Valuation Methods
focus on conventional market approaches
Session Objectives:
• Identify key steps in
valuing the environment
• Use selected methods to
analyze environmental
issues
Agenda
• Explain major valuation methods
• Exercises
• Discussions
Concepts of Techniques
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Doze response
Human capital
Replacement cost
Prevention cost
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Travel cost
Hedonic pricing
Benefit transfer
Contingent valuation
Dose-Response Method
• Dose - cause of an environmental impact
such as pollution
• Response - resulting environmental impact
• Impact shows up in changes in quantity or
price of marketed inputs or outputs
• Measures the value of impact in terms of
changes in total surplus (consumer plus
producer surplus)
Changes in Total Surplus
P
S’
S
Consumer Surplus
Producer Surplus
D
Q
Application of D-R
Method
• Often used if causal relationships are known
(effects of pollution on health, physical
effects on materials/building, aquatic
ecosystems, vegetation, and soil erosion)
• Physical dose-response function multiplied
by a unit “price” or value per unit of
physical damage to give a “monetary
function”.
Illustration of D-R
Method
• Doze-response:1 ton of untreated water >
loss of fish catch 50 kg per fishing season
• Average market price = $5
• Total discharge of untreated water 200 tons
• Value of damage caused by untreated water:
200 x 5 = $1,000
• If the response leads to a change in existing
market price, use a predicted new price
Limitations
• A dose may lead to responses from different
input & output sectors - difficult to predict
the new price
• A response may be due to different types of
doses - difficult to isolate the effects
• The method cannot estimate non-use values
• Mostly used in estimating pollution-related
damages only.
Human Capital
Method
• A sub-set of the Dose-Response method
• Assess the health effect of an environmental
change
• Estimate the loss of working days or
statistical life for the affected population
• Estimate the total present value of forgone
income
Replacement Cost
• Estimate the cost of replacing or restoring a
damaged environmental asset to its original
state or an established standard
• A measure of the cost of damage or benefit
of restoration (WTP for restoration)?
• Applicable if there is an environmental
standard that must be met
• Efficient if the standard meets MB=MC
Prevention Cost
• Get data on an environmental change &
related preventive measures
• Observe people’s expenditures on
associated preventive measures
• Reflect the value people attach to
environmental quality, or benefits of
reduced environmental damage
• Assume prevention is technically possible
Prevention Cost: Illustration
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Environmental change: soil erosion
Associated preventive measure: plant trees
For reducing soil erosion by 1m3, plant 2 trees
Cost of planting a tree = $5
Value per 1m3 of soil erosion = $10
Observed soil erosion = 500m3
Total prevention cost: 500 x 10 = $5,000
Travel Cost
• Estimate recreational (use) value of natural
resources and their quality changes
• Value expressed in terms of the costs of
travel and time
• Costs estimated through surveys
• There are many different models
• Expensive to carry out travel cost studies
Travel Cost: Illustration I
C ity
P o p u la tio n
(P o p )
T o ta l V isits
Per year
(V )
T ra v e l C o st
P e r v isit
(T C )
V isita tio n
R a te
(V /P o p )
A
1000
450
$1
0 .4 5
B
2000
600
$2
0 .1 5
C
3000
700
$3
0 .3 5
D
4000
200
$4
0 .0 5
Travel Cost: Illustration II
• Postulate a linear relationship:
– V/Pop = a - b x TC (for each city)
• Regression analysis (Ordinary Least
Square) gives the equation:
– V/Pop = 0.5 - 0.1TC (for each city)
Travel Cost: Illustration I
C ity
T ra v e l C o st
p e r v isit
P re d ic te d
A n n u a l V isits
p e r c a p ita
P e r C a p ita
C o n su m e rs'
S u rp lu s
T o ta l
C o n su m e rs'
S u rp lu s
A
$1
0 .4 0
0 .8 0
800
B
$2
0 .3 0
0 .4 5
1800
C
$3
0 .2 0
0 .2 0
400
D
$4
0 .1 0
0 .0 5
200
Travel Cost: Illustration IV
Travel cost
per visit
5
1
4
2
3
3
2
4
1
Per capita visit
01
0.2
0.3
0.4
0.5
Hedonic Pricing
• Different prices of the same product may reflect
different environmental quality of the product
(such as a house)
• Isolate the price differences attributable only to
different environmental quality (such as air
quality) using econometric techniques
• The difference is the value of the difference in
environmental quality (benefit of improvement)
• Can be applied to different wages due to different
job-related environmental risks
Benefit Transfer
• Find previous studies that have estimated
economic benefits of a similar environmental
change
• Transfer those estimates to the site of interest with
adjustments to account for differences in social,
economic, and environmental characteristics
between the previous sites and the new site
• It is an inexpensive approach, still in its
infancy
Contingency
Valuation
• A hypothetical scenario of the specific terms under
which the good/service is to be offered
• Give the description to respondents & ask them
their WTP for environmental improvement or
WTA to avoid deterioration under the specific
terms
• Ask questions on socio-economic and
demographic characteristics for econometric
analysis
• Not easy to do!