A brief taxonomy of valuation methods

1. A brief taxonomy of valuation methods

2. Once we know benefit and cost functions… • Basics of benefit cost analysis • Discrete (yes/no) • Continuous (how much) – requires benefit and cost “functions” • Uncertainty • Dynamics

3. Calculating benefits and costs • Usually one side of equation is easily quantified (e.g. costs of retrofitting lead pipes or reduced fish harvest from marine reserves) • Often, the other side of equation is and “environmental” benefit or cost, not fully captured in a market • How measure?

4. Measuring non-market benefits or costs • Usually, this amounts to estimating a WTP (demand) curve for environmental good • Sea otters, visits to Yellowstone, caribou, biodiversity, health outcomes, unobstructed view, etc. • If the value is captured (or can be cleverly teased out) in a market, then do it • Travel Cost Method (e.g. recreational demand) • Hedonic Pricing Method (e.g. bridge views in S.F.) • Experimental Market (e.g. risk tradeoffs) • To extent that cannot capture in market, use CV • Survey method, lots of bias, carefully design, less credible • If low budget, or to develop priors, can use Benefits Transfer Approach • Important to transfer functions (not values), where possible

5. Once demand curve has been calculated… • Proceed with cost benefit analysis • Make policy recommendations • Remember the key equity implication • Winners must gain more than losers lose • Also called “Potential Compensation Criterion” • Nothing preventing advocacy of actual compensation – this does not contradict economic theory