[ECONOMICS 177 TAKE HOME EXAM] Camille May Savillo

Economic Valuation: What is economic valuation?

Economic valuation is defined as the attempt to assign quantitative values to the goods
and services provided by environmental resources, or biological resources or biodiversity.
Economic valuation is done whether or not market prices are available. In other words, through
economic valuation, we monetize, or assign monetary values to environmental or natural goods
and services.

Economic valuation is anthropocentric, which means that the value placed on

environmental goods and services are based on the preferences held by people. Economic
valuation is done for the benefit of the whole society. It can be done ex ante or before the project,
ex post or after the project, and en media res or during the project. The economic value of a good
or service is usually measured through peoples willingness to pay for that good or service.

Economic valuation involves three major phases and these are demonstration,
appropriation, and utilization. In demonstration, the economic values are being identified. Next is
appropriation, wherein economic values are being captured through the appropriate mechanisms.
The last one is utilization, wherein the measured values are being used in decision making and in
the financing of conservation or preservation of the resource (Subade, 2008).

Rationale: Why do we value?

Economic valuation is a very important tool when it comes to assigning values to

environmental goods and services, since most of these goods and services are not being
exchanged in the market. Not having market prices does not mean that these resources do not
have value. Because of these missing markets, economic valuation can help in providing values
to goods and services which previously do not have any values assigned to them in the past.
 [ECONOMICS 177 TAKE HOME EXAM] Camille May Savillo

Economic valuation is also important in understanding and appreciating the alternative

uses of biodiversity goods and services. It can help in lessening the uncertainty that involves the
demand and supply of natural resources, especially in the future.

Economic valuation also helps in designing conservation programs for biodiversity

resources and ecosystems. It can be used to find the total economic value of a resource,
especially its non-use values.

Economic valuation aids us in decision making. It also affects policy making. Without
economic valuation, we would not know which alternative is the most efficient, or the one with
the most benefits. Without this knowledge, we may choose the wrong choices, such as the
inefficient ones.

Economic Valuation Techniques: How do we value?

Economic valuation is primarily based on the assumption that people are willing to pay
for economic goods and willing to accept compensation for economic bads. People show
this through their preferences, and it is through their preferences that value is placed on goods,
services, and other resources.

There are many techniques used in economic valuation. They are classified according to
whether prices exist in the market for that certain resource or not. These techniques can be
categorized into market-based approaches, surrogate markets, and non-market based
approaches.

Market-Based

Market-based methods rely on direct and observable interactions in the market to place
monetary values on goods and services. In the market-based approach, consumers reveal their
preferences through the choices they make in allocating scarce resources among many
alternatives. Examples of market-based methods are the change in productivity, change in
income, replacement cost, preventive expenditure, and relocation cost.
 [ECONOMICS 177 TAKE HOME EXAM] Camille May Savillo

In change in productivity and change in income, we measure the change in availability,

quality, or quantity of an output. In replacement cost, we measure the costs when individuals,
groups, or society replace an entire asset or a part of an asset. Preventive expenditure are the
costs incurred when people spend money to defend the environment, while in relocation cost, we
measure the costs from relocating an activity.

Surrogate Market

The surrogate market approach is used when there are no clearly defined markets for an
economic resource. This approach is usually used in the valuation of environmental resources.
The values of these resources are being derived from information acquired through surrogate
markets (National Oceanic and Atmospheric Administration [NOAA], 2000). Examples of
techniques used in this approach are the hedonic price method and the travel cost method.

In the hedonic price method, we attempt to evaluate resources by their impacts on market
goods. This method assumes that the price of a market good is a function of its characteristics.
This method is commonly used in placing prices n houses. For example, a house located in an
area with scenic views and clean air is given a higher price compared to a house in an area where
there is much pollution.

In the travel cost method, it is assumed that the travel cost to a certain site can be
regarded as a proxy for the value of that site. Travel costs include transportation fees, entrance
fees, and other on-site expenditures such as food and accommodations. This method is
commonly used for recreational sites.

Non-Market Based or Hypothetical Markets

The non-market based method is based on the assumption that peoples intended behavior
when presented with a hypothetical market reflects their preferences for non-market resources. In
this approach, valuation is based on intended future behavior (NOAA, 2000). Two techniques are
used in the non-market based approach. These are Contingent Valuation Method and Choice
Experiments.
 [ECONOMICS 177 TAKE HOME EXAM] Camille May Savillo

Contingent valuation method uses surveys or questionnaires to acquire information about

the preferences of people on a certain resource or good. In this method, a hypothetical market or
scenario is constructed which involves either the improvement of a resource, or its decline.
Willingness to pay (WTP) is asked for the improvement, and willingness to accept (WTA)
compensation is asked for the decline of the resource (NOAA, 2000). Through this, peoples
preferences are directly measured through WTP and WTA. Contingent valuation method can also
measure non use values.

Another technique used in non-market based approaches is the choice experiment. In this
technique, individuals are presented a list of alternatives and they are asked to choose then rate
and rank their preferred alternative among the various constructed scenarios. Each of the
scenarios presented is a function of various attributes of that certain resource, including the price
(NOAA, 2000).
Case Studies on Economic Valuation
Study 1 Study 2 Study 3 Study 4 Study 5
Title Pricing of Philippine Benefits and Costs Estimation of The Oil Spill Solid Waste Segregation
Grassland Resources of Controlling Environmental Incident in Lingayen and Recycling in Metro
Pollutant Emissions Damages from Mining Gulf: Valuation of Manila: Household
from Fossil-Fired Pollution: The Losses & Conflict Attitudes and Behavior
Power Plants Marinduque Mining Resolution Analysis
Accident

Author/s Herminia A. Elvira M. Orbeta, Ma. Eugenia C. Herminia A. Ma. Eugenia Bennagen,
Francisco, Merlyn N. Carlito M. Rufo Jr., Bennagen Francisco, Kirby A. Georgina Nepomuceno,
Rivera, Enriqueta A. and Anabeth L. Tardeo, and Dan and Ramil Covar
Perino, Levi V. Indab V.D. Antonio
Florido, Evangeline
T. Castillo, Juan B.
Ebora, Florita E.
Siapno
Site Philippines Region IV, Marinduque Lingayen Gulf Metro Manila
Philippines
Objectives Aims to estimate and To provide some Fill the gap on current To show how the oil To contribute to a better
determine what the basis for decisions information on mining spill incident could understanding of
appropriate rent regarding externalities affect the various household waste
should be for the use investments in air sectors in the marine management behavior
of the grasslands in pollution control in Partly assist in the socio-environment
the country power generation formulation of and how these To analyze the factors
sector, specifically guidelines on damage impacts may be that promote household
for fossil-fired assessment and valued waste segregation and
power plants compensation for the resource recovery
mining sector To demonstrate the
conflict resolution To provide quantitative
process involving measures of household
the acting and wastes & demonstrate
affected parties and potential economic
 the role of the benefits
intermediaries
To provide inputs to the
formulation of local
waste management
plans and programs

Importance Pricing the resource Power generation Mining pollution has The oil spill Metropolitan cities in
can reflect its true was the major historically been a damaged the coral developing countries are
value and allow the source of sulfur major source of reefs, mangrove beset with many solid
government to oxide (SOx) degradation of natural plantations, fish waste management
recover all or part of emissions and these resource systems pens, a pilot project related problems
the rent totally emissions were on sea urchin
appropriated by mainly from fossil- Mining as an economic culture, and other
current leaseholders fired power plants, activity is subject to marine resources in
particularly from major environmental the area
May encourage oil-fired power regulations but
investment in pasture plants unfortunately, current The oil spill brought
improvement information on mining about economic
externalities is losses to fishpond
insufficient to be useful operators, coastal
for policy setting fishermen, the
community, the
LGU, and national
government

Method/s Used Rent Estimation, Rapid assessment Foregone market use Cost and Returns Benefit transfer method,
Opportunity Cost method, damage values, foregone Analysis - Cost of Contingent Valuation
Method function approach, nonmarket use values Restoration and Method (WTP)
benefits transfer Rehabilitation,
method, cost foregone income,
transfer approach, replacement/ repair
Net Present Value costs, cost of illness
Results There is room for Emission controls The estimated foregone The imbalance of There is room for
 reform in the existing for particulates met income in 1996 of Php power, large legal promoting increased
pricing schemes of the emissions 50.1 million was 52% fees and the related resource recovery at the
natural resources in standard. of the total provincial transaction costs, the household level,
the country. income of Php 95.0 long litigation particularly in the area
The value of health million. process, and the of composting of
The cost of effects avoided was absence of clear-cut biodegradable wastes
degradation is much larger when The compensation policy to support the and recovery of
substantial. impact area is schedules of the four affected parties in an recyclable materials.
extended from 10 major livelihood oil spill incident
Returns from to 50 km radius. activities are higher have worked to the Middle-income
agroforestry and than the actual disadvantage of the households are willing
reforestation are the The incremental compensation received affected party. to pay garbage fees
most rewarding with cost of reducing by the households. when assured of regular
the highest net PM10 and SO2 collection services.
benefit. emissions per unit The foregone income of
of power generated Php 50.1 million was A good baseline
was lower for the more than twice of the information on waste
coal-fired than the total economic management-related
oil-fired power compensation paid by concerns is required for
plant. Marcopper which is effective waste
Php 21.6 million. management and
decision-making at the
local level.

Recommendation If rent maximization A review of existing Government policy on There is a need to Problems in waste
s is the goal of the sulfur content the nature and extent of push for the passage segregation should be
government, it standard is liability of polluters for of HB 80 or the Oil considered in designing
should pay to convert recommended. damage on natural Spill Compensation waste management
grasslands from resource systems should Law. programs.
pasture to other land The impact of the be clearly defined.
uses, without internalization of Create a body that Garbage fees should be
sacrificing the external costs by the Guidelines for the will specifically charged according to the
environment. power generation conduct of a systematic handle amount or volume of the
sector on energy natural resource damage environmental wastes collected for
For food security, it pricing and assessment for events disaster situations in disposal.
may be necessary to subsequently on the (damage to the general with the full
retain some environment is environment) should be backing of the law.
grasslands as recommended for formulated.
pastureland. future study.
References

Bennagen, M.E. (1998). Estimation of environmental damages from mining pollution: The
Marinduque island mining accident. Retrieved on March 19, 2014 from http://idl-
bnc.idrc.ca/dspace/bitstream/10625/21613/23/116325.pdf

Bennagen, M. E., Nepomuceno, G., and Covar, R. (2002). Solid Waste Segregation and
Recycling In Metro Manila: Household Attitudes and Behavior
http://ideas.repec.org/p/eep/report/rr2002062.html#biblio

Francisco, H., et al. (2000). Pricing of grassland resources in the Philippines: Rent, grassland
degradation and rehabilitation and alternative land uses. Retrieved on March 19, 2014
from http://www.nscb.gov.ph/peenra/workshop/Technical%20Papers/Session
%2011%20Polic y-Pricing%20Grslnds%20DENR.PDF

National Oceanic and Atmospheric Administration (NOAA). (2000). Environmental valuation:

Principles, techniques, and applications. Retrieved on March 18, 2014 from
http://www.csc.noaa.gov/archived/coastal/economics/envvaluation.htm

Orbeta, E., Rufo, C., and Indab, A. (2000). Benefits and costs of controlling emissions from
fossil-fired power plants: Region IV, Philippines. Retrieved on March 19, 2014 from
http://idl-bnc.idrc.ca/dspace/bitstream/10625/17673/8/116131.pdf

Subade, R. (2008). Integrated economic valuation in coral reef management: Demonstration,

appropriation and utilization of coral reef economic values for sustainability and
conservation. Retrieved on March 19, 2014 from
http://www.nova.edu/ncri/11icrs/proceedings/files/m21-05.pdf