Return to Home Page

Return to Home Page GEOG 370 May 7, 2013

Assessing the value of the negative effects of closing the trestle bridge: Method 1-”the worth” of having the bridge. Assume steel alloy is only way of having uninterrupted service. P = $191,524 is thus minimum PV of having 50 years of uninterrupted service. P = R(USPW) Pab = $191,524 = R (USPW i=0.06, n=50) = $191,524 =R(15.762) $191,524/15.762 =$12,150 = annual value of having a bridge, so monthly value of having bridge = $12,150/12 = $1013 P = $1013 (SPPW i=0.06, n=25) = $1013 (0.233) = $236 Hence, the negative effect of being without a bridge for one bridge for 1 month 25 years from now would have present value of at least $236

Assessing the value of the negative effects of closing the trestle bridge: Method 2- the “opportunity cost” of not having the bridge for 1 month 25 years from now. Assume 1000 necessary crossings per day, and about 500 unnecessary crossing per day. Without bridge the closest route requires alternative with extra driving of 30 miles/trip. Therefore, daily cost = 1000 trips x 30 mi/trip x $0.15/mi = $4500. If necessary crossings are assumed to be undertaken 20 days/month, the monthly cost would be $4500 x 20 = $90,000. P = $90,000 (SPPW i=0.06, n=25) = $90,000 (0.233) = $20,970 = negative effect Still not enough to offset the cost difference, but the inconvenience, an intangible negative impact of not having the bridge for a month, might be more than enough to shift the preference to the steel alloy bridge.

Assessing Storm risk costs Assume “100-year storm” will require trestle bridge to be replaced. Such a storm would occur with a probability of 0.01 that in any year the bridge will be destroyed. Using binomial probability tables for n = 50 and p = 0.01, we find the probability of having any number of floods during the next 50 years Probability Number of “100-year storms” 0.60 0 0.31 1 0.08 2 0.01 3 If a storm occurs during next 50 years, the additional cost incurred would be an extra $80,000 (unless storm occurs happens to occur in the year in which the bridge was schedule to be replaced, and an additional negative benefit of $90,000 for each month the region is without the bridge. Costs depend on years (time) in which the storm(s) occur(s). Estimate the PV of the additional costs by averaging its time of occurrence.

Assessing additional costs for 3 “100-year storm” For three storms Cost = $80,000 + $80,000 (SPPW i=0.06, n=13) + $80,000 (SPPW i=0.06, n=25) + $80,000 (SPPW i=0.06, n=37) + $4000(USPW i=0.06, n=50) = $80,000 + $80,000(0.4688) + $80,000(0.233) + $80,000(0.1158)+ $4000(15.762) = $80,000 + $37,504 + $18,640 + $9,264 + $63,048 = $208,488 negative effects = $90,000(SPPW i=0.06, n=13) + $90,000(SPPW i=0.06, n=25) + $90,000(SPPW i=0.06, n=37) = $90,000(0.4688) + $90,000(0.233) + $90,000(0.1158) = $42,192 + $20,970 +$10,422 = $73,584 = $208,488 + $73,584 Ptb3storm = $282,072

Table. Present value of estimated costs & negative effects Alternatives State of nature Probability Steel alloyTrestle bridgeBridge w/risk 0 storm 0.60 $191,524 $182,658 $109,595 1 storm 0.31 $191,524 $222,268 $68,903 2 storms 0.08 $191,524 $222,268 $17,781 3 storms 0.01 $191,524 $282,072 $2,821 Expected value (costs +negative effects $191,524 $199,100

Questions relating to the performance of public undertakings Are the program’s objectives appropriate? Are they desirable for a social welfare standpoint? (Addressed in policy analysis.) Is the program economically efficient? Are the intended effects worth the costs? (Addressed in cost-benefit analysis.) 3) Is the program effective? Are the objectives being achieved? (Addressed in program evaluation.) 4) Is the operation technologically efficient? Are resources being used to get the maximum result? (Addressed in cost-effectiveness analysis.) 5) Is the scope of the undertaking adequate? Are objectives and results commensurate with the need? (Addressed by program analysis and program evaluation.)

Comparison of B/C and Cost Effectiveness

Ecosystem Functions and Services Ecosystem functions are the physical, chemical, and biological processes or attributes that contribute to the self-maintenance of an ecosystem; in other words, what the ecosystem does. Some examples of ecosystem functions are provision of wildlife habitat, carbon cycling, or the trapping of nutrients. Thus, ecosystems, such as wetlands, forests, or estuaries, can be characterized by the processes, or functions, that occur within them. Ecosystem services are the beneficial outcomes, for the natural environment or people, that result from ecosystem functions. Some examples of ecosystem services are support of the food chain, harvesting of animals or plants, and the provision of clean water or scenic views. In order for an ecosystem to provide services to humans, some interaction with, or at least some appreciation by, humans is required. Thus, functions of ecosystems are value-neutral, while their services have value to society. BUT ecosystems have value regardless of human interaction! Introduction to Ecosystem Functions & Services

Difficulties with Environmental Valuation Non-Market Goods Most environmental goods, such as clean air and water, and healthy fish and wildlife populations, are not traded in markets. Their economic value - how much people would be willing to pay for them in dollars is not revealed in market prices. The only option for assigning dollar values to them is to rely on non-market valuation methods. Non-Rival Goods One person's consumption of most goods (apples or housing) reduces the amount available for everyone else. Environmental goods are different. Clean water and air, beautiful views, and to some extent outdoor recreation, can be enjoyed by everyone in the same way as radio and television. The economic value of non-rival or public goods is the sum of all people's willingness to pay. Non-exclusive Goods People cannot be excluded from enjoying most environmental goods and the cost of trying to exclude them is prohibitive. Other than increases in onsite hunting and fishing opportunities, which may be a source of economic benefit to farmers, the environmental benefits of most conservation practices are non-exclusive. The free rider problem makes it impractical for farmers to recoup the cost of on-farm conservation investments from those who benefit from off-farm environmental improvements. Inseparable Goods Conservation practices at a given site contribute in many roundabout ways to environmental goods and result in environmental and economic benefits that accrue over great distances in time and space. It may be impossible to separate the economic benefits that result from one conservation practice undertaken at one site from another undertaken at another site. Worse, it may be impossible to separate the aggregate benefits of those practices from those of other environmental investments.

Ecosystem Services Glossary Benefit-Cost analysis – a comparison of economic benefits and costs to society of a policy, program, or action. Bequest Value (option demand)– the value that people place on knowing that future generations will have the option to enjoy something. Consumer surplus –the difference between the price actually paid for a good, and the maximum amount that an individual is willing to pay for it. Thus, if a person is willing to pay up to $3 for something, but the market price is $1, then the consumer surplus for that item is $2. This measure approximates, and is bounded by, the more technically precise measures of economic benefit: compensating variation or equivalent variation. Compensating variation - the amount of money that leaves a person as well off as they were before a change. Thus, it measures the amount of money required to maintain a person’s satisfaction, or economic welfare, at the level it was at before the change.

Glossary Complementary goods– goods that are often purchased together, such as bread and butter. Demand curve – the graphical representation of the demand function. The demand function relates price and quantity demanded. It tells how many units of a good will be purchased at different prices. In general, at higher prices, less will be purchased, so demand curves slope downward. The market demand function is calculated by adding up all of the individual consumers’ demand functions. Demand function – the mathematical function that relates price and quantity demanded for goods or services. It tells how many units of a good will be purchased at different prices. The market demand function is calculated by adding together all of the individual consumers’ demand functions. Discount rate – the rate used to reduce future benefits and costs to their present time equivalent. Economic efficiency – the allocation of goods to their highest relative economic value.

Glossary Ecosystem functions – the physical, chemical, and biological processes or attributes that contribute to the self-maintenance of the ecosystem; in other words, what the ecosystem does. Some examples of ecosystem functions are wildlife habitat, carbon cycling, or trapping nutrients. Ecosystem services – the beneficial outcomes, for the natural environment, or for people, that result from ecosystem functions. Some examples of ecosystem services are support of the food chain, harvesting of animals or plants, clean water, or scenic views. In order for an ecosystem to provide services to humans, some interaction with, or at least some appreciation by, humans is required. Equivalent variation - the amount of money that leaves a person as well off as they would be after a change. Thus, it measures the amount of money required to maintain a person’s satisfaction, or economic welfare, at the level it would be at after a change. Existence value – the value that people place on simply knowing that something exists, even if they will never see it or use it. Externalities - uncompensated side effects of human actions. For example, if a stream is polluted by runoff from agricultural land, the people downstream experience a negative externality.

Glossary Fixed costs – production costs that are not related to the level of production; also referred to as overhead costs. Geographical Information System (GIS) – a computer mapping system that links databases of geographically-based information to maps that display the information. For more information, see www.esri.com. Market failure – the inability of markets to reflect the full social costs or benefits of a good, service, or state of the world. Therefore, markets will not result in the most efficient or beneficial allocation of resources. Net economic benefit – the net economic benefit is the total economic benefit received from a change in the state of a good or service, measured by the sum of consumer surplus plus producer surplus, less any costs associated with the change. Net Present value – the current value of net benefits (benefits minus costs) that occur over time. A discount rate is used to reduce future benefits and costs to their present time equivalent.

Glossary Non-use values, also referred to as “passive use” values – values that are not associated with actual use, or even the option to use a good or service. Opportunity Cost – The value of the best alternative to a given choice, or the value of resources in their next best use. In regard to time, the opportunity cost of time spent on one activity is the value of the best alternative activity that the person might engage in at that time. Option value – the value that people place on having the option to enjoy something in the future, although they may not currently use it. Producer surplus – the difference between the total amount earned from a good (price times quantity sold) and the production costs. Public goods – goods that may be enjoyed by any number of people without affecting other peoples’ enjoyment. For example, an aesthetic view is a pure public good. No matter how many people enjoy the view, others can also enjoy it.

Glossary Substitute goods – goods that you might purchase instead of a particular good. For example, different types of bread are substitutes for each other. Supply Function – the mathematical function that relates price and quantity supplied for goods or services. The supply function tells how many units of a good that producers are willing to produce and sell at a given price. Supply Curve - the graphical representation of the supply function. Because producers would like to sell more at higher prices, the supply function slopes upward. Total economic value – the sum of all types of use and non-use values for a good or service. Use value – value derived from actual use of a good or service. Uses may include indirect uses. For example, enjoying a television show about whales provides an indirect use value for the whales. Variable costs – production costs that change when the level of production changes, so that when more is produced the costs increase; as opposed tofixed costs. Willingness to Pay – the amount—measured in goods, services, or dollars—that a person is willing to give up to get a particular good or service.

Why are estimates of ecosystem benefits needed? To justify and decide how to allocate public spending on conservation, preservation, or restoration initiatives. To consider the public’s values, and encourage public participation and support for environmental initiatives. To compare the benefits of different projects or programs. To prioritize conservation or restoration projects. To maximize the environmental benefits per dollar spent. To assess tradeoffs and resource allocations even for decisions involving ESA, health and safety issues where economic considerations are secondary.

Important questions that various governmental agency staff must answer: When and how should agency staff attempt to answer ecosystem benefit questions? What criteria and methods are being used to make spending decisions, and what is the justification for these criteria and methods? Are the benefits of a project or program greater than the cost to taxpayers? Is agency spending being managed to maximize environmental benefits? How do different projects compare to each other in terms of ecosystem benefits? When should agency staff provide dollar-based estimates of ecosystem benefits? When should they answer questions about benefits only by demonstrating that they are using reasonable benefit-based project ranking criteria?

Some overview comments on Ecosystem Valuation Conventional economics –> measures of economic value based on what people want (“market economies”), individuals, not government, should be the judge Maximum amount a person is “willing to give up to get more of something else is fair measure of relative “value” of the two things to that person Measuring of values of ES in $ does not require they be bought & sold in markets – just estimates of “willingness to give up to get” Non-$ measures include ranking or prioritizing the expected benefits of environmental benefits Indicator-based valuation tools are often less expensive & require less time to apply

Some practical issues of Ecosystem Valuation Easy to spend lots of $ to assign $ values Easy for environmental program managers/decision makers to misuse results & undermine even their best programs Risky for managers to ignore demands for more fiscal accountability (government especially, but also private sector) “Best professional judgment,” “best available science” and/or “objective scientific” project ranking criteria that ignore beneficial outcomes to people are prone to being extremely unpopular (CAO???)

Basic Concepts of Economic Value Demand Curve Price Consumer Surplus Market Price Quantity (net) economic benefit is often measured by consumer surplus

Supply Curve & Producer Surplus Total net economic benefit = sum of consumer surplus + producer surplus - costs

Typology of Ecosystem Services Complications Natural resources & environment associated with market failure Ecosystem services are often public goods Overuse common if property rights are not clearly defined Ecosystem services often affected by externalities

Monetary-based ($£) Ecosystem Valuation Methods (a) Market Prices – Revealed Willingness to Pay 1) Market Price Method Estimates economic values for ecosystem products or services that are bought and sold in commercial markets. 2) Productivity Method Estimates economic values for ecosystem products or services that contribute to the production of commercially marketed goods 3) Hedonic Pricing Method Estimates economic values for ecosystem or environmental services that directly affect market prices of some other good. Most commonly applied to variations in housing prices that reflect the value of local environmental attributes. 4) Travel Cost Method Estimates economic values associated with ecosystems or sites that are used for recreation. Assumes that the value of a site is reflected in how much people are willing to pay to travel to visit the site.

Monetary-based ($£) Ecosystem Valuation Methods (b) Circumstantial Evidence – Imputed Willingness to Pay 5) 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. Surveys – Expressed Willingness to Pay 6) Contingent Valuation Method Estimates economic values for virtually any ecosystem or environmental service. The most widely used method for estimating non-use, or “passive use” values. Asks people to directly state their willingness to pay for specific environmental services, based on a hypothetical scenario. 7) Contingent Choice Method Estimates economic values for virtually any ecosystem or environmental service. Based on asking people to make tradeoffs among sets of ecosystem or environmental services or characteristics. Does not directly ask for willingness to pay—this is inferred from tradeoffs that include cost as an attribute. 8) Benefit Transfer Method Estimates economic values by transferring existing benefit estimates from studies already completed for another location or issue.

Step 1: The first step is to specify and describe the policy or action to be evaluated, including such information as its location, timing, and the people who will be affected. Step 2: The second step is to describe and quantify the effects of the policy or program that will lead to benefits and costs to society. Step 3: The third step is to estimate the social costs and benefits. Step 4: The final step is to compare benefits and costs of the proposed project. Applying Ecosystem Value Estimates – B-C Analysis:

B-C for one or several alternatives Compares both benefits & costs Bt/(1+r)t, where Bt is the benefit to be received in year t, and r is the discount rate Ct/(1+r)t, where Ct is the cost to be received in year t, and r is the discount rate n B/C = ∑ Bt/(1+r)t , where B/C = present value B/C ratio t=0 Ct/(1+r)t What is to be B-C goal? max. net PV (PVB-PVC = net PV)? Max. B/C ratio? How to choose r? How to treat “negative effect” – as positive costs or negative benefits? How to treat scale effects? B-C Analysis continued:

Both B-C and C-E use discounting C-E compares several alternatives C-E – Maximize benefits with fixed costs/resources, or C-E – Minimize cost/resources with fixed benefit C-E sometimes can better deal with common asymmetry of benefit and cost data, i.e., often (environmental/ecosystem) costs are better know than (environmental/ecosystem) benefits. B-C Analysis vs. Cost-Effectiveness:

Market Price Method: 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. The total net economic benefit, or economic surplus, is the sum of consumer surplus and producer surplus. Changes in net economic benefit can be equated with value of ecosystem services.

Example: Market Price Method (est. pollution costs) • Consumer surplus: beforeafter • ($10 - $5)/lb x 10000 lb/2 = $25000 ($10 - $7)/lb x 6000l b/2 = $9000 • Consumer surplus = $9000 - $25000 = -$16,000 (loss in benefits) Producer surplus: revenue = $1/lb x 10000 lb = $10,000 $1.5/lb x 6000 lb = $9,000 (variable) costs = $0.5/lb x 10000 lb = $5000 $0.6/lb x 6000 lb = $3,600 producer surplus = $1,0000 - $5,000 - $5,000 $9,000 - $3,600 = $5,400 • Producer surplus = $5,400 - $5,000 = $400 (gain in producer surplus) Net economic effect (est. pollution cost)- $16,000 + $400 = -$15,600 i.e., est. pollution damages = $15,600 or (min.) value of ES provided “clean water”

Productivity, Net Factor Income, or Derived Value Methods: • Application: to estimate the economic value of ecosystem products • or services that contribute to the production of • commercially marketed goods • Easiest applications: • cases where the ES in question is a perfect substitute for other inputs • cases where only producers of final good benefit from changes in quantity or quality of the ES • Data needs: • costs of production for the final good • supply and demand for the final good • supply and demand for other factors of production

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 • May used to estimate the value of environmental amenities that affect prices of marketed goods: • use residential housing prices to estimate the value of environmental amenities. • based on the assumption that people value the characteristics of a good, or the services it provides, rather than the good itself. • prices will reflect the value of a set of characteristics, including ES, that people consider important when purchasing the good. • Data needs: • cross-section and/or time-series data on property values, and household characteristics • index of ES/environmental quality • use multiple regression • Complications: • Non linear prices • Auto-correlation

Travel Cost Method (“revealed preferences”): • Alternative approaches: • 1) simple zonal travel cost approach, using mostly secondary data, with some simple data collected from visitors. • 2) individual travel cost approach, using a more detailed survey of visitors. • 3) random utility approach using survey and other data, and more • complicated statistical techniques. • Data needs: • number of visits from each origin zone (usually defined by zip code) • 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 • More complicated, and thorough, applications may also collect information about: • exact distance that each individual traveled to the site • exact travel expenses • the length of the trip • the amount of time spent at the site • other locations visited during the same trip, and amount of time spent at each • substitute sites that the person might visit instead of this site, and the travel distance to each • other reasons for the trip (is the trip only to visit the site, or for several purposes) • quality of the recreational experience at the site, and at other similar sites (e.g., fishing success) • perceptions of environmental quality at the site • characteristics of the site and other, substitute, sites

Damage Cost Avoided, Replacement Cost, and Substitute Cost Methods: • Values of ecosystem services based on: • costs of avoiding damages due to lost services • costs of replacing environmental assets, or • costs of providing substitute services • Estimates are based on costs, thus, not technically correct measure of economic value • Assumes (may or may not be correct) ES must be worth a least what people paid to replace them (salmon problem?) • Measures of damage costs or replacement costs generally much easier to estimate than people’s willingness to pay for ES

Contingent Valuation Method (CV or CVM) Estimate both “use” and “non-use values” Assign dollar values to non-use values of the environment—values that do not involve market purchases and may not involve direct participation (bequest value, existence value, option value) . These values are sometimes referred to as “passive use” values. “contingent” valuation, because people are asked to state their willingness to pay, contingent on a specific hypothetical scenario and description of the environmental service. (“stated preference” rather than inferring actual choices as in "revealed preferences”). People are willing to pay for non-use, or passive use, environmental benefits, but how much? CVM is highly controversial.

Contingent Choice Method (CCM) • CCM 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. • 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. • Useful in valuation of improvements to ecosystems, given that several service flows are often simultaneously affected. • May also be used to simply rank options, without focusing on dollar values. • Formats for applying contingent choice methods: • Contingent Ranking—Contingent ranking surveys ask individuals to compare and rank alternate program outcomes with various characteristics, including costs. • Discrete Choice—In the discrete choice approach, respondents are simultaneously shown two or more different alternatives and their characteristics, and asked to identify the most preferred alternative in the choice. • Paired Rating—variation on the discrete choice format, where respondents are asked to • compare 2 alternate situations and are asked to rate them in terms of strength of preference. • Choices that respondents make are statistically analyzed using discrete choice statistical techniques, to determine the relative values for the different characteristics or attributes. If one of the characteristics is a monetary price, then it is possible to compute the respondent’s willingness to pay for the other characteristics.

Benefit Transfer Method: Basic goal of benefit transfer is to estimate benefits for one context by adapting an estimate of benefits from some other context. More rigorous approach involves transferring a benefit function from another study. Different standards for benefit transfer may be applied in different contexts. Higher standard of accuracy may be required when the costs of making a poor decision are higher. Benefit transfer method is most reliable when the original site and the study site are very similar in terms of factors such as quality, location, and population characteristics; when the environmental change is very similar for the two sites; and when the original valuation study was carefully conducted and used sound valuation techniques.

Market Price Method • 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.

Productivity Method • Advantages of the Productivity Method • In general, the methodology is straightforward. • Data requirements are limited, and the relevant data may be readily available, so the method can be relatively inexpensive to apply. • Issues and Limitations of the Productivity Method • The method is limited to valuing those resources that can be used as inputs in production of marketed goods. • When valuing an ecosystem, not all services will be related to the production of marketed goods. Thus, the inferred value of that ecosystem may understate its true value to society. • Information is needed on the scientific relationships between actions to improve quality or quantity of the resource and the actual outcomes of those actions. In some cases, these relationships may not be well known or understood. • If the changes in the natural resource affect the market price of the final good, or the prices of any other production inputs, the method becomes much more complicated and difficult to apply.

Hedonic Pricing Methods • Advantages of theHedonic 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.

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. • 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. • 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. Travel 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. • 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. Advantages of the Damage Cost Avoided, Replacement Cost, and Substitute Cost Methods

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. • 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. • 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. Advantages of the Contingent Valuation Method:

Issues and Limitations of the Contingent 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. • 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.” • 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. • 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.

Issues and Limitations of the Contingent Valuation Method: • 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. • 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 answer 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.

Advantages of the Contingent Choice Method • The contingent choice method can be used to value the outcomes of an action as a whole, as well as the various attributes or effects of the action. • The method allows respondents to think in terms of tradeoffs, which may be easier than directly expressing dollar values. The tradeoff process may encourage respondent introspection and make it easier to check for consistency of responses. In addition, respondents may be able to give more meaningful answers to questions about their behavior (i.e. they prefer one alternative over another), than to questions that ask them directly about the dollar value of a good or service or the value of changes in environmental quality. Thus, an advantage of this method over the contingent valuation method is that it does not ask the respondent to make a tradeoff directly between environmental quality and money. • Respondents are generally more comfortable providing qualitative rankings or ratings of attribute bundles that include prices, rather than dollar valuation of the same bundles without prices, by de-emphasizing price as simply another attribute. • Survey methods may be better at estimating relative values than absolute values. Thus, even if the absolute dollar values estimated are not precise, the relative values or priorities elicited by a contingent choice survey are likely to be valid and useful for policy decisions. • The method minimizes many of the biases that can arise in open-ended contingent valuation studies where respondents are presented with the unfamiliar and often unrealistic task of putting prices on non-market amenities. • The method has the potential to reduce problems such as expressions of symbolic values, protest bids, and some of the other sources of potential bias associated with contingent valuation.

Issues and Limitations of the Contingent Choice Method • Respondents may find some tradeoffs difficult to evaluate, because they are unfamiliar. • The respondents’ behavior underlying the results of a contingent choice study is not well understood. Respondents may resort to simplified decision rules if the choices are too complicated, which can bias the results of the statistical analysis. • If the number of attributes or levels of attributes is increased, the sample size and/or number of comparisons each respondent makes must be increased. • When presented with a large number of tradeoff questions, respondents may lose interest or become frustrated. • Contingent choice may extract preferences in the form of attitudes instead of behavior intentions. • By only providing a limited number of options, it may force respondents to make choices that they would not voluntarily make. • Contingent ranking requires more sophisticated statistical techniques to estimate willingness to pay. • Translating the answers into dollar values, may lead to greater uncertainty in the actual value that is placed on the good or service of interest. • Although contingent choice has been widely used in the field of market research, its validity and reliability for valuing non-market commodities is largely untested.

Advantages of the Damage Cost Avoided and Replacement Cost Methods • Benefit transfer is typically less costly than conducting an original valuation study. • Economic benefits can be estimated more quickly than when undertaking an original valuation study. • The method can be used as a screening technique to determine if a more detailed, original valuation study should be conducted. • The method can easily and quickly be applied for making gross estimates of recreational values. The more similar the sites and the recreational experiences, the fewer biases will result. • Issues and Limitations • Benefit transfer may not be accurate, except for making gross estimates of recreational values, unless the sites share all of the site, location, and user specific characteristics. • Good studies for the policy or issue in question may not be available. • It may be difficult to track down appropriate studies, since many are not published. • Reporting of existing studies may be inadequate to make the needed adjustments. • Adequacy of existing studies may be difficult to assess. • Extrapolation beyond the range of characteristics of the initial study is not recommended. • Benefit transfers can only be as accurate as the initial value estimate. • Unit value estimates can quickly become dated.

Strengths and Weaknesses Of Absolute (Dollar-Based) Ecosystem Valuation • Strengths • Universally Accepted Measure of Economic Benefits • Easy to Interpret and to use for purposes of comparison • Suitable for use in conventional Cost-Benefit Analysis • Only measure of economic benefits acceptable to some people • Weaknesses • Non-market $$ Valuation Methods are not fully developed • Non-market $$ Valuation Methods are expensive to apply • Results of Non-market $$ Methods are controversial • Results are almost always site-specific • Results of good studies almost always apply to individual services • Results not generally accepted in courtrooms and hearing rooms • Difficult to address linkages between benefits and decisions • Difficult to use to compare environmental assets being traded • Difficult to use to prioritize environmental assets

Strengths and Weaknesses of Non-monetary Indices • Strengths • Can focus on necessary conditions to provide services • Can be based on conventional tool of the production function • Can reflect factors that determine aggregate willingness to pay • Can reflect risks of service flow disruptions • Can be site-based and take account of landscape context • Can be used as benefit-transfer method if $$ estimates exist • Can be used to compare environmental assets for trading • Can be used for prioritizing environmental investments • Similar to indicators that decision-makers use everywhere else • Practical because of GIS and Web • Can reflect relative preferences for mix of services • Weaknesses • Cannot be used in conventional benefit-cost analysis • Not very useful for justifying increases in levels of $ spending • Generally unpopular with economists, scientists, & policymakers • Requires some decisions that will appear to be arbitrary • Requires acceptance as better than $$ and better than nothing • Requires upfront investments in data collection/software

Return to Home Page