Session 15 Valuing Recreation/Amenity Benefits – travel costs, CVM, hedonics

1. Session 15Valuing Recreation/Amenity Benefits – travel costs, CVM, hedonics John A. Dixon johnkailua@aol.com The World Bank Institute Ashgabad, November 2005

2. Questions • What are the primary recreational/ amenity benefits associated with Caspian Sea resources? • What are the main analytical techniques used to estimate these values? Differences between “revealed preference” and “stated preference” techniques. • What are the main economic policies that can be used to regulate or manage these uses? Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

3. Selecting the appropriate valuation technique (again) Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

4. Principal Recreational/ Amenity Benefits • Direct, consumptive uses: fishing, hunting, gathering of marine organisms, oil and gas? • Direct, non-consumptive uses: swimming, sailing, viewing wildlife, transportation, others? • Indirect uses: ecosystem services, vistas and views, amenity benefits Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

5. Matching Economic Valuation Technique to Uses and Users • Direct, consumptive uses: changes in production, CVM, Travel Cost • Direct non-consumptive uses: CVM, travel cost, RUM (random utility models), hedonics, others • Indirect uses: changes in production of ecosystem services, replacement cost/ preventive expenditures, hedonics, others Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

6. Valuing Recreational Uses • Usually done by one of three means: • Observing net admission fees/ permit fees paid (a minimum estimate of WTP) • Use of Travel Cost approach that relies on “revealed preference” information on travelers time and costs of visiting a location • Use of CVM that relies on “stated preferences” to determine WTP (willingness to pay) for use of a location Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

7. “Revealed” vs “Stated” preferences • Economists tend to prefer revealed preference approaches since they rely on real data on expenditures and markets • Can be collected from the market or via use of surveys • Real dollars exchanged for various goods and services • Stated preferences (e.g. CVM), however, are sometimes the only valuation approach possible. When is this true??? Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

8. A Simple Travel Cost Example (revealed preference) – value of Lake Sevan in Armenia • Visitors to Lake Sevan in Armenia are surveyed to find their cost of travel and frequency of visits. • This information is used to estimate a demand curve for Lake Sevan recreation • Different demand curves are estimated for Armenians and foreign visitors (due to great differences in income levels) • Travel Cost does NOT capture non-use values by both Armenians and foreigners Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

9. The value of Lake Sevan can also be estimated by use of the CVM approach (stated preferences) • CVM can be used when a market is only partially developed (and sales data hard to obtain). Especially useful for non-use values. • In theory CVM can capture the MAXIMUM willingness to pay for the use of a resource • Advantage of CVM: you will always get an answer • Disadvantage of CVM: you will always get an answer!!! Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

10. Valuing Ecosystem Services: Cost-side Valuation Techniques • Include the Replacement Cost approach and the Preventive Expenditures approach (both approaches are closely linked) • Uses information on replacing a “lost” service or function, or preventing the damage from occurring • For example, the cost of replacing flood protection benefits of a wetland, or • The cost of replacing natural water filtration/ treatment benefits by mechanical/engineering approaches Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

11. Replacement-cost approach: New York City (NYC) watershed • The question was whether it was better to protect NYC’s watershed and keep water clean, or allow the watershed to be developed and clean and treat the water when it reached NYC • The economic analysis showed that it was CHEAPER (less costly) to protect the watershed by an investment of $1 billion plus in purchasing land in the watershed, than to build and operate a water-treatment plant closer to NYC Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

12. Valuing Amenity Benefits: Hedonics (revealed preferences) and CVM (stated preferences) • Amenity benefits are usually valued by either Hedonic approaches or via CVM (surveys) • Hedonic effects are commonly seen in pricing of hotel rooms, real estate, other tangible goods or services that have an amenity value component • Hedonic approaches use information on actual market transactions to estimate the WTP for these amenity values Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

13. Hedonic Valuation Approaches • Use information on observed behavior to estimate WTP (willingness to pay) for an environmental amenity (an economic ‘good’) or disamenity (an economic ‘bad’) • Requires information on transactions and differences in environmental quality • Often applied to housing, hotel rooms or other locational decisions (e.g. wages and a ‘sunshine tax’) Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

14. Example 1: Houses near the Zandvlei Wetland in Capetown, South Africa Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

15. Capetown Case (cont’d) Basic idea: Houses near the Zandvlei wetland sell for more, an “environmental premium.” How large is this premium? • The analysis was based on sales data on housing over the past 4 years; the results were then extrapolated to the entire housing stock in the area • Premium per house for water frontage was about R130,000 per house (about US$13,000) (see van Zyl/ Leiman paper Tables 2 and 3) • The results were very similar to estimates made by estate agents (expert opinion approach) for the same area – Hedonic approach value of R77 million vs Expert opinion value of R88 million Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

16. Discussion of Capetown Results • The waterfront (open space) premium was less than 10% (and in some cases was even negative due to security concerns) • The results are very site specific (and management specific) – and only capture one aspect of open space values (as embodied in property ownership) • Hedonic pricing may NOT value certain types of native vegetation (e.g. fynbos are seen as unkempt and a fire hazard even though they are a unique ecosystem) • The hedonic study ignores wider values of open spaces to recreational users and other parts of Capetown (as reflected in generally high property values in all of Capetown compared to other parts of South Africa – the San Francisco effect) Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

17. Hedonic pricing (cont’d) 2. Hotel room pricing in resorts is a market that “clears” every day. For example, in hotels on the beach in Hawaii: • Room price varies with floor (higher floors are more expensive) • Room price varies with view • ocean view • ‘garden view’… usually the parking lot, maybe the mountains! • Room price varies with season: • High season/Low season • Or, as in Costa Rica, high season and the ‘green’ season (e.g. rain!) Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

18. Hedonic pricing (cont’d) 3.Pricing of faculty flats at a university in China In this case a 6 storey building, no lift, one flat per floor, and the roof leaks. What is the monthly rental per flat? If ground floor rents for 100 units per month, what are the monthly rents for the following floors? • Floor 2 ___ • Floor 3 ___ • Floor 4 ___ • Floor 5 ___ • Floor 6 (top) ___ Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

19. Pricing of Professor’s Flats in Beijing (cont’d) Suppose that the roof is fixed and does not leak, and that an elevator/ lift is installed. How does this change the pricing structure? What is the monthly rental per flat? If ground floor rents for 100 units per month, what are the monthly rents for the following floors? • Floor 2 ___ • Floor 3 ___ • Floor 4 ___ • Floor 5 ___ • Floor 6 (top) ___ Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

20. Pricing of Professor’s Flats in Beijing (cont’d) • How could this hedonic pricing information be used to make better decisions?? • To decide whether or not the repairs and changes are justified? How? • To decide whether or not to build new buildings? How? • To design a more efficient pricing structure? How? Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities