1. Chapter Six
Valuation of Environmental Resources
• Economists generally assume that
individuals, not the government, are the best
judges of what they want
• The economic value of a particular item
measured by the most someone is willing to
give up in other goods and services
• In a market economy, money is a
universally accepted measure of economic
value
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2. Why environmental valuation and
analysis?
• market prices cannot be relied on for env’tal
resources
• to identify socially optimal decision
– optimal pollution tax rate, project appraisal
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4. Economic valuation technique
Environmental valuation is mainly based on the assumption
that:
individuals are willing to pay for environmental gains and, on
the other hand,
willing to accept compensation for some environmental losses.
The individual demonstrates preferences, which, in turn,
place values on environmental resources.
Environmental economists have developed a number of
market and non-market based techniques to value the
environment.
According to Garrod and Willis (1999), environmental
valuation methods can be broadly divided into two kinds of
methods: Revealed preference and stated preferences.
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5. Economic valuation technique..
There are 3 generally accepted approaches
1. Market Prices
• Market Price Method - Applies for products or
services that are bought and sold in commercial
markets.
• Productivity Method - for ecosystem products or
services that contribute to the production of
commercially marketed goods
• Hedonic Pricing Method - Estimates economic values
for ecosystem or environmental services that directly
affect market prices of some other good
• Travel Cost Method- Estimates ecosystems that are
used for recreation. - Assumes that the value of a site
is reflected in how much people are willing to pay to
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6. Economic valuation technique..
2. Circumstantial Evidence
– Damage Cost Avoided,
– Replacement Cost, and
– Substitute Cost Methods
Damage Cost Avoided, Replacement Cost, and Substitute Cost
Methods
– Estimate economic values based on costs of avoided damages
resulting from lost ecosystem services, costs of replacing ecosystem
services, or costs of providing substitute services
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7. Cont….
3. Surveys Expressed Willingness to Pay
• Contingent valuation method -The most widely used
method for estimating non-use value. Asks people to
directly state their willingness to pay for specific
environmental services
• Contingent choice method- Does not directly ask for
willingness to pay—this is inferred from tradeoffs
that include cost as an attribute
• Contingent experiment method- Benefit Transfer Method -
Estimates economic values by transferring existing benefit estimates
from studies already completed for another location or issue
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8. • Revealed preference methods are “observable”
because they involve actual behavior and
“indirect” because they infer a value rather than
estimate it directly.
• The two most commonly used revealed
preference techniques are the hedonic price
method and the travel cost.
• 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
sport fishing.
• How is this loss to be valued when access to the
fishery is free?
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9. One way to derive this loss is through travel
cost methods.
Travel cost methods: may infer the value of a
recreational resource (such as a sport fishery, a
park, or a wildlife preserve where visitors hunt
with a camera) by using information on how
much the visitors spent in getting to the site to
construct a demand curve for willingness to
pay for a “visitor day.”
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10. One interesting paradox that arises with the
travel-cost model is that those who live closest
to the site and may actually visit frequently,
will have low travel costs.
These users will appear to have a lower value
for that site even if their (unmeasured)
willingness to pay for the experience is very
high.
Another challenge in this model is how to
incorporate the opportunity cost of time.
Usually, this is represented by wages, but that
approach is not universally accepted.
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11. Hedonic pricing method
• The method is based on the assumption that any difference
in wage rates or property values between normal areas and
degraded areas is due to the value of the environment
• it uses differences in prices of related goods (e.g. housing
prices) to estimate willingness to pay for an environmental
good, taking into account other relevant factors that
determine the price of the related good.
• The difference in the value can be seen and technically
identified as the implicit value attached to environmental
change.
• The basic limitation of the method is that it requires large
data and greater statistical competence and it requires real
property markets, does not capture non-use values of
environmental resource
• it has very little relevance for environmental resources
located in remote areas and in developing countries where
competitive markets do not exist
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12. Stated preference method (Direct method)
• Stated preference method: is a non-market direct
method based on individuals’ responses to surveys and
questionnaires relating to hypothetical situations
Direct stated preference: case that might be used when
the value is not directly observable
Stated preference methods: use survey techniques to
elicit willingness to pay for a marginal improvement or
for avoiding a marginal loss.
Constructed markets
• Contingent valuation method (CVM)
• Choice modelling
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13. CONTINGENT VALUATION
The most direct approach, called contingent
valuation, provides a means of deriving values
that cannot be obtained in more traditional
ways.
The simplest version of this approach merely
asks respondents what value they would place
on an environmental change (such as the loss
of a wetlands or increased exposure to
pollution) or on preserving the resource in its
current state.
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14. WTP VS WTA
• People view gains and losses differently
• WTP is limited to an individual‘s income
• WTAC is unbounded
• Confirmed by empirical studies, but not uncontested
• Implies that surveys, policies need to be carefully
designed
• If an individual has the legal right, WTAC is the
appropriate concept
• It can be difficult to determine property rights (public
goods)
• Sometimes the current allocation is taken as the legal
entitlement
• Improvements = WTP and reductions = WTAC
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15. DESIGN A CV STUDY
• Define a market scenario
• Choose an elicitation method
• Design market administration
• Design sampling
• Design of experiment
• Estimate WTP-function
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16. DEFINE MARKET SCENARIO
• What is being valued? A day at the beach, a
view of the beach? Pollution of a single beach,
or all beaches?
• What is being valued is a policy intervention
or a change in pollution – these have to be
plausible and comprehensible
• What is the payment vehicle? A tax, an
entrance fee, a levy on parking – note that
people have opinions on these
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17. CHOOSE ELICITATION METHOD
• Direct question: How much are you willing to
pay?
• Bidding game: Are you willing to pay X? If yes,
X+d? If no, X-d?
• Payment card: Choose from a list of numbers,
including comparisons
• Referendum choice: Are you willing to pay X?
for different X, to many people
• (Note: we are looking for the maximum
amount)
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18. • ADMINISTRATION & SAMPLE
• Mail: No feedback or clarification possible
• Telephone: Has to be simple and short, no
graphical material
• In-person: Expensive, interviewer bias
• Are the people approached a representative
sample? And those who answered? Does the
survey itself induce a bias, for example, in
knowledge?
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19. EXPERIMENT & ESTIMATION
If one hypothesizes a relationship between
WTP and income, then the suggested values
(payment card, bidding game, referendum)
have to be independent of income
If one hypothesizes a relationship between
WTP and political colour, then one should
include a question about the interviewees
political opinions
But sample sizes need to be small, and
interviews short!
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20. VALIDITY
• Content (face) validity: Does what is measured
and
• what is supposed to be measured coincide?
• Criterion validity: Do the measured values
correspond to other measurements of the same
thing?
• Construct/convergent validity: Do the measured
values correlate to measurements of similar
things?
• Construct/theoretical validity: Do the
measurements correspond to predictions?
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21. RELIABILITY
• The more familiar people are with the good
and the scale, the more reliable the measured
values
• For public goods, referenda and taxes are
perhaps best; for (quasi-)private goods,
individual questions and entrance fee may be
better
• The payment vehicle may distort the measure
Payment cards and perhaps bidding games
give the most reliable results
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22. 22
CVM
• Exxon in fear of the large size of the
damage claims being made against it funded
a study to discredit CVM
• National Oceanic and Atmospheric
Administration (NOAA- the government
body that is responsible for issuing
regulations on the assessment of damage
from oil spill) formed a panel consisting of
distinguished economists to consider
criticisms of CVM and make
recommendations to NOAA
23. 23
CVM-
• Panel agreed that CVM is valid if the
following recommendations are taken into
account:
– Dichotomous choice format
– Minimum response rate of 70%
– In person interviewing
– WTP rather than WTA
– Sensitivity to scope is accounted for
– Respondents are reminded of their budget
constraints
24. NOAA Panel on CV
Recommendations:
1. Sample: Statistician recommend size and type to ensure significance
of results.
2. Non-responses High rate makes results unreliable.
3. Interviews Face to face are best, must test effect of interviewer.
4. Reporting Data and procedure used must be available to all.
5. Questionnaire design: Piloted + pre-tested
6. Cross-tabulations: Cross checks to assess interpretation of data
7. Elicitation procedure: WTP better than WTA, Yes/No Q’s
8. Accurate Description of issue
9. Expenditure implications
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25. 25
CVM-Overview
• It is clear that people are WTP for non-use,
or passive use, environmental benefits.
• However, these benefits are likely to be
implicitly treated as zero unless their
monetary 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 behaviour, the only option for
estimating a value is by asking them
questions.
26. 26
CVM-Overview
• However, the fact that the CVM is based on
asking people questions, as opposed to
observing their actual behaviour, is the
source of enormous controversy.
• The conceptual, empirical, and practical
problems associated with developing
monetary 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.
27. Problems in CV studies
1. Treatment of Outliers – a source of bias
• Strategic responses
• Protest answers (refusal to answer)
2. Embedding Problem
• Tendency for WTP answers to be similar across different
surveys.
• Part whole bias – some people claim this invalidates the whole
process
3. Starting Point Bias
• Structure of survey influences all responses and the order of
magnitudes in responses.
• Yes/No Q’s in ascending vs descending order influences answers
given.
4. Instrument Bias
• Proposed financing affects peoples’ answers.
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28. ..con..
The major concern with the use of the contingent
valuation method has been the potential for
survey respondents to give biased answers.
Five types of potential bias have been the focus of
a large amount of research: (1) strategic bias, (2)
information bias, (3) starting-point bias, (4)
hypothetical bias, and (5) the observed
discrepancy between willingness to pay
• (WTP) and willingness to accept (WTA).
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29. 29
CVM
• CV survey was carefully designed to
minimise CV limitations
– Use of probability sampling
– Referendum elicitation format
– In person interviews with cards photos and maps
– Accurate description of the valuation scenarios
– Checks on understanding and acceptance
– Yes/no follow up questions
– Careful pre-testing
30. Choice-experiment method (CEM):
• This is rather a group of methods where individuals are
asked to choose between different alternatives of
environment good, but where there are no direct questions
about valuation.
• In an individual CE question, individuals are faced with a
choice between two “projects” which differ in the
environmental dimension, and in addition in some other
dimensions. One advantage that CE has over CVM is the
ability to separately identify the value of individual
attributes of a good. However, the CE questionnaire needs
respondents to answer complex choices or rankings between
bundles with many attributes and levels.
• On the other hand, a weakness of CE relative to CVM is
just that it is less direct. When people have a good sense of
the value of particular environmental goods, it is best to ask
them directly about this value, instead of asking in a
circumscribed way.
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