Brian H. Hurd, PhD, Professor
Dept. of Agricultural Economics & Agricultural Business
New Mexico State University
bhurd @ nmsu.edu
http://agecon.nmsu.edu/bhurd
“Assessing Costs and Benefits of Adaptation: Methods and Data”
First Regional Training Workshop – Capacity Building Programme on the Economics of Adaptation
Bangkok, Thailand
11 Mar - 14 Mar 2013
Lec 5. Strategies for Developing
Climate Change Scenarios and
Modeling Data
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Hydrological data and modeling
Economic data and water demand estimation
Collaborate, work t0gether and other final thoughts
Hydrological Data and
Modeling
 Water management agencies/authorities may have
measured streamflows from various locations on the
river
 Naturalized streamflows (native streamflow without
reservoirs) is desirable, sometimes synthesized
datasets are available
 Various hydrologic models are available from
simplified water-balance models, such as WATBAL, to
more sophisticated variable Variable Infiltration
Capacity (VIC) Macroscale Hydrologic Models
(http://www.hydro.washington.edu/Lettenmaier/Models/VIC/index.shtml)
Economic Data and Water
Demand Estimation
 Water demand studies are conducted in many places
and regions, providing information on water prices,
costs, and demand elasticities.
 In developing countries, water demand estimates
maybe difficult to find, estimates may need to be made
based on water use estimates and available water price
information
Defining Prices, Benefits, Costs
 Willingness-to-pay is a monetary measure of the intensity
of individual preferences (needs, wants, desires)
 Market goods
 Observed equilibrium market prices represent the
willingness-to-pay at the margin of potential buyers and the
willingness-to-accept of potential sellers for a good or service.
 Non-market goods
 Benefits are based on individual values in the form of
willingness-to-pay (WTP) and their aggregation across all
affected individuals
 Costs are the value of the opportunities forgone because of
the commitment of resources to a project, or the willingnessto-pay to avoid detrimental effects (damages).
Identify Types of Water Values
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Long-run versus short-run
At-site versus at-source (in situ)
Per period (e.g., annual) versus capitalized
Use, nonuse and Total Economic Values
Units of water quantity measures
 Withdrawal – amount removed from source
 Delivery – amount delivered to place of use
 Depletion or consumptive use – amount evaporated or
transpired into the atmosphere, incorporated into crops
and products, removed from the local water
environment.
From Young, 2005, pp. 47-49, Table 2-1. Main Types of Nonmarket Water Valuation Methods, Their Characteristics, and Uses
Taxonomy of Water Valuation Methods
Valuation Method
Description of Method and Data Sources
Useful for Valuing Water as:
1. Observations of Water
Market Transactions
Observed prices from transactions for short-term leases
or permanent sales of rights to water.
Actual at-source or at-site WTP manifested by
transactions within or between agricultural,
industrial, municipal, and environmental uses.
2. Econometric Estimation of
Production and Cost
Functions
Primary or secondary data on industrial and
agricultural inputs and outputs analyzed with statistical
(usually regression) techniques.
Producers' (agricultural or industrial) at-site
valuations.
3. Econometric Estimation of
Municipal Water Demand
Functions
Primary or secondary municipal data analyzed with
statistical methods.
At-site demands for municipal sector (including
residential, commercial, and government)
deliveries.
Inductive Methods
4. Travel Cost Method (TCM) Revealed preference approach using econometric
analysis to infer the value of recreational site attributes
from the varying expenditures incurred by consumers to
travel to the site.
Valuation of recreational services and derived at
source valuations for changes in water supply.
5. Hedonic Property Value
Method (HPM)
Revealed preference approach using econometric
At-source demands for changes in water
analysis of data on real property transactions with varying quantity or quality revealed by transactors in
availability of water supply or quality.
residential or farm properties.
6. Defensive Behavior
Method
Revealed preference method using reductions in the
costs of actions taken to mitigate or avoid incurring an
external cost as a partial measure of the benefits of
policies from reducing the externality.
Valuation of reduced water pollution from
biological or chemical contaminants.
7. Damage Cost Methods
Maximum willingness to pay given as monetary value of
damages avoided.
Valuation of reduced water pollution or flood
damages.
8. Contingent Valuation
Method (CVM)
Expressed preference method using statistical
techniques for analyzing responses to survey questions
asking for monetary valuation of proposed changes in
environmental goods or services.
At-source valuations of environmental (e.g.
instream) water supplies. Also at-site valuations
of changes in residential water supplies.
From Young, 2005, pp. 47-49, Table 2-1. Main Types of Nonmarket Water Valuation Methods, Their Characteristics, and Uses
Taxonomy of Water Valuation Methods
Valuation Method
Description of Method and Data Sources
9.
Expressed preference method using statistical techniques to At-source valuations of environmental (e.g. instream)
infer WTP for goods or services from survey questions asking water supplies. Also at-site valuations of changes in
a sample of respondents to make choices among alternative residential water supplies.
proposed policies.
Choice Modeling (CM)
Useful for Valuing Water as:
10. Benefit Transfer
Benefits estimated for one or more sites or policy proposals
employed to assign benefits or value to other sites or policy
proposals.
Adaptable in principle for any case: producers' or
consumers' goods; and collective environmental
goods including nonuse values.
11. Benefit Function Transfer /
Meta-Analysis
Statistical synthesis of the results of previously reported
studies of the same phenomenon or relationship to distill
generalizations.
A potential basis for benefit transfer in all producers'
and consumers' valuation contexts. Also valuable for
assessing role of methodological assumptions in
research results.
12. Basic Residual Method
Constructed models for deriving point estimate of net
producers' income or rents attributable to water via budget or
spreadsheet analysis.
At-site or at-source estimates for offstream
intermediate goods (agriculture, industry) for singleproduct case.
13. Change in Net Rents
Constructed residual models for deriving interval estimate of
net producers' income or rents attributable to increment of
water via budget or spreadsheet analysis.
At-site or at-source estimates for offstream
intermediate goods (agriculture, industry) for multipleproduct, multiple-technology cases.
14. Mathematical
Programming
Constructed residual models for deriving net producers' rents At-site or at-source valuation of offstream
or marginal costs attributable to water via (usually) fixed price intermediate goods (agriculture, industry) for multipleoptimization models.
product, multiple-technology cases.
15. Value-added
Constructed models of net producers' income or rents
attributable to water via value-added measure from inputoutput models.
Seriously biased (overestimate) method that has
been used mainly in offstream intermediate goods
(agriculture and industry).
16. Computable General
Equilibrium (CGE) Models
Constructed models for deriving net producers' income or
rents attributable to water via price endogenous optimization
models.
Recently adapted method used mainly for off stream
intermediate goods (agriculture and industry).
17. Alternative Cost
Recently adapted method used mainly for off stream
intermediate goods (agriculture and industry).
At-site or at-source valuation of intermediate goods
offstream (agriculture, industry) and instream
(hydropower, transportation). Also for water as
private and collective consumption good by
households.
Deductive Methods
A Common Appoach for Estimating Use Values:
Residual Analysis Methods
 Value of water is imputed by accounting for the values
and payments to all other inputs and factors of
production, the residual claimant
 Maximum willingness to pay is bounded by the
amount or share of Total Revenues remaining after all
other variable and fixed factors have been paid their
fair price – either a market price or the price required
to attract that factor into production
Valuing Water as a Residual Claim on Revenues
(max WTP)
Total Revenue = $16.5 million
Total Non-water Costs and Payments = $14.1
Value of water = $16.5 - $14.1 = $2.4
Value of Water (Net Return to Water)
 With Production Function
 Y=Y(XM, XH, XK, XL, XW)

where: Y-output, M-materials, H-labor, L-land, K-capital, W-water
 If all inputs are paid according to their VMP, then the total product
value is completely allocated as:
( PY  Y )  (VM PM  X M )  (VM PH  X H )  (VM PK  X K )  (VM PL  X L )  (VM PW  X W )
 Assuming competitive input markets and optimizing producer
behavior (i.e., choose Xj such that VMPXj = Pj) then
 the ‘value of water’ is found by solving for the shadow price of water:
PW 
*
( PY  Y )  [( PM  X M )  ( PH  X H )  ( PK  X K )  ( PL  X L )]
XW
 The maximum willingness to pay for water is the RESIDUAL value
remaining after all other factors (both fixed and variable) have been
paid.
Other Deductive Approaches
 Input-Output Models
 Alternative Cost Method
 Benefit Transfer
Inductive Approaches: Empirical
and Statistical Methods
 Estimated production functions
 Market analysis – observation of water markets, trades,
leases, and water rights
 Hedonic property value method
Merci’ Beaucoup!
Grazie
Gracias Thank You
Brian H. Hurd, PhD
Department of Agricultural Economics & Agricultural Business
Gerald Thomas Hall Rm. 350
New Mexico State University
Tel :
Email:
Web:
(575) 646-2674
bhurd@nmsu.edu
http://agecon.nmsu.edu/bhurd