Chapter 3
Valuing the
Environment:
Methods
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Why give a monetary value?
WHY VALUE THE
ENVIRONMENT?
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Exxon Valdez…
• oil tanker spilled 11 million gallons of crude
oil in March 1989. Litigation on
environmental damages settled with Exxon
agreeing to pay $900 million over 10 years.
2004, US court awarded punitive damages in
the amount of $4.5 billion.
• How?
• Cost of clean up + compensation for the
damage caused to the local ecology
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Valuing benefits and costs
• Valuation techniques

Damages inflicted to the environment

Services provided by the environment
• Assessing the magnitude of the damage in
monetary terms

Identifying the affected categories

Estimating the physical relationship between the
source of damage and the harm caused to
affected categories

Estimating responses by affected parties

Placing a monetary value on the physical damage
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Benefit valuation
• Types of Values

Use Value
• the willingness to pay for direct use of the
environmental resource

Option Value
• the willingness to pay for the future ability to use the
environment

Nonuse Value
• individuals’ willingness to pay to preserve a
resource that he or she will never use; intrinsic
value of a resource independent of its use
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Total willingness to pay (TWP)
TWP = Use Value + Option Value +
Nonuse Value
TOTAL ECONOMIC VALUE
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Valuing Benefits
• Classifying Valuation Methods

Revealed preference methods
• Methods which are based on actual observable
choices and from which actual resource values can
be directly inferred

Direct stated preference methods
• Methods to elicit respondents’ TWP when the value
is not directly observable
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Valuing Benefits
• Classifying Valuation Techniques

Contingent Valuation Method

Travel Cost Models

Hedonic Property Value and Hedonic Wage
Approaches

Contingent Ranking and Conjoint Analysis
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Economic Methods for Measuring
Environmental and Resource Values
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Valuing benefits and costs
• Direct observation methods


Methods based on actual observable choices and
from which the actual resource values can be
inferred
When the value is not directly observable – use
contingent valuation method
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• Contingent valuation method


It is to elicit people’s willingness-to-pay (WTP) in a
hypothetical market
Major concerns include:
• strategic bias – respondent gives a particular answer
to influence a particular outcome
• information bias – respondent is forced to value
attributes with which s/he has little experience
• starting-point bias – the range of possibilities has an
impact on the results
• hypothetical bias – contrived rather than actual set of
choices
• and discrepancy between WTP and willingness-toaccept (WTA)
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
Contingent valuation method
• Other issues:



Estimates are too large when using this method ?
Problems for respondents to understand the technique
Accuracy of responses and what they reflect
• A NOAA panel (1993) legitimized the use of
contingent valuation.
• Meta-analysis utilizes a cross section of contingent
valuation studies for determining non-use values and
could eliminate the biases.
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Valuing benefits and costs – indirect
hypothetical methods
• Attribute-based methods

Survey based technique

Respondents choose between states of the world
• Contingent ranking

Survey based

Respondents are asked to rank order hypothetical
situations that differ in terms of the environmental
amenity available
• Methods for valuing human life…
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A Sample Conjoint Analysis Survey
Questionnaire
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Let’s try something. Let’s try to value a
market good. Take out a paper.
We would like to ask you a few questions
concerning your WTP for various goods and
services. Please answer all questions
honestly, keeping mind your household
budget when choosing a response. Thank
you for your participation.
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Question 1
• The UOB student-run coffee house is
considering setting up a gourmet coffee in
Khoury. Coffee would be sold from 7 am until
noon. What would you be willing for an 8 oz
gourmet cup of coffee from this student
group?
• $____ or LL ____
If you wrote 0, please state why
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Question 2
• Starbucks is considering setting up a
gourmet coffee in Khoury. Coffee would be
sold from 7 am until noon. What would you
be willing for an 8 oz gourmet cup of coffee
from Starbucks?
• $____ or LL ____
If you wrote 0, please state why
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Question 3
• There are less than 50 hyenas left in
Lebanon. Habitat necessary for the hyena is
rapidly being bought for development. The
Nature Conservancy is considering buying
land in an effort to save this species. What
would you be willing to pay in the form of an
annual donation to buy enough habitat to
save 50 hyenas?
• $___ or LL ___
If you wrote 0, please state why
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Question 4
• There are less than 20 hyenas left in
Lebanon. Habitat necessary for the hyena is
rapidly being bought for development. The
Nature Conservancy is considering buying
land in an effort to save this species. What
would you be willing to pay in the form of an
annual donation to buy enough habitat to
save 50 hyenas?
• $___ or LL ___
If you wrote 0, please state why
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Start here
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Economic Valuation of Nature: Context

Hence,
• “The issue of valuation is inseparable from
the choices and decisions we have to make
about ecological systems”

(Costanza et al 1997)
24
Economic Valuation of Nature: What is it?
An attempt to measure people’s
preferences for human actions likely
to affect natural systems.
25
Economic Valuation of Nature:
What is it?
An attempt

Imperfect

New and evolving techniques
26
Economic Valuation of Nature:
What is it?
An attempt to measure



Quantitative
Uses money as the measuring rod, for
comparability with other values
Willingness to pay (WTP) or to accept
payment (WTA)
27
Economic Valuation of Nature:
What is it?
An attempt to measure people’s
preferences


People make decisions and take action
Social scientists measure what people
already feel
28
Economic Valuation of Nature:
What is it?
• An attempt to measure people’s
preferences for human actions likely to
affect natural systems

Development, management, preservation
and protection are all actions

Natural systems often require collective
management
29
What are we Valuing?
• Use Values

Fishing, hunting, recreation

subsistence

ecosystem services (life support)
• Non-use Values

Called existence, passive use, intrinsic

Includes aesthetics, cultural heritage
30
Using Market Prices: Example
Replacement Cost of Worldwide
Ecosystem Services
• Divide entire world into 16 ecosystem types
• Look at 17 ecosystem functions
• What does it cost to replicate these
functions?

Source: Costanza et al 1997
31
Example: Using Market Prices
Value of Worldwide Ecosystem Services
• Nutrient Cycling $17 trillion / yr
• Waste treatment $2.3 trillion / yr
• Water regulation & supply $2.9 trillion / yr
• Gas regulation $1.3 trillion / yr
• Recreation $0.8 trillion /yr
• Cultural benefits $3.0 trillion / yr
• TOTAL = $33 trillion /yr
• Compare to gross world product of $18 trillion / yr
32
Hence…
• Ecosystem services are often not bought
and sold in private markets
• Environmental goods and services must
often be provided through collective social
processes (politics!)
• We use Politics to translate individual
preferences into collective action
33
Valuing benefits and costs – indirect
hypothetical methods
• Attribute-based methods

Survey based technique

Respondents choose between states of the world
• Contingent ranking

Survey based

Respondents are asked to rank order hypothetical
situations that differ in terms of the environmental
amenity available
• Methods for valuing human life…
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Indirect observable methods
• Travel Cost Models infer values of recreational resources by
determining how much visitors spent getting to a site and
then using this information to estimate a demand curve for
that site.
• Hedonic property value: price of property = f(property
characteristics, neighborhood, env characteristics) => WTP
• Hedonic wage approach: isolates the component of wages
that serve to compensate workers in risky occupations for
taking on the risk  WTP
• Averting or defensive expenditures: when the damage
caused by pollution is reduced by taking defensive actions
• Contingent ranking and conjoint models are useful when
project options have multiple levels of different attributes.
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
Using Geographic Information Systems for
Economic Valuation
• Incorporating spatial dimensions into economic
analysis, for example, in hedonic property valuation
models (Example 3.4)

Valuing Human Life
• Controversial subject

Focusing on calculating the change in the probability of
death resulting from a reduction in some environmental
risk and then placing a value on that change (Table 3.4)
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How do you value human life?
1. Estimate what an individual contributes
in terms of production of goods and
services to society. (example?)
•
Problems in this approach?
2. Consider amounts people on life insurance
and safety precautions.
•
Problems in this approach?
Hedonic Methods Approach
• Uses market price of a good to estimate the value of
an environmental attribute which is embedded in the
price of the marketed good
• Example: house (size, construction, location,
environmental and aesthetic attributes, e.g. clean
air)
• Application


property prices and air pollution/aesthetic traits and access
to water supply and rubbish collection
Job markets and risks to life
• Limitations:


requires survey, lots of data, economic theory/econometrics
Relies on existence of properly functioning land/property
and labour market
Example: Hedonics
• Idea: property values reflect a “bundle of
attributes” – safe streets, good schools, nice
neighbors, environmental quality,

Hence,
• Variations in property values can be tied to
variations in environmental quality
39
Example: Hedonics
• Land Values in Mat Su Valley
• Berman (1987) regression equation
• Value of parcels declines with distance from
Anchorage
• Value of parcels declines with number of
close neighbors
• Value of parcels increases with proximity to
public open space
40
Travel Cost Method
• Uses expenditures (transport costs and time)
to reach a site to estimate willingness to pay
• Application:

recreational areas, national parks, historic/cultural
sites

time spent collecting fuel wood and water
• Limitations:

Requires survey, skills

Measures only use value
Travel cost method – Viewing Value of
Elephants, Kenya
• Survey of tourists and expenditures at
national park
• Results:

tourists were willing to pay an extra $20-24 million
per year to ensure that they saw elephants

Information used to set park admission prices

Revenue from parks could be far greater than
revenues from ivory trade and other uses of land
Example: Observed Behavior
Value of Alaska Fish
(Based on ISER sport fishing study, 1993 data)
• Travel Cost Method (TC)

People incur a travel cost to fish

Those facing higher travel cost make fewer trips to
a given site

Use this relationship between number of trips and
(travel) cost per trip to estimate net economic
value of activity
43
Example: Observed Behavior
Value of Alaska Fish
• Example of TC Data:

Mr X. lives at the fishing site, TC=0, make 6 trips

Brother lives ten miles away, TC = 10, make 3
trips

Cousin lives 20 miles away, TC = 20, makes zero
trips
44
Example: Observed Behavior
Value of Alaska Fish
• Draw a graph:
45
Example: Observed Behavior
Value of Alaska Fish
• Assume all three people have similar
preferences
• Compute net economic value

Mr. X.: between 30 and 60

Brother: between 0 and 15

Cousin: zero

TOTAL: between 30 and 75
46
Example: Observed Behavior
Value of Alaska Big Game
• ADF&G used survey data to estimate TC
models for hunting trips
• Net values estimated by species and by
resident / nonresident status
• Total net value of hunted species in year
2000 = $23.5 million
47
Net Economic Value of Alaska Big Game
(McCollum & Miller 1994, Colt 2000)
48
Example: Ask People
Existence Value of Prince William Sound
• State of Alaska, for EVOS trial
• 1,043 completed in-person interviews using
nationwide sample
• Asked people how much they would pay to
avoid another spill
• Used the median value of $31 per household
• $31 x 90.3 million households = $2.8 billion
49
Example: Ask People
Existence Value of Prince William Sound
• Construct Scenario

There will be another spill in 10 years…
• Include possible action

Unless we implement the following plan…
• Ask “Take-it-or-leave-it” questions

Would you pay $15 in higher taxes to implement
the plan
50
Example: Ask People
Existence Value of Prince William Sound
• Use different amounts ($5-$250) to elicit
range of willingness to pay
• Importance of the proposed payment vehicle

EVOS study used general tax after considering
gasoline tax, higher gasoline prices

Used lump sum one-time payment
51
Problems with Contingent Valuation
• Hypothetical market, not actual transaction

CV estimates understate TC for same goods
• Information effects
• Scope effects – Does WTP increase
“correctly” with scope of proposed action?

Recent research suggests scope does matter as
it should
52
Contingent Valuation in Practice
• Tentatively endorsed by NOAA Panel
• Quality depends on execution

In-person interviews

Discrete choice question

Clear description of scenario
• Used by “most federal” and “many state”
agencies (Carson 1999)
• Dominant methodology today
53
Economic Valuation:
Should we Do it?
• Problems:

Whose values count? (WTP always depends on
income)

Reducing complex choices to one dimension ($)
• A Trojan Horse? (Weeden 1987)
“Economic valuation is an arcane art, full of mysterious hocus-pocus that
ordinary mortals finally have to leave to economists. In any
competition for favorable land allocations or other resource decisions,
our economic studies will lead to studies by adversaries, data set A will
be tested against data sets B and C, claims will lead to counterclaims.
Meanwhile, biologists will be pushed farther into the deep
background…we now complain of the tyranny of law: we will have
invited the tyranny of dollars. (1987)
Cash as the “great homogenizer”
54
Economic Valuation: Must we Do it?
• – we do it everyday, implicitly
• – we know how to do it – maybe
• – The alternative to conscious valuation is a
zero valuation
• – valuation is one, useful, tool

“We can find ways to use the sharp-edged
techniques of economic valuation without cutting
our jugulars” (Weeden 1987)
55
Choosing Valuation Techniques
• Issues in Benefit Estimation

Primary Versus Secondary Effects
• Considering both primary and secondary
consequences while implementing environmental
projects

Tangible Versus Intangible Benefits
• Tangible benefits can reasonably be assigned a
monetary value.
• Intangible benefits cannot be assigned a monetary
value.
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Approaches to Cost Estimation
•
•
The Survey Approach

Involves asking polluters about their control costs

Finding out who actually bears the costs
The Engineering Approach

•
Using engineering information to estimate the
technologies available and the costs of
purchasing and using those technologies.
The Combined Approach

Combining both survey and engineering
approaches
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The treatment of risk
• Inaccuracy of scientific estimates

Impossibility of determining with certainty the
result of a certain policy

Need for extrapolation
• 2 major dimensions of risk

Identifying the risk

Deciding how much risk is acceptable
• Risk in CBA

Determining possible outcomes and their
possiblity of occurrence

Calculating for each policy option, the expected
present value of net benefits
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• Choosing the Discount Rate

The appropriate rate to use will depend on the
nature and expected lifetime of the project, who is
doing the financing and the level of risk (See
Example 3.5).
• A Critical Appraisal

Concerns exist on the reliability of benefit/cost
analysis.
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Cost-Effective Analysis
• A criterion for decision making other than CBA
• Example, pollution control: based on expert advice;
maximum acceptable level of pollution w/o harming
human health
• Once policy target is specified, economic analysis ->
cost consequences
• Second Equimarginal Principle (the CostEffectiveness Equimarginal Principle):

The least-cost means of achieving an environmental target
will have been achieved when the marginal costs of all
possible means of achievement are equal (See example
3.6).
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Impact Analysis
• An impact analysis attempts to quantify the
consequences of various actions.
• Impact analysis places a large amount of
relatively undigested information at the
disposal of the policy-maker.
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Summary
• Total Economic Value
• Valuation Methods

Benefit-cost Analysis
• Valuation Techniques

Cost effective Analysis

Impact Analysis
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