea, timber harvested from
the forest, water extracted from a
stream for irrigation, even the scenic
beauty conferred by a natural vista. If
you used one of your senses to
experience the resource—sight,
sound, touch, taste, or smell—then
you have used the resource.
Types of Values:
Option Value
• Option value reflects the value
people place on a future ability to
use the environment. It
reflects the willingness to pay to
preserve the option to use the
environment in the future even
if one is not currently using it.
Types of Values:
Non-use Value
• Passive-use or nonconsumptive use values
arise when the resource is not actually
consumed
in the process of experiencing it.
• A pure nonuse value, is called existence
value. Existence value is measured by the
willingness to pay to ensure that a resource
continues to exist in the absence of any
interest in future use
• People are getting utility just by knowing
some environment is intact, eventhough s/he
will never use it.
Total Willingness to
Pay(WTP)
WTP= Use Value + Option Value + Non-use Value

Economic Theory Related to
Environmental Quality
• The Household Health Production Function Model
• Find the calculation in Whiteboard
Classifying the Valuation Method
Market Price Method
• The market price method estimates the economic value of

ecosystem products or services that are bought and sold in
commercial markets.
• Hypothetical Situation:
Water pollution has caused the closure of a commercial fishing area,
and agency staff want to evaluate the benefits of cleanup.
• Why Use the Market Price Method?
The market price method was selected in this case, because the
primary resource affected is fish that are commercially harvested,
and thus market data are available.
Market Price
Method
• Application of the Market Price Method:
The objective is to measure total economic surplus for the increased fish harvest that
would occur if the pollution is cleaned up. This is the sum of consumer surplus plus
producer surplus. Remember that consumer surplus is measured by the maximum
amount that people are willing to pay for a good, minus what they actually pay.
Similarly, producer surplus is measured by the difference between the total revenues
earned from a good, and the total variable costs of producing it. Thus, the researcher
must estimate the difference between economic surplus before the closure and
economic surplus after the closure.
Market Price Method
• Step 1:
The first step is to use market data to
estimate the market demand function and
consumer surplus for the fish before the
closure. To simplify the example, assume a
linear demand function, where the initial
market price is $5 per pound, and the
maximum willingness to pay is $10 per
pound. The figure shows the area that the
researcher wants to estimate ? the consumer
surplus, or economic benefit to consumers,
before the area was closed.
Market Price Method
• Step 1:
At $5 per pound, consumers purchased
10,000 pounds of fish per year. Thus,
consumers spent a total of $50,000 on
fish per year. However, some consumers
were willing to pay more than $5.00 per
pound and thus received a net economic
benefit from purchasing the fish. This is
shown by the shaded area on the graph,
the consumer surplus. This area is
calculated as ($10-$5)*10,000/2 =
$25,000. This is the total consumer
surplus received from the fish before the
Market Price Method
• Step 2:
The second step is to estimate the market
demand function and consumer surplus for
the fish after the closure. After the closure,
the market price of fish rose from $5 to $7
per pound, and the total quantity demanded
decreased to 6,000 pounds per year.
• Thus, the economic benefit has decreased,
as shown in the figure. The new consumer
surplus is calculated as ($10-$7)*6,000/2 =
$9,000.
Market Price Method
• Step 3:
The third step is to estimate the
loss in economic benefits to
consumers, by subtracting
benefits after the closure,
$9,000, from benefits before
the closure, $25,000. Thus, the
loss in benefits to consumers is
$16,000.
Market Price Method
• Step 4:
Because this is a marketed good, the
researcher must also consider the
losses to producers, in this case the
commercial fishermen. This is
measured by the loss in producer
surplus. As with consumer surplus,
the researcher must measure the
producer surplus before and after the
closure and calculate the difference.
Thus, the next step is to estimate the
producer surplus before the closure.
Market Price Method
• Step 4:
Producer surplus is measured by the
difference between the total revenues
earned from a good, and the total variable
costs of producing it. Before the closure,
10,000 pounds of fish were caught per
year. Fishermen were paid $1 per pound,
so their total revenues were $10,000 per
year. The variable cost to harvest the fish
was $.50 per pound, so total variable cost
was $5,000 per year. Thus, the producer
surplus before the closure was $10,000 -
$5,000 = $5,000.
Market Price Method
• Step 6:
The next step is to calculate the loss in
producer surplus due to the closure.
This is equal to $5,000 - $2,400 =
$2,600. Note that this example is
based on assumptions that greatly
simplify the analysis, for the sake of
clarity. Certain factors might make the
analysis more complicated. For
example, some fishermen might switch
to another fishery after the closure, and
thus losses would be lower.
Market Price Method
• Step 7:
The final step is to calculate the
total economic losses due to the
closure?the sum of
lost consumer surplus and lost
producer surplus. The total loss
is $16,000 + $2,600 = $18,600.
Thus, the benefits of cleaning
up pollution in order to reopen
the area are equal to $18,600.
Applying the Market Price Method
• The market price method uses prevailing prices for goods and services traded
in markets, such as timber or fish sold commercially. Market price represents
the value of an additional unit of that good or service, assuming the good is
sold through a perfectly competitive market (that is, a market where there is
full information, identical products being sold and no taxes or subsidies).
• Application of the market price method requires data to estimate consumer
surplus and producer surplus. To estimate consumer surplus, the demand
function must be estimated. This requires time series data on the quantity
demanded at different prices, plus data on other factors that might affect
demand, such as income or other demographic data. To estimate producer
surplus, data on variable costs of production and revenues received from the
good are required.
Advantages of the Market Price Method
• The market price method reflects an individual's willingness to pay for
costs and benefits of goods that are bought and sold in markets, such
as fish, timber, or fuel wood. Thus, people?s values are likely to be
well-defined.
• Price, quantity and cost data are relatively easy to obtain for
established markets.
• The method uses observed data of actual consumer preferences.
• The method uses standard, accepted economic techniques.
Issues and Limitations of the Market Price
Method
• Market data may only be available for a limited number of goods and services
provided by an ecological resource and may not reflect the value of all
productive uses of a resource.
• The true economic value of goods or services may not be fully reflected in
market transactions, due to market imperfections and/or policy failures.
• Seasonal variations and other effects on price must be considered.
• The method cannot be easily used to measure the value of larger scale changes
that are likely to affect the supply of or demand for a good or service.
• Usually, the market price method does not deduct the market value of other
resources used to bring ecosystem products to market, and thus may overstate
benefits.
Contingent Valuation Method
• The contingent valuation method (CVM) is used to estimate economic values
for all kinds of ecosystem and environmental services. It can be used to
estimate both use and non use values, and it is the most widely used method
for estimating non-use values. It is also the most controversial of the non-
market valuation methods.
• The contingent valuation method involves directly asking people, in a survey,
how much they would be willing to pay for specific environmental services.
In some cases, people are asked for the amount of compensation they would
be willing to accept to give up specific environmental services. It is called
“contingent” valuation, because people are asked to state their willingness to
pay, contingent on a specific hypothetical scenario and description of the
environmental service.
• The contingent valuation method is referred to as a “stated preference” method,
because it asks people to directly state their values, rather than inferring values from
actual choices, as the “revealed preference” methods do. The fact that CV is based
on what people say they would do, as opposed to what people are observed to do, is
the source of its greatest strengths and its greatest weaknesses. .
• Contingent valuation is one of the only ways to assign dollar values to non-use
values of the environment—values that do not involve market purchases and may not
involve direct participation. These values are sometimes referred to as “passive use”
values. They include everything from the basic life support functions associated
with ecosystem health or biodiversity, to the enjoyment of a scenic vista or a
wilderness experience, to appreciating the option to fish or bird watch in the future,
or the right to bequest those options to your grandchildren. It also includes the value
people place on simply knowing that giant pandas or whales exist.
• It is clear that people are willing to pay for non-use, or passive use, environmental benefits.
However, these benefits are likely to be implicitly treated as zero unless their dollar value is
somehow estimated. So, how much are they worth? Since people do not reveal their willingness to
pay for them through their purchases or by their behavior, the only option for estimating a value is
by asking them questions.
• However, the fact that the contingent valuation method is based on asking people questions, as
opposed to observing their actual behavior, is the source of enormous controversy. The conceptual,
empirical, and practical problems associated with developing dollar estimates of economic value on
the basis of how people respond to hypothetical questions about hypothetical market situations are
debated constantly in the economics literature. CV researchers are attempting to address these
problems, but they are far from finished. Meanwhile, many economists, as well as many
psychologists and sociologists, for many different reasons, do not believe the dollar estimates that
result from CV are valid. More importantly, many jurists and policy-makers will not accept the
results of CV. Because of its controversial nature, users must be extremely cautious about spending
money on CV studies and about using the results of CV studies.
• Hypothetical Scenario:
A remote site on public land provides important habitat for several species of
wildlife. The management agency in charge of the area must decide whether to
issue a lease for mining at the site. Thus, they must weigh the value of the
mining lease against the wildlife habitat benefits that may be lost if the site is
developed. Because the area is remote, few people actually visit it, or view
the animals that rely on it for habitat. Therefore, non-use values are the largest
component of the value for preserving the site.
• Why Use the Contingent Valuation Method?

The contingent valuation method was selected in this case because of the
importance of non-use values, and their potentially significant levels.
Application of the Contingent Valuation
Method:
• Step 1:
The first step is to define the valuation problem. This would include
determining exactly what services are being valued, and who the
relevant population is. In this case, the resource to be valued is a
specific site and the services it provides – primarily wildlife habitat.
Because it is federally owned public land, the relevant population
would be all citizens of the U.S.
Method:
• Step 2:
The second step is to make preliminary decisions about the survey itself,
including whether it will be conducted by mail, phone or in person, how large
the sample size will be, who will be surveyed, and other related questions. The
answers will depend, among other things, on the importance of the valuation
issue, the complexity of the question being asked, and the size of the budget.
• In-person interviews are generally the most effective for complex questions,
because it is often easier to explain the required background information to
respondents in person, and people are more likely to complete a long survey
when they are interviewed in person. In some cases, visual aids such as videos
or color photographs may be presented to help respondents understand the
conditions of the scenario that they are being asked to value.
Method:
• In-person interviews are generally the most expensive type of survey.
However, mail surveys that follow procedures that aim to obtain high
response rates can also be quite expensive. Mail and telephone surveys
must be kept fairly short, or response rates are likely to drop dramatically.
Telephone surveys may be less expensive, but it is often difficult to ask
contingent valuation questions over the telephone, because of the amount of
background information required.
• In this hypothetical case, the researchers have decided to conduct a mail
survey, because they want to survey a large sample, over a large
geographical area, and are asking questions about a specific site and its
benefits, which should be relatively easy to describe in writing in a
relatively short survey.
Method:
• Step 3:
The next step is the actual survey design. This is the most important
and difficult part of the process, and may take six months or more to
complete. It is accomplished in several steps. The survey design
process usually starts with initial interviews and/or focus groups with
the types of people who will be receiving the final survey, in this case
the general public. In the initial focus groups, the researchers would
ask general questions, including questions about peoples’
understanding of the issues related to the site, whether they are
familiar with the site and its wildlife, whether and how they value this
site and the habitat services it provides.
Method:
• In later focus groups, the questions would get more detailed and specific, to help
develop specific questions for the survey, as well as decide what kind of
background information is needed and how to present it. For example, people
might need information on the location and characteristics of the site, the
uniqueness of species that have important habitat there, and whether there are any
substitute sites that provide similar habitat. The researchers would also want to
learn about peoples’ knowledge of mining and its impacts, and whether mining is a
controversial use of the site. If people are opposed to mining, they may answer the
valuation questions with this in mind, rather than expressing their value for the
services of the site. At this stage, test different approaches to the valuation
question and different payment mechanisms would be tested. Questions that can
identify any “protest” bids or other answers that do not reveal peoples’ values for
the services of interest would also be developed and tested at this stage.
Method:
• After a number of focus groups have been conducted, and the researchers
have reached a point where they have an idea of how to provide background
information, describe the hypothetical scenario, and ask the valuation
question, they will start pre-testing the survey. Because the survey will be
conducted by mail, it should be pretested with as little interaction with the
researchers as possible. People would be asked to assume that they’ve
received the survey in the mail and to fill it out. Then the researchers would
ask respondents about how they filled it out, and let them ask questions
about anything they found confusing. Eventually, a mail pretest might be
conducted. The researchers continue this process until they’ve developed a
survey that people seem to understand and answer in a way that makes
sense and reveals their values for the services of the site.
Method:
• Step 4:
The next step is the actual survey implementation. The first task is to select
the survey sample. Ideally, the sample should be a randomly selected
sample of the relevant population, using standard statistical sampling
methods. In the case of a mail survey, the researchers must obtain a mailing
list of randomly sampled U.S. citizens. They would then use a standard
repeat-mailing and reminder method, in order to get the greatest possible
response rate for the survey. Telephone surveys are carried out in a similar
way, with a certain number of calls to try to reach the selected respondents.
In-person surveys may be conducted with random samples of respondents,
or may use “convenience” samples – asking people in public places to fill
out the survey.
Method:
• Step 5:
The final step is to compile, analyze and report the results. The data
must be entered and analyzed using statistical techniques appropriate
for the type of question. In the data analysis, the researchers also
attempt to identify any responses that may not express the
respondent’s value for the services of the site. In addition, they can
deal with possible non-response bias in a number of ways. The most
conservative way is to assume that those who did not respond have
zero value.
Method:
• How Do We Use the Results?
From the analysis, the researchers can estimate the average value for
an individual or household in the sample, and extrapolate this to the
relevant population in order to calculate the total benefits from the
site. For example, if they find that the mean willingness to pay is $.10
per capita, the total benefits to all citizens would be $26 million.
Case Study Examples of the Contingent
Valuation Method:
• Case # 1—Mono Lake [ref.]
• The Situation
The State of California Water Resources Control Board was faced with
a decision about how much water to allocate to Los Angeles from
sources flowing into Mono Lake. The reduced water flows to the lake
were affecting food supplies for nesting and migratory birds. One of
the first contingent valuation studies to measure the use and non-use
values that citizens have for public trust resources was a survey of
California households regarding willingness to pay for increased water
flows into Mono Lake.
Valuation Method:
• Initial Work
The initial academic study asked California households, in a mail survey, whether
they would pay more on their water bill for higher cost replacement water supplies,
so that natural flows could once again go into Mono Lake. They were told that,
according to biologists, the higher flows to the lake were needed to maintain food
supplies for nesting and migratory birds.
• The average willingness to pay per household was estimated to be $13 per month,
or $156 per year. When multiplied by the number of households in California, the
total benefits exceeded the $26 million cost of replacing the water supply by a
factor of 50. One impact of the survey results was to change the nature of the
debate over Mono Lake from "fish or people" to one that recognized that people
care about fish and birds, as well as about inexpensive water supplies for Los
Angeles.
Valuation Method:
• Follow-up Work
The State of California determined that information about the general
public’s willingness to pay for increased water in Mono Lake could be an
important part of the economic analysis of the water allocation decision. As
part of an Environmental Impact Report, the State hired a consulting firm to
perform a more detailed contingent valuation survey. This new survey
involved the use of photo-simulations showing what the lake would look
like at alternative water levels. It also gave detailed information about
effects of changing lake levels on different bird species. The survey was
conducted over the telephone, with people who had been mailed information
booklets with maps and photo-simulations. Survey respondents were asked
how they would vote in a hypothetical referendum regarding Mono Lake.
Valuation Method:
• This study also showed that the benefits of a moderately high (but not
the highest) lake level were greater than the costs. While one cannot
claim the economic analysis was a deciding
factor, the California Water Resources Control Board did reduce Los
Angeles’ water rights by half, from 100,000 acre feet to about 50,000
acre feet, to allow more flows into Mono Lake.
Valuation Method:
• Case # 2 – Water Over the Falls [ref.]
• The Situation
The Federal Energy Regulatory Commission faced a licensing
decision where one important issue was how much water the utility
company should allow to flow over the falls at a recreation area.
Increasing the flow over the falls would result in less hydropower
generated, but more water for recreation. The previous license
required only a minimum instream flow of 50 cubic feet per second,
which reduced the flow over the falls to a trickle.
Valuation Method:
• The Application
A contingent valuation survey was developed to determine how much
visitors to the falls would be willing to pay for increased overflow
levels. The survey instrument included pictures of the falls at four
different flow levels and a series of valuation questions. It was mailed
to a sample of previous visitors to the site. The key survey questions
asked how much individuals would pay to visit the falls with each of
the four flow levels depicted in the photos, and how many times they
would visit each year at the four different flow levels.
Valuation Method:
• Results
Since both visitation and value per day were sensitive to flow, a
statistical analysis of the survey results was used to estimate a total
recreation benefit function. Using this function, the economic value of
additional flows in each month was calculated, and compared to the
economic value of the foregone hydropower required to allow the
additional flows. The resulting optimum flow level during the summer
months, when visitation was high, was calculated as 500 cubic feet per
second, which was ten times larger then the existing minimum
instream flow.
Applying the Contingent Valuation
Method:
• Applying the contingent valuation method is generally a complicated,
lengthy, and expensive process. In order to collect useful data and
provide meaningful results, the contingent valuation survey must be
properly designed, pre-tested, and implemented. Contingent valuation
survey questions must focus on specific environmental service(s) and
a specific context that is clearly defined and understood by survey
respondents. In other words, a CV survey to assess the dollar value of
the results of an environmental improvement cannot be based on the
environmental improvement itself, but on increases in specific
environmental services that the improvement is expected to provide.
Method:
• A good CV study will consider the following in its application:
• Before designing the survey, learn as much as possible about how
people think about the good or service in question. Consider people’s
familiarity with the good or service, as well as the importance of such
factors as quality, quantity, accessibility, the availability of substitutes,
and the reversibility of the change.
• Determine the extent of the affected populations or markets for the
good or service in question, and choose the survey sample based on
the appropriate population.
Method:
• The choice scenario must provide an accurate and clear description of the change in
environmental services associated with the event, program, investment, or policy choice
under consideration. If possible, convey this information using photographs, videos, or
other multi-media techniques, as well as written and verbal descriptions.
• Unlike ordinary survey questions, which sometimes ask respondents whether they are
willing to pay x dollars to improve “air quality,” the nature of the good and the changes to
be valued must be specified in detail in a CV survey. It is also important to make sure that
respondents do not inadvertently assume that one or more related improvements are
included. For example, if people are asked to value only air visibility, it would be
important to make sure that they do not include their value for health-related improvements
in their stated willingness to pay amount. Similarly, if people have a tendency to think of
environmental improvements in general, even when asked about water quality alone, it
would be necessary to point out specifically that environmental quality, other than water
quality, would remain the same.
Method:
• Questions can be asked in a variety of ways, using both open-ended and closed-
ended formats. In the open-ended format, respondents are asked to state their
maximum willingness to pay for the environmental improvement. With the
closed-ended format, also referred to as discrete choice, respondents are asked
whether or not they would be willing to pay a particular amount for the
environmental improvement, or whether they would vote yes or no for a specific
policy at a given cost. The discrete choice format is generally accepted as the
preferred method.
• In addition to the hypothetical question that asks for willingness to pay, the survey
must specify the mechanism by which the payment will be made, for example
through increased taxes. In order for the question to be effective, the respondent
must believe that if the money was paid, whoever was collecting it could effect the
specified environmental change.
Method:
• Respondents should be reminded to consider their budget constraints.
• Specify whether comparable services are available from other sources,
when the good is going to be provided, and whether the losses or gains
are temporary or permanent.
• Respondents should understand the frequency of payments required,
for example monthly or annually, and whether or not the payments
will be required over a long period of time in order to maintain the
quantity or quality change. They should also understand who would
have access to the good and who else will pay for it, if it is provided.
Method:
• In the case of collectively held goods, respondents should understand
that they are currently paying for a given level of supply. The scenario
should clearly indicate whether the levels being valued are
improvements over the status quo, or potential declines in the absence
of sufficient payments.
• If the household is the unit of analysis, the reference income should be
the household’s, rather than the respondent’s, income.
Method:
• Thoroughly pre-test the valuation questionnaire for potential biases.
Pre-testing includes testing different ways of asking the same
question, testing whether the question is sensitive to changes in the
description of the good or resource being valued, and conducting post-
survey interviews to determine whether respondents are stating their
values as expected.
• Include validation questions in the survey, to verify comprehension
and acceptance of the scenario, and to elicit socioeconomic and
attitudinal characteristics of respondents, in order to better interpret
variation in responses across respondents.
Method:
• CVM can be conducted as in-person interviews, telephone interviews or mail
surveys. The in-person interview is the most expensive survey administration
format, but is generally considered to be the best approach, especially if visual
materials are to be presented.
• Interview a large, clearly defined, representative sample of the affected
population.
• Achieve a high response rate and a mix of respondents that represents the
population.
• Whatever survey instruments and survey designs are used, and whatever
response rate is achieved, make sure that survey results are analyzed and
interpreted by professionals before making any claims about the resulting
dollar values.
Advantages of the Contingent Valuation
Method:
• Contingent valuation is enormously flexible in that it can be used to
estimate the economic value of virtually anything. However, it is best
able to estimate values for goods and services that are easily identified
and understood by users and that are consumed in discrete units (e.g.,
user days of recreation), even if there is no observable behavior
available to deduce values through other means.
• CV is the most widely accepted method for estimating total economic
value , including all types of non-use, or “passive use,” values. CV
can estimate use values , as well as existence values , option values ,
and bequest values .
Advantages of the Contingent Valuation
Method:
• Though the technique requires competent survey analysts to achieve
defensible estimates, the nature of CV studies and the results of CV
studies are not difficult to analyze and describe. Dollar values can be
presented in terms of a mean or median value per capita or per
household, or as an aggregate value for the affected population.
• CV has been widely used, and a great deal of research is being
conducted to improve the methodology, make results more valid and
reliable, and better understand its strengths and limitations.
Issues and Limitations of the Contingent
Valuation Method:
• Although the contingent valuation method has been widely used for the
past two decades, there is considerable controversy over whether it
adequately measures people's willingness to pay for environmental
quality.
• People have practice making choices with market goods, so their
purchasing decisions in markets are likely to reflect their true willingness
to pay. CV assumes that people understand the good in question and will
reveal their preferences in the contingent market just as they would in a
real market. However, most people are unfamiliar with placing dollar
values on environmental goods and services. Therefore, they may not
have an adequate basis for stating their true value.
Valuation Method:
• The expressed answers to a willingness to pay question in a contingent valuation
format may be biased because the respondent is actually answering a different
question than the surveyor had intended. Rather than expressing value for the
good, the respondent might actually be expressing their feelings about the
scenario or the valuation exercise itself. For example, respondents may express
a positive willingness to pay because they feel good about the act of giving for a
social good (referred to as the “warm glow” effect), although they believe that
the good itself is unimportant. Respondents may state a positive willingness to
pay in order to signal that they place importance on improved environmental
quality in general. Alternatively, some respondents may value the good, but
state that they are not willing to pay for it, because they are protesting some
aspect of the scenario, such as increased taxes or the means of providing the
good.
Valuation Method:
• Respondents may make associations among environmental goods that the
researcher had not intended. For example, if asked for willingness to pay for
improved visibility (through reduced pollution), the respondent may actually
answer based on the health risks that he or she associates with dirty air.
• Some researchers argue that there is a fundamental difference in the way that
people make hypothetical decisions relative to the way they make actual
decisions. For example, respondents may fail to take questions seriously
because they will not actually be required to pay the stated amount.
Responses may be unrealistically high if respondents believe they will not
have to pay for the good or service and that their answer may influence the
resulting supply of the good. Conversely, responses may be unrealistically
low if respondents believe they will have to pay.
Valuation Method:
• The payment question can either be phrased as the conventional ‘What are you
willing to pay (WTP) to receive this environmental asset?’, or in the less usual
form, ‘What are you willing to accept (WTA) in compensation for giving up
this environmental asset?’ In theory, the results should be very close.
However, when the two formats have been compared, WTA very significantly
exceeds WTP. Critics have claimed that this result invalidates the CVM
approach, showing responses to be expressions of what individuals would like
to have happen rather than true valuations.
• If people are first asked for their willingness to pay for one part of an
environmental asset (e.g. one lake in an entire system of lakes) and then asked
to value the whole asset (e.g. the whole lake system), the amounts stated may
be similar. This is referred to as the “embedding effect.”
Valuation Method:
• In some cases, people’s expressed willingness to pay for something
has been found to depend on where it is placed on a list of things being
valued. This is referred to as the "ordering problem."
• Respondents may give different willingness to pay amounts,
depending on the specific payment vehicle chosen. For example,
some payment vehicles, such as taxes, may lead to protest responses
from people who do not want increased taxes. Others, such as a
contribution or donation, may lead people to answer in terms of how
much they think their “fair share” contribution is, rather than
expressing their actual value for the good.
Valuation Method:
• Many early studies attempted to prompt respondents by suggesting a
starting bid and then increasing or decreasing this bid based upon
whether the respondent agreed or refused to pay a such sum.
However, it has been shown that the choice of starting bid affects
respondents’ final willingness to pay response.
• Strategic bias arises when the respondent provides a biased answer in
order to influence a particular outcome. If a decision to preserve a
stretch of river for fishing, for example, depends on whether or not the
survey produces a sufficiently large value for fishing, the respondents
who enjoy fishing may be tempted to provide an answer that ensures a
high value, rather than a lower value that reflects their true valuation.
Valuation Method:
• Information bias may arise whenever respondents are forced to value attributes
with which they have little or no experience. In such cases, the amount and type
of information presented to respondents may affect their answers
• Non-response bias is a concern when sampling respondents, since individuals who
do not respond are likely to have, on average, different values than individuals
who do respond.
• Estimates of nonuse values are difficult to validate externally.
• When conducted to the exacting standards of the profession, contingent valuation
methods can be very expensive and time-consuming, because of the extensive pre-
testing and survey work.
• Many people, including jurists policy-makers, economists, and others, do not
believe the results of CV.
Potential Bias of Contingent Valuation
• Six types of potential bias have been the focus of a large amount of
research:
• Strategic Bias
• Information Bias
• Starting Point Bias
• Hypothetical Bias
• Payment Vehicle Bias(Protest Bids)
• Discrepancy between WTP and WTA
Choice Experiments/ Contingent Choice
Method
• The contingent choice method is similar to contingent valuation, in
that it can be used to estimate economic values for virtually any
ecosystem or environmental service, and can be used to estimate non-
use as well as use values. Like contingent valuation, it is a
hypothetical method – it asks people to make choices based on a
hypothetical scenario. However, it differs from contingent valuation
because it does not directly ask people to state their values in dollars.
Instead, values are inferred from the hypothetical choices or tradeoffs
that people make.
• The contingent choice method asks the respondent to state a preference
between one group of environmental services or characteristics, at a given
price or cost to the individual, and another group of environmental
characteristics at a different price or cost. Because it focuses on tradeoffs
among scenarios with different characteristics, contingent choice is
especially suited to policy decisions where a set of possible actions might
result in different impacts on natural resources or environmental services.
For example, improved water quality in a lake will improve the quality of
several services provided by the lake, such as drinking water supply, fishing,
swimming, and biodiversity. In addition, while contingent choice can be
used to estimate dollar values, the results may also be used to simply rank
options, without focusing on dollar values.
• Hypothetical Scenario:
• In the contingent valuation section, we used the case of a remote site on
public land that provides important habitat for several species of wildlife.
The management agency in charge of the area must decide whether to issue a
lease for mining at the site. Suppose that there are several possible options
for preserving and/or using the site. These include allowing no mining and
preserving the site as a wilderness habitat area, and various levels and
locations for the mining operation, each of which would have different
impacts on the site. Thus, several options must be weighed in terms of costs
and benefits to the public. Again, because the area is remote, few people
actually visit it, or view the animals that rely on it for habitat. Therefore,
non-use values are the largest component of the value for preserving the site.
• Why Use the Contingent Choice Method?
• The contingent choice method was selected in this case because we want to
value the outcomes of several policy options, and because non-use values are
important.
• Alternative Approaches:
• Since non-use values are significant, and few people actually visit the site,
other methods, such as the travel cost method, will underestimate the benefits
of preserving the site. In this case, contingent valuation methods might also
be used. However, because we need to value several levels of services, based
on different scenarios, the survey questions might become quite complicated.
Application of the Contingent Choice
Method:
• Because both contingent choice and contingent valuation are hypothetical
survey-based methods, their application is very similar. The main
differences are in the design of the valuation question(s), and the data
analysis.
Step 1:
• The first step is to define the valuation problem. This would include
determining exactly what services are being valued, and who the relevant
population is. In this case, the resource to be valued is a specific site and
the services it provides – primarily wildlife habitat. Because it is federally
owned public land, the relevant population would be all citizens of the U.S.
Method:
• Step 2:
• The second step is to make preliminary decisions about the survey itself,
including whether it will be conducted by mail, phone or in person, how large
the sample size will be, who will be surveyed, and other related questions. The
answers will depend, among other things, on the importance of the valuation
issue, the complexity of the question(s) being asked, and the size of the budget.
• In-person interviews are generally the most effective for complex questions,
because it is often easier to explain the required background information to
respondents in person, and people are more likely to complete a long survey
when they are interviewed in person. In some cases, visual aids such as videos
or color photographs may be presented to help respondents understand the
conditions of the scenario(s) that they are being asked to value.
Method:
• In-person interviews are generally the most expensive type of survey.
However, mail surveys that follow procedures that aim to obtain high
response rates can also be quite expensive. Mail and telephone surveys
must be kept fairly short, or response rates are likely to drop dramatically.
Telephone surveys are generally not appropriate for contingent choice
surveys, because of the difficulty of conveying the tradeoff questions to
people over the telephone.
• In this hypothetical case, the researchers have decided to conduct a mail
survey, because they want to survey a large sample, over a large
geographical area, and are asking questions about a specific site and its
benefits, which should be relatively easy to describe in writing in a
relatively short survey.
Method:
• Step 3:
• The next step is the actual survey design. This is the most important
and difficult part of the process, and may take six months or more to
complete. It is accomplished in several steps. The survey design
process usually starts with initial interviews and/or focus groups with
the types of people who will be receiving the final survey, in this case
the general public. In the initial focus groups, the researchers would
ask general questions, including questions about peoples’
understanding of the issues related to the site, whether they are
familiar with the site and its wildlife, whether and how they value this
site and the habitat services it provides.
Method:
• In later focus groups, the questions would get more detailed and specific, to help
develop specific questions for the survey, as well as decide what kind of background
information is needed and how to present it. For example, people might need
information on the location and characteristics of the site, the uniqueness of species
that have important habitat there, and whether there are any substitute sites that
provide similar habitat.
• At this stage, the researchers would test different approaches to the choice question.
Usually, a contingent choice survey will ask each respondent a series of choice
questions, each presenting different combinations and levels of the relevant services,
as well as the cost to the respondent of the action or policy. In this example, each
choice might be described in terms of the site’s ability to support each of the
important wildlife species. Thus, people will be making tradeoffs among the different
species that might be affected in different ways by each possible choice of scenario.
Method:
• After a number of focus groups have been conducted, and the researchers
have reached a point where they have an idea of how to provide background
information, describe the hypothetical scenario, and ask the choice question,
they will start pre-testing the survey. Because the survey will be conducted
by mail, it should be pretested with as little interaction with the researchers
as possible. People would be asked to assume that they’ve received the
survey in the mail and to fill it out. Then the researchers would ask
respondents about how they filled it out, and let them ask questions about
anything they found confusing. Eventually, a mail pretest might be
conducted. The researchers continue this process until they’ve developed a
survey that people seem to understand and answer in a way that makes
sense and reveals their values for the services of the site.
Method:
• Step 4:
• The next step is the actual survey implementation. The first task is to select
the survey sample. Ideally, the sample should be a randomly selected
sample of the relevant population, using standard statistical sampling
methods. In the case of a mail survey, the researchers must obtain a mailing
list of randomly sampled U.S. citizens. They would then use a standard
repeat-mailing and reminder method, in order to get the greatest possible
response rate for the survey. Telephone surveys are carried out in a similar
way, with a certain number of calls to try to reach the selected respondents.
In-person surveys may be conducted with random samples of respondents,
or may use “convenience” samples – asking people in public places to fill
out the survey.
Method:
• Step 5:
• The final step is to compile, analyze and report the results. The statistical
analysis for contingent choice is often more complicated than that for
contingent valuation, requiring the use of discrete choice analysis methods
to infer willingness to pay from the tradeoffs made by respondents.
• From the analysis, the researchers can estimate the average value for each of
the services of the site, for an individual or household in our sample. This
can be extrapolated to the relevant population in order to calculate the total
benefits from the site under different policy scenarios. The average value
for a specific action and its outcomes can also be estimated, or the different
policy options can simply be ranked in terms of peoples’ preferences.
How Do We Use the Results?
• The results of the survey might show that the economic benefits of
preserving the site by not allowing mining are greater than the benefits
received from allowing mining. If this were the case, the mining lease
might not be issued, unless other factors override these results.
Alternatively, the results might indicate that some mining scenarios are
acceptable, in terms of economic costs and benefits. The results could
then be used to rank different options, and to help select the most
preferred option.
An Example of Choice Experiment
• Consider an example (Landry and Mires, 2017) that surveyed North Carolina
residents on their preferences and willingness to pay for marine cultural
heritage sites (e.g., shipwrecks). The choice experiment included five
attributes including the preservation zone, the availability of public programs
and whether or not there was a walking, virtual, or diving trail.
• reproduces the attributes and levels. With three attributes with three levels
and two with two levels, there are 216 possible different profiles. Best
practices suggests the use of a fractional factorial design and the authors
chose eight versions with three choice sets per version of the survey,
resulting in 24 choice sets.
Choice Experiment: Attributes and Levels
Sample Choice Experiment Question
Revealed Preference Methods
• Revealed preference methods are “observable” because they involve
actual behavior and expenditures and “indirect” because they infer a
value rather than estimate it directly. Suppose, for example, a
particular sport fishery is being threatened by pollution, and one of the
damages
caused by that pollution is a reduction in sportfishing. How is this loss
to be valued when access to the fishery is free?
Travel Cost Method
• The travel cost method is used to estimate economic use values
associated with ecosystems or sites that are used for recreation.
• The method can be used to estimate the economic benefits or costs
resulting from:
• changes in access costs for a recreational site
• elimination of an existing recreational site
• addition of a new recreational site
• changes in environmental quality at a recreational site
Travel Cost Method
• The basic premise of the travel cost method is that the time and travel
cost expenses that people incur to visit a site represent the “price” of
access to the site. Thus, peoples’ willingness to pay to visit the site
can be estimated based on the number of trips that they make at
different travel costs. This is analogous to estimating peoples’
willingness to pay for a marketed good based on the quantity
demanded at different prices.
Travel Cost Method
• A site used mainly for recreational fishing is threatened by development in the
surrounding area. Pollution and other impacts from this development could destroy
the fish habitat at the site, resulting in a serious decline in, or total loss of, the site’s
ability to provide recreational fishing services. Resource agency staff want to
determine the value of programs or actions to protect fish habitat at the site.
• Why Use the Travel Cost Method?
• The travel cost method was selected in this case for two main reasons:
• The site is primarily valuable to people as a recreational site. There are no endangered
species or other highly unique qualities that would make non-use values for the site
significant.
• The expenditures for projects to protect the site are relatively low. Thus, using a relatively
inexpensive method like travel cost makes the most sense
Options for Applying the Travel Cost
Method:
• There are several ways to approach the problem, using variations of
the travel cost method.
• These include:
• A simple zonal travel cost approach, using mostly secondary data, with some
simple data collected from visitors.
• An individual travel cost approach, using a more detailed survey of visitors.
• A random utility approach using survey and other data, and more complicated
statistical techniques.
Application of the Zonal Travel Cost
Approach:
• The zonal travel cost method is the simplest and least expensive approach.
It will estimate a value for recreational services of the site as a whole. It
cannot easily be used to value a change in quality of recreation for a site,
and may not consider some of the factors that may be important
determinants of value.
• The zonal travel cost method is applied by collecting information on the
number of visits to the site from different distances. Because the travel and
time costs will increase with distance, this information allows the researcher
to calculate the number of visits “purchased” at different “prices.” This
information is used to construct the demand function for the site, and
estimate the consumer surplus , or economic benefits, for the recreational
services of the site.
Approach
• Step 1:
The first step is to define a set of zones surrounding the site. These may be defined by
concentric circles around the site, or by geographic divisions that make sense, such as
metropolitan areas or counties surrounding the site at different distances.
• Step 2:
The second step is to collect information on the number of visitors from each zone,
and the number of visits made in the last year. For this hypothetical example, assume
that staff at the site keep records of the number of visitors and their zipcode, which can
be used to calculate total visits per zone over the last year.
• Step 3:
The third step is to calculate the visitation rates per 1000 population in each zone.
This is simply the total visits per year from the zone, divided by the zone’s population
in thousands. An example is shown in the table:
Approach
Zone Total Visits/Year Zone Population Visits/1000
0 400 1000 400
1 400 2000 200
2 400 4000 100
3 400 8000 50
Beyond 3 0
Total Visits 1600
Approach
• Step 4:
• The fourth step is to calculate the average round-trip travel distance and
travel time to the site for each zone. Assume that people in Zone 0 have
zero travel distance and time. Each other zone will have an increasing travel
time and distance. Next, using average cost per mile and per hour of travel
time, the researcher can calculate the travel cost per trip. A standard cost per
mile for operating an automobile is readily available from AAA or other
sources. Assume that this cost per mile is $.30. The cost of time is more
complicated. The simplest approach is to use the average hourly wage.
Assume that it is $9/hour, or $.15/minute, for all zones, although in practice
it is likely to differ by zone. The calculations are shown in the table:
Approach
Zone Round Trip Round Trip Distance times Travel Time Total Travel
Travel Travel Time Cost/Mile times Cost/Trip
Distance ($.30) Cost/Minute
($.15)
0 0 0 0 0 0
1 20 30 $6 $4.50 $10.50
2 40 60 $12 $9.00 $21.00
3 80 120 $24 $18.00 $42.00
Approach
• Step 5:
• The fifth step is to estimate, using regression analysis, the equation
that relates visits per capita to travel costs and other important
variables. From this, the researcher can estimate the demand function
for the average visitor. In this simple model, the analysis might
include demographic variables, such as age, income, gender, and
education levels, using the average values for each zone. To maintain
the simplest possible model, calculating the equation with only the
travel cost and visits/1000, Visits/1000 = 330 – 7.755*(Travel Cost).
Approach
• Step 6:
• The sixth step is to construct the demand function for visits to the site,
using the results of the regression analysis. The first point on the
demand curve is the total visitors to the site at current access costs
(assuming there is no entry fee for the site), which in this example is
1600 visits per year. The other points are found by estimating the
number of visitors with different hypothetical entrance fees (assuming
that an entrance fee is viewed in the same way as travel costs).
• For the purposes of our example, start by assuming a $10 entrance fee.
Plugging this into the estimated regression equation, V = 330 – 7.755C,
gives the following:
Approach
Zone Travel Cost plus Visits/1000 Population Total Visits
$10
0 $10 252 1000 252
1 $20.50 171 2000 342
2 $31.00 90 4000 360
3 $52.00 0 8000 0
Total Visits 954
Approach
• This gives the second point on the demand curve—954 visits at an
entry fee of $10. In the same way, the number of visits for increasing
entry fees can be calculated, to get:
Entry Fee Total Visits

$20 409
$30 129
$40 20
$50 0
Application of the
Zonal Travel Cost
Approach
Approach
• Step 7:
• The final step is to estimate the total economic benefit of the site to visitors by
calculating the consumer surplus, or the area under the demand curve. This
results in a total estimate of economic benefits from recreational uses of the
site of around $23,000 per year, or around $14.38 per visit ($23,000/1,600).
• Remember that the agency staff’s objective was to decide whether it is
worthwhile to spend money on programs and actions to protect this site. If the
actions cost less than $23,000 per year, the cost will be less than the benefits
provided by the site. If the costs are greater than this, the staff will have to
decide whether other factors make them worthwhile.
Application of the Individual Travel Cost
Approach:
• The individual travel cost approach is similar to the zonal approach,
but uses survey data from individual visitors in the statistical analysis,
rather than data from each zone. This method thus requires more data
collection and slightly more complicated analysis, but will give more
precise results.
• For the hypothetical example of the recreational fishing site, rather
than simply collecting information on number of visitors and their
zipcodes, the researcher would conduct a survey of visitors. The
survey might ask for the following information:
Questions of Individual Travel Cost
Method
• location of the visitor’s home – how far they traveled to the site
• how many times they visited the site in the past year or season
• the length of the trip
• the amount of time spent at the site
• travel expenses
• the person’s income or other information on the value of their time
• other socioeconomic characteristics of the visitor
• other locations visited during the same trip, and amount of time spent at each
• other reasons for the trip (is the trip only to visit the site, or for several purposes)
• fishing success at the site (how many fish caught on each trip)
• perceptions of environmental quality or quality of fishing at the site
• substitute sites that the person might visit instead of this site
Process of Individual Travel Cost Method
• Using the survey data, the researcher can proceed in a similar way to
the zonal model, by estimating, using regression analysis, the
relationship between number of visits and travel costs and other
relevant variables. This time, the researcher would use individual
data, rather than data for each zone. The regression equation gives us
the demand function for the “average” visitor to the site, and the area
below this demand curve gives the average consumer surplus. This is
multiplied by the total relevant population (the population in the
region where visitors come from) to estimate the total consumer
surplus for the site.
• Because additional data about visitors, substitute sites, and quality of
the site has been collected, the value estimates can be “fine tuned” by
adding these other factors to the statistical model. Including
information about the quality of the site allows the researcher to
estimate the change in value of the site if its quality changes. To do
so, two different demand curves would be estimated—one for each
level of quality. The area between these two curves is the estimate of
the change in consumer surplus when quality changes.
• In the example, the researcher might recognize that development
around the site is unlikely to totally destroy the fish population.
However, it could diminish the population enough to adversely affect
catch rates. By including catch rates in the model, the researcher can
estimate the lost recreational benefits from reduced catch rates.
However, the random utility model, described in the next section, is a
more appropriate approach for this type of estimation.
Applying the Travel Cost Method:
• On average, people who live farther from a site will visit it less often,
because it costs more in terms of actual travel costs and time to reach
the site. The number of visits from origin zones at different distances
from the site, and travel cost from each zone, are used to derive an
aggregate demand curve for visits to the site, and thus for the
recreational or scenic services of the site. This demand curve shows
how many visits people would make at various travel cost prices, and
is used to estimate the willingness to pay for people who visit the site
(whether they are charged an admission fee or not).
• Other factors may also affect the number of visits to a site. People
with higher incomes will usually make more trips. If there are more
alternative sites, or substitutes, a person will make less trips. Factors
like personal interest in the type of site, or level of recreational
experience will affect the number of visits. A more thorough
application will take these and other factors into account in the
statistical model.
• To apply the travel cost method, information must be collected about:
• number of visits from each origin zone (usually defined by zipcode)
• demographic information about people from each zone
• round-trip mileage from each zone
• travel costs per mile
• the value of time spent traveling, or the opportunity cost of travel time
• The most controversial aspects of the travel cost method include
accounting for the opportunity cost of travel time, how to handle
multi-purpose and multi-destination trips, and the fact that travel time
might not be a cost to some people, but might be part of the
recreational experience.
Advantages of the Travel Cost Method:
• The travel cost method closely mimics the more conventional
empirical techniques used by economists to estimate economic values
based on market prices.
• The method is based on actual behavior—what people actually do—
rather than stated willingness to pay—what people say they would do
in a hypothetical situation.
• The method is relatively inexpensive to apply.
• On-site surveys provide opportunities for large sample sizes, as
visitors tend to be interested in participating.
• The results are relatively easy to interpret and explain.
Issues and Limitations of the Travel Cost
Method:
• 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.
• The most simple models assume that individuals take a trip for a single purpose – to visit a
specific recreational site. Thus, if a trip has more than one purpose, the value of the site
may be overestimated. It can be difficult to apportion the travel costs among the various
purposes.
• Defining and measuring the opportunity cost of time, or the value of time spent traveling,
can be problematic. Because the time spent traveling could have been used in other ways, it
has an "opportunity cost." This should be added to the travel cost, or the value of the site
will be underestimated. However, there is no strong consensus on the appropriate measure
—the person’s wage rate, or some fraction of the wage rate—and the value chosen can
have a large effect on benefit estimates. In addition, if people enjoy the travel itself, then
travel time becomes a benefit, not a cost, and the value of the site will be overestimated.
Method:
• The availability of substitute sites will affect values. For example, if two
people travel the same distance, they are assumed to have the same value.
However, if one person has several substitutes available but travels to this
site because it is preferred, this person’s value is actually higher. Some of
the more complicated models account for the availability of substitutes.
• Those who value certain sites may choose to live nearby. If this is the case,
they will have low travel costs, but high values for the site that are not
captured by the method.
• Interviewing visitors on site can introduce sampling biases to the analysis.
• Measuring recreational quality, and relating recreational quality to
environmental quality can be difficult.
Method:
• Standard travel cost approaches provides information about current conditions, but not about
gains or losses from anticipated changes in resource conditions.
• In order to estimate the demand function, there needs to be enough difference between
distances traveled to affect travel costs and for differences in travel costs to affect the number
of trips made. Thus, it is not well suited for sites near major population centers where many
visitations may be from "origin zones" that are quite close to one another.
• The travel cost method is limited in its scope of application because it requires user
participation. It cannot be used to assign values to on-site environmental features and functions
that users of the site do not find valuable. It cannot be used to value off-site values supported
by the site. Most importantly, it cannot be used to measure nonuse values. Thus, sites that have
unique qualities that are valued by non-users will be undervalued.
• As in all statistical methods, certain statistical problems can affect the results. These include
choice of the functional form used to estimate the demand curve, choice of the estimating
method, and choice of variables included in the model.
Damage Cost Avoided, Replacement Cost,
and Substitute Cost Methods
• The damage cost avoided, replacement cost, and substitute cost methods are
related methods that estimate values of environmental services based on either the
costs of avoiding damages due to lost services, the cost of replacing ecosystem
services, or the cost of providing substitute services. These methods do not
provide strict measures of economic values, which are based on peoples’
willingness to pay for a product or service. Instead, they assume that the costs of
avoiding damages or replacing ecosystems or their services provide useful
estimates of the value of these goods or services. This is based on the assumption
that, if people incur costs to avoid damages caused by lost ecosystem services, or
to replace the services of ecosystems, then those services must be worth at least
what people paid to replace them. Thus, the methods are most appropriately
applied in cases where damage avoidance or replacement expenditures have
actually been, or will actually be, made.
• Some examples of cases where these methods might be applied
include:
• Valuing improved water quality by measuring the cost of controlling effluent
emissions.
• Valuing erosion protection services of a forest or wetland by measuring the
cost of removing eroded sediment from downstream areas.
• Valuing the water purification services of a wetland by measuring the cost of
filtering and chemically treating water.
• Valuing storm protection services of coastal wetlands by measuring the cost of
building retaining walls.
• Valuing fish habitat and nursery services by measuring the cost of fish
breeding and stocking programs.
• Hypothetical Situation
An agency is considering restoring some degraded wetlands in order
to improve their ability to protect the surrounding area from flooding.
The agency wants to value the benefits of improved flood protection.
• Why Use the Cost-Based Methods?
This method was selected in this case because the agency is only
interested in valuing the flood protection services of the wetlands, and
they do not have a large budget available for a valuation study. A cost-
based method may be the easiest and least costly method to apply in
this case.
Application of the Cost-Based Methods
• Step 1:
The first step is to conduct an ecological assessment of the flood protection
services provided by the wetlands. This assessment would determine the
current level of flood protection, and the expected level of protection if the
wetlands are fully restored.
• Step 2:
This step depends on the specific method chosen. The Damage Cost
Avoided method might be applied using two different approaches. One
approach is to use the information on flood protection obtained in the first
step to estimate potential damages to property if flooding were to occur. In
this case, the researcher would estimate, in dollars, the probable damages to
property if the wetlands are not restored.
• A second approach would be to determine whether nearby property
owners have spent money to protect their property from the possibility
of flood damage, for example by purchasing additional insurance or by
reinforcing their basements. These avoidance expenditures would be
summed over all affected properties to provide an estimate of the
benefits from increased flood protection. However, one would not
expect the two approaches to produce the same estimate. One might
expect that, if avoidance costs are expected to be less than the possible
damages, people would pay to avoid those damages.
• The replacement cost method is applied by estimating the costs of
replacing the affected ecosystem services. In this case, flood
protection services cannot be directly replaced, so this method would
not be useful. The substitute cost method is applied by estimating the
costs of providing a substitute for the affected services. For example,
in this case a retaining wall or a levee might be built to protect nearby
properties from flooding. The researcher would thus estimate the cost
of building and maintaining such a wall or levee. The researcher must
also determine whether people would be willing to accept the wall or
levee in place of a restored wetland.
• How Can the Results be Used?
The dollar values of the property damages avoided, or of providing
substitute flood protection services provide an estimate of the flood
protection benefits of restoring the wetlands, and can be compared to
the restoration costs to determine whether it is worthwhile to restore
the flood protection services of the wetlands.
Case Study Example of the Replacement
Cost Method
• Case #1— Soil Erosion in Korea
• The Situation
As relatively flat farmland in Korea is lost to urban growth and industrial
development, farming has moved into the hilly upland areas. Heavy soil
erosion has occurred on these upland areas, due to inadequate soil
management techniques and errors in field layout and construction.
• The Challenge
Resource managers needed to evaluate the benefits of proposed new soil
management techniques. These benefits include the benefits of retaining
the soil and nutrients on the upland areas, and the benefits of protecting
downslope areas from damage by the eroded soil.
Case Study
• The Analysis
The replacement cost method was used, with the costs of physically recovering and replacing lost soil,
nutrients, and water taken as a measure of minimum benefits from preventing erosion and the
resulting soil, nutrient and water losses. Researchers measured the cost of physically replacing lost
soil, nutrients, and water in upland areas, and the cost of compensating for downstream losses.
• First, the researchers calculated the annual soil loss per hectare, nutrient loss/hectare, and water
runoff/hectare. Second, they calculated the expected losses, in terms of replacement costs, if the new
management practices were not implemented. The cost of recovering and replacing eroded soil was
estimated as W80,000 per hectare per year; the cost of fertilizer and spreading to replace lost nutrients
was estimated as W31,200 per hectare per year; the cost of annual field maintenance and repair was
estimated as W35,000 per hectare per year; the cost of damage to downstream fields in lost production
(valued at market price) was estimated as W30,000 per hectare per year; and the cost of supplemental
irrigation to replace lost water was calculated as W92,000 per hectare per year. Thus, the total cost of
soil erosion under existing management is W268,200 per hectare per year. The net present value of
the annual replacement of soil and nutrients with existing practices, using a 15 year time horizon, was
calculated as W2,039,662.
Case Study
• Next, the researchers calculated costs with the new management
techniques. These costs included the cost of compensation payments,
soil replacement, nutrient replacement, and mulching. The net present
value of the costs of new management techniques was estimated to be
W1,076,742.
• The Results
The researchers found that the cost of new management techniques is
about half the replacement cost. Thus, the proposed preventive steps
are worth implementing
Case Study
• Case #2 — Oil Spill Damages
•
The Situation
The Zoe Colocotroni was a ship that spilled oil off the coast of Puerto Rico. The case
was taken to court to determine the monetary damages resulting from the spill’s effects
on the local ecosystem.
•
The Analysis
The trustees used the replacement cost method to estimate monetary damages. They
first calculated the number of lower trophic organisms killed by the spill, and then
added up the cost of purchasing these organisms from a scientific catalog.
Case Study
• The Results
The US Court of Appeals rejected the use of the replacement cost

method in this case, because the trustees did not plan to actually
purchase the organisms and restore them to the ocean. In fact, by the
time such a plan could have been carried out, the organisms would
have restored themselves. Thus, the Court determined that the costs of
purchasing the organisms did not accurately measure the actual
ecosystem damages.
Summary of the Damage Cost Avoided and
Replacement Cost Methods
• The damage cost avoided, replacement cost, and substitute cost methods are
related methods that estimate values of ecosystem services based on either
the costs of avoiding damages due to lost services, the cost of replacing
environmental assets, or the cost of providing substitute services.
• The damage cost avoided method uses either the value of property
protected, or the cost of actions taken to avoid damages, as a measure of the
benefits provided by an ecosystem. For example, if a wetland protects
adjacent property from flooding, the flood protection benefits may be
estimated by the damages avoided if the flooding does not occur or by the
expenditures property owners make to protect their property from flooding.
Summary of the Damage Cost Avoided and
Replacement Cost Methods
• The replacement cost method uses the cost of replacing an ecosystem or its services as an estimate of the
value of the ecosystem or its services. Similarly, the substitute cost method uses the cost of providing
substitutes for an ecosystem or its services as an estimate of the value of the ecosystem or its services.
For example, the flood protection services of a wetland might be replaced by a retaining wall or levee.
• Because these methods are based on using costs to estimate benefits, it is important to note that they do
not provide a technically correct measure of economic value, which is properly measured by the
maximum amount of money or other goods that a person is willing to give up to have a particular good,
less the actual cost of the good. Instead, they assume that the costs of avoiding damages or replacing
natural assets or their services provide useful estimates of the value of these assets or services. This is
based on the assumption that, if people incur costs to avoid damages caused by lost ecosystem services,
or to replace the services of ecosystems, then those services must be worth at least what people paid to
replace them. This assumption may or may not be true. However, in some cases it may be reasonable to
make such assumptions, and measures of damage cost avoided or replacement cost are generally much
easier to estimate than people’s willingness to pay for certain ecosystem services. The methods are most
appropriately applied in cases where damage avoidance or replacement expenditures have actually been,
or will actually be, made.
Advantages of the Damage Cost Avoided,
Replacement Cost, and Substitute Cost Methods
• The methods may provide a rough indicator of economic value, subject to
data constraints and the degree of similarity or substitutability between
related goods.
• It is easier to measure the costs of producing benefits than the benefits
themselves, when goods, services, and benefits are non-marketed. Thus,
these approaches are less data- and resource-intensive.
• Data or resource limitations may rule out valuation methods that estimate
willingness to pay.
• The methods provide surrogate measures of value that are as consistent as
possible with the economic concept of use value, for services which may
be difficult to value by other means.
Issues and Limitations
• These approaches assume that expenditures to repair damages or to replace
ecosystem services are valid measures of the benefits provided. However, costs
are usually not an accurate measure of benefits.
• These methods do not consider social preferences for ecosystem services, or
individuals’ behavior in the absence of those services. Thus, they should be
used as a last resort to value ecosystem services.
• The methods may be inconsistent because few environmental actions and
regulations are based solely on benefit-cost comparisons, particularly at the
national level. Therefore, the cost of a protective action may actually exceed the
benefits to society. It is also likely that the cost of actions already taken to
protect an ecological resource will underestimate the benefits of a new action to
improve or protect the resource.
Issues and Limitations
• The replacement cost method requires information on the degree of substitution between the market
good and the natural resource. Few environmental resources have such direct or indirect substitutes.
Substitute goods are unlikely to provide the same types of benefits as the natural resource, e.g.,
stocked salmon may not be valued as highly by anglers as wild salmon.
• The goods or services being replaced probably represent only a portion of the full range of services
provided by the natural resource. Thus, the benefits of an action to protect or restore the ecological
resource would be understated.
• These approaches should be used only after a project has been implemented or if society has
demonstrated their willingness-to-pay for the project in some other way (e.g., approved spending for
the project). Otherwise there is no indication that the value of the good or service provided by the
ecological resource to the affected community greater than the estimated cost of the project.
• Just because an ecosystem service is eliminated is no guarantee that the public would be willing to
pay for the identified least cost alternative merely because it would supply the same benefit level as
that service. Without evidence that the public would demand the alternative, this methodology is not
an economically appropriate estimator of ecosystem service value.
Hedonic Pricing Method
• The hedonic pricing method is used to estimate economic values for
ecosystem or environmental services that directly affect market
prices. It is most commonly applied to variations in housing prices
that reflect the value of local environmental attributes.
• It can be used to estimate economic benefits or costs associated with:
• environmental quality, including air pollution, water pollution, or noise
• environmental amenities, such as aesthetic views or proximity to recreational
sites
• The basic premise of the hedonic pricing method is that the price of a
marketed good is related to its characteristics, or the services it provides.
For example, the price of a car reflects the characteristics of that car—
transportation, comfort, style, luxury, fuel economy, etc. Therefore, we can
value the individual characteristics of a car or other good by looking at how
the price people are willing to pay for it changes when the characteristics
change. The hedonic pricing method is most often used to value
environmental amenities that affect the price of residential properties.
• This section continues with an example application of the hedonic pricing
method, followed by a more complete technical description of the method
and its advantages and limitations.
Agency staff want to measure the benefits of an open space preservation program in a
region where open land is rapidly being developed.
• Why Use the Hedonic Pricing Method?
The hedonic pricing method was selected in this case because:
• Housing prices in the area appear to be related to proximity to open space.
• Data on real estate transactions and open space parcels are readily available, thus making this the
least expensive and least complicated approach.
• Alternative Approaches:
If the open space of concern is used mainly for recreation, the travel cost method might be
used. Alternatively, survey-based methods, like contingent valuation or contingent choice,
might be used. However, these methods would generally be more difficult and expensive
to apply.
Application of the Hedonic Pricing
Method:
• Step 1:
• The first step is to collect data on residential property sales in the region
for a specific time period (usually one year). The required data include:
• selling prices and locations of residential properties
• property characteristics that affect selling prices, such as lot size, number and
size of rooms, and number of bathrooms
• neighborhood characteristics that affect selling prices, such as property taxes,
crime rates, and quality of schools
• accessibility characteristics that affect prices, such as distances to work and
shopping centers, and availability of public transportation
• environmental characteristics that affect prices
Method:
• In this case, the environmental characteristic of concern is the
proximity to open space. The researcher might collect data on the
amount and type of open space within a given radius of each property,
and might also note whether a property is directly adjacent to open
space. Often, this type of data may be obtained from computer-
based GIS (geographical information systems) maps. Data on
housing prices and characteristics are available from municipal
offices, multiple listing services, and other sources.
Method:
• Step 2:
Once the data are collected and compiled, the next step is to statistically estimate
a function that relates property values to the property characteristics, including
the distance to open space. The resulting function measures the portion of the
property price that is attributable to each characteristic. Thus, the researcher can
estimate the value of preserving open space by looking at how the value of the
average home changes when the amount of open space nearby changes.
The results can be used to evaluate agency investments in open space
preservation. For example, specific parcels may be under consideration for
protection. The hedonic value function can be used to determine the benefits of
preserving each parcel, which can then be compared to the cost.
Case Study Example of the Hedonic Pricing Method—Values
of Environmental Amenities in Southold, Long Island
• The Situation
The town of Southold, Long Island, New York has coastlines on both the
Peconic Bay and Long Island Sound. Compared to the rest of Long Island,
it is a relatively rural area, with a large amount of farmland. However,
population and housing density are rapidly increasing in the town, resulting
in development pressures on farmland and other types of open space.
• The Challenge
The Peconic Estuary Program is considering various management actions
for the Estuary and surrounding land areas. In order to assess some of the
values that may result from these management actions, a hedonic valuation
study was conducted, using 1996 housing transactions.
Case Study Example
• The Analysis
The study found that the following variables that are relevant for local
environmental management were had significant effects on property values in
Southold:
• Open Space: Properties adjacent to open space had, on average, 12.8% higher per-acre
value than similar properties located elsewhere.
• Farmland: Properties located adjacent to farmland had, on average, 13.3% lower per-acre
value. Property values increased very slightly with greater distance from farmland.
• Major Roads: Properties located within 20 meters of a major road had, on average, 16.2%
lower per-acre value.
• Zoning: Properties located within an area with two- or three-acre zoning had, on average,
16.7% higher per-acre value.
• Wetlands: For every percentage point increase in the percent of a parcel classified as a
wetland, the average per-acre value increased by .3%.
Case Study Example
• The Results
Based on the results of this study, managers could, for example,
calculate the value of preserving a parcel of open space, by calculating
the effects on property values adjacent to the parcel. For a
hypothetical simple case, the value of preserving a 10 acre parcel of
open space, surrounded by 15 “average” properties, was calculated as
$410,907.
Summary of the Hedonic Pricing Method:
• The hedonic pricing method is used to estimate the value of
environmental amenities that affect prices of marketed goods. Most
applications use residential housing prices to estimate the value of
environmental amenities. The method is based on the assumption that
people value the characteristics of a good, or the services it provides,
rather than the good itself. Thus, prices will reflect the value of a set
of characteristics, including environmental characteristics, that people
consider important when purchasing the good.
Summary of the Hedonic Pricing Method:
• The hedonic pricing method may be used to estimate economic
benefits or costs associated with:
• environmental quality, including air pollution, water pollution, or noise
• environmental amenities, such as aesthetic views or proximity to recreational
sites
• The hedonic pricing method is relatively straightforward and
uncontroversial to apply, because it is based on actual market prices
and fairly easily measured data. If data are readily available, it can be
relatively inexpensive to apply. If data must be gathered and
compiled, the cost of an application can increase substantially.
Advantages of the Hedonic Pricing
Method:
• The method’s main strength is that it can be used to estimate values
based on actual choices.
• Property markets are relatively efficient in responding to information, so
can be good indications of value.
• Property records are typically very reliable.
• Data on property sales and characteristics are readily available through
many sources, and can be related to other secondary data sources to
obtain descriptive variables for the analysis.
• The method is versatile, and can be adapted to consider several possible
interactions between market goods and environmental quality.
Issues and Limitations:
• The scope of environmental benefits that can be measured is limited to things that are related to
housing prices.
• The method will only capture people’s willingness to pay for perceived differences in environmental
attributes, and their direct consequences. Thus, if people aren’t aware of the linkages between the
environmental attribute and benefits to them or their property, the value will not be reflected in home
prices.
• The method assumes that people have the opportunity to select the combination of features they
prefer, given their income. However, the housing market may be affected by outside influences, like
taxes, interest rates, or other factors.
• The method is relatively complex to implement and interpret, requiring a high degree of statistical
expertise.
• The results depend heavily on model specification.
• Large amounts of data must be gathered and manipulated.
• The time and expense to carry out an application depends on the availability and accessibility of data.
Meta-analysis
• Meta-analysis, sometimes called the “analysis of analyses,” takes
empirical estimates from a sample of studies, statistically relates them
to the characteristics of the studies, and calculates the degree to which
the reported differences can be attributed to differences in location,
subject matter, or methodology. For example, meta-analysis has been
used with cross sections of contingent valuation studies as a basis for
isolating and quantifying the determinants of nonuse value. Once these
determinants have been isolated and related to specific policy
contexts, it may be possible to transfer estimates from one context to
another by finding the value consistent with the new context without
incurring the time and expense of conducting new surveys each time.
Value of Statistical Life (VSL)
• Value of Statistical Life (VSL) represents an individual’s willingness
to pay for small changes in mortality risks. It does not represent a
willingness to pay to prevent certain death. It is measured as the
“marginal rate of substitution between mortality risk and money (i.e.,
other goods and services)
Value of Statistical Life (VSL)
• Suppose, for example, that a particular environmental policy could be expected
to reduce the average concentration of a toxic substance to which 1 million
people are exposed. Suppose further that this reduction in exposure could be
expected to reduce the risk of death from 1 out of 100,000 to 1 out of 150,000.
This implies that the number of expected deaths would fall from 10 to 6.67 in
the exposed population as a result of this policy. If each of the 1 million persons
exposed is willing to pay $5 for this risk reduction (for a total of $5 million),
then the implied value of a statistical life is approximately $1.5 million ($5
million divided by 3.33). Alternatively, the VSL can be calculated using the
change in WTP divided by the change in risk. For this example, that would be $5
divided by the change in risk of death (1/100,000 – 1/150,000), or $1.5 million.
Thus, the VSL is capturing the rate of trade-off between money and a very small
risk of death.
Thank You

Environmental Valuation

Uploaded by

Copyright:

Available Formats

You might also like

Environmental Valuation

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Environmental Valuation

Uploaded by

Copyright:

Available Formats

Environmental Valuation

• Off the coast of Alaska on March 24, 1989, spilling approximately 11

• Economists have decomposed the total

WTP= Use Value + Option Value + Non-use Value

• The market price method estimates the economic value of

• Why Use the Contingent Valuation Method?

Entry Fee Total Visits

The US Court of Appeals rejected the use of the replacement cost

You might also like