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REM 621 TOPIC 7: REVEALED PREFERENCE VALUATION TECHNIQUES

REM 621 TOPIC 7: REVEALED PREFERENCE VALUATION TECHNIQUES. Revealed Preference: Hedonic Pricing Method (HPM). Derives values from the influence of environmental quality on market prices, especially property values

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REM 621 TOPIC 7: REVEALED PREFERENCE VALUATION TECHNIQUES

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  1. REM 621TOPIC 7: REVEALED PREFERENCE VALUATION TECHNIQUES

  2. Revealed Preference: Hedonic Pricing Method (HPM) • Derives values from the influence of environmental quality on market prices, especially property values • Cross-sectional data on house prices and data on factors liable to influence these prices, including environmental quality (noise, air pollution, etc.) are needed • Multiple regression uses these factors to 'explain' the prices, and a measure of the impact of environmental quality can be derived.

  3. Applying the Hedonic Pricing Method An HPM model looks as follows (PP is property price): PP = f (property variables, neighbourhood variables, accessibility variables, environmental variables) and might be specified as: lnPP = alnPROP + blnNHOOD +clnACCESS + dlnENV • a rough measure of value uses the derivative dPP/dENV • demand curve can be estimated from this & other data

  4. Revealed Preference: Travel Cost Method (TCM) • Measures how much individuals are willing to pay to visit a site, given income, distance and competing sites • Adjusting for income differences and competing sites, the relationship between distance (and therefore costs) and number of visits is estimated per visitor (V): V = f (travel cost, income, substitutes, demographics) • Site visit price is increased arbitrarily (from zero) and visits per individual are recalculated and aggregated • This provides a demand curve for visits to the site

  5. Applying the Travel Cost Method (TCM) Some of the problems associated with the TCM include: • treatment of time (does it have a cost? what is it?) • multi-site trips (how to allocate trip costs?) • use of estimated rather than real costs (accurate?) • treatment of discretionary costs (e.g. lodging) • allocating durables' costs on per trip basis • endogenous distance effects (residence selection?)

  6. Production Function Approaches to Valuation • Production functions model the contribution of various inputs to outputs in a production process • Environment may be one of these inputs, as in: Q (output) = f(K (capital), L (labour), E (environment) • Production function techniques allow the analyst to isolate and value the contribution to output from the environment • For example, a coastal mangrove area may support commercial fish reproduction

  7. The Comb Jelly “Mnemiopsis leidyi”

  8. Black Sea Anchovy-Mnemiopsis Model

  9. Producers Surplus in the Black Sea Anchovy Fishery for the Pre-Mnemiopsis and Mnemiopsis Periods (US $’000, 1990 prices) Source: Knowler and Barbier 2000

  10. Ecosystem Goods & Services from Tropical Forests Source: adapted from Barbier (1991), Panayotou and Ashton (1992), Myers (1992) and Pearce and Warford (1993)

  11. (Glover and Jessup 1999)

  12. Fire related damage Loss to Indonesia Loss to other countries Total Timber 493.7 -- 493.7 Agriculture 470.4 -- 470.4 Other Direct Uses 705.0 -- 705.0 Indirect use values 1,077.1 -- 1,077.1 Biodiversity 30.0 -- 30.0 Fire-fighting 25.1 13.4 25.1 Carbon release -- 272.1 272.1 Sub-total 2,787.9 285.5 3,073.4 Fire related damages (1997 $US Millions)

  13. Haze related damage Loss to Indonesia Loss to other countries Total Short-term health 924.0 16.8 940.8 Tourism 70.4 185.8 256.2 Other 17.6 181.5 199.1 Sub-total 1,012.0 384.1 1,396.1 Total damage 3,799.9 669.6 4,469.5 Percent of total 85% 15% 100% Haze related damages (1997 $US Millions)

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