VALUATION

Presentation by

Dr Peter Bradley

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 Valuation

NSB = Σi Σt αi [(Bit-Cit)/(1+d)t ]

TOTAL ECONOMIC VALUE (TEV)

TEV = USE VALUE + NONUSE VALUE

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 USE VALUE

DIRECT INDIRECT

Physical contact Benefits from

side effects
e.g. value of crops
from farming land e.g. amenity for
visitors

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 NON-USE VALUE
Option value
Retaining the option for use in the future

Quasi-option
“If an individual is uncertain about the future value of an ecosystem, but believes
it may be high or that current exploitation and conversion may be irreversible,
then there may be quasi-option value derived from delaying the development
activities. Quasi-option value is simply the expected value of the information
derived from delaying exploitation and conversion of the ecosystem today”

Existence
(anthropocentric) – overlapping utility functions (inter or intra generational eg
bequest)
(ecocentric) – satisfying ethical standards

Vicarious use
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Value from contemplating use by others
Classification of total economic value for wetlands
Non-use values
Use values
Direct use Indirect use Option and quasi-option Existence
fish nutrient potential future (direct and indirect) uses biodiversity culture,
retention future value of information heritage bequest
values
agriculture flood control

fuel/wood storm
protection
recreation groundwater
recharge
transport external
ecosystem
support
wildlife micro-
climatic
harvesting stabilization

peat/energy shoreline
stabilization,
etc.

Source: E.B. Barbier, M. Acreman and D. Knowler, Economic valuation of wetlands: A guide for policy makers and planners,
5 Gland,
of 17 Switzerland, Ramsar Convention Bureau, 1997.
 BEHAVIOUR-BASED METHODS OF VALUING PUBLIC
GOODS

OBSERVED/ OBSERVED/
DIRECT INDIRECT
referenda travel cost
simulated markets hedonic pricing

HYPOTHETICAL/
HYPOTHETICAL/
DIRECT INDIRECT
contingent valuation contingent ranking

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 VALUATION METHODS

Hedonic Pricing
Travel Cost
CVM
Benefits Transfer
Dose Response/Health Effects
Non-economic approaches

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 The Contingent Valuation Method

Hypothetical-direct questionnaire approach

- asking individuals to imagine a change in the context of
their lives
Theoretical basis
- determining a sum of money which would compensate
for the environmental change. Economists describe this
as indifference between the money and the change
Property rights
– Willingness to Pay (WTP) to preserve or Willingness to
Accept (WTA) in compensation?

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 Methodology
• Select a sample of affected population
• Record socio-economic profile and location data
• Communicate proposed change using images and models
• Ask for estimates of WTP or WTA
• Analyse and aggregate to represent value for total population

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 No. of responses CVM – Reliability and Validity

Actual

Validity problem
Reliability problem

Value

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 Some more problems with CVM

• Difficult to communicate change

• WTA and WTP will vary with income
• Expensive, especially if change has global impact.

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 Travel cost method
(sometimes referred to as the Clawson technique)
Observed indirect approach

First proposed by Harold Hotelling 1947.

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 Methodology
Based on simple trip generation function:
Vi = f (Ci, X1i, X2i,…….Xni)
where Vi is number of visits from zone I
Ci is cost of travel from I
X1i, X2i,…….Xni are socio-economic variables
If the function is linear and Ci = Ti + P
Where T is time and P transport cost
then: Vi = α + β(Ti + P) + εi (see perman et al for detailed discussion)
Where α, β and ε are constants
Find Vi , Ti and P through an on-site or relevant population survey
Carry out regression analysis of the no. of visits per unit population from zone i on
travel cost from zone i: effectively constructing a demand curve for visits where
travel cost is the price.

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 Methodology (contd.)
Calculate area under the demand curve to give the total consumer
surplus (CS) as an estimate of value
Divide this by the no. of visits used in the survey to get value per
visit
Multiply the value per visit by the total no. of estimated visits per
year to get value p.a..

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 Some issues with TCM
• Should we use zonal or individual method?
(Willis and Garrod 1991) – 6 UK forests – tried both approaches
Zonal CS range £0.06p - £0.96p average £0.48p
Individual CS range £1.43p – £2.60p average £2.03p
Over 1 million visits per year gives massive variation

• Functional form – linear? Log linear? Other?

Hanley (1989) tried 4 specifications on same dataset – CS per visit
ranged from £0.32p - £15.13p..

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 Some issues with TCM contd.
• Estimation – is OLS appropriate?
• Substitute sites – would need travel cost data on all alternatives
• No non use value
• Travel costs – time and cost of motoring
-Time: -ve or +ve?
Opportunity cost? (= wage rate for some but not all)
- Cost of motoring: Petrol? Petrol + fixed costs? Perceived cost?
Multi-site visits.

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 Hedonic Pricing
• Like the Travel Cost Approach – Observed Indirect
• Based on the assumption that when we buy a
product (or sell our labour) we consider a number of
product characteristics (or aspects of the job)
• Usually used in HOUSING or LABOUR markets.

• In HOUSING market: consider two identical

houses which differ only by the view enjoyed by the
occupants. The houses will command different
prices and if the only difference is the view, the
price differential must be the value placed on the
view.

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 Methodology
• The house price is determined by the no. of
rooms, proximity to amenities, size of garden,
age and condition of the house, etc … and
environmental characteristics

• Collect data on all the characteristics of

houses sold in a given location over a short
time period (cross-section data)
• Use multiple regression techniques to
estimate the willingness-to-pay for certain types
or amounts of environmental characteristics eg
air quality
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 Some problems with Hedonic Pricing

• Can’t estimate non-use value

• Can only be used where there is sufficient turnover of

housing stock
• Difficult (but not impossible) to get the data – use estate
agents or mortgage companies
• If an individual is NOT in equilibrium the coefficients
cannot be taken as implicit prices (has the individual
bought a house with just the right amount of every
characteristic or have compromises had to be made?)

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 Some more problems….
• Omitted variable bias

• Choice of functional form

• Multi-collinearity (issue of highly

correlated variables)

• Did the purchaser buy in anticipation of changes in

the environmental characteristics? If so, the implicit
price is not the value of the current level

• Attitudes to risk - we overvalue low risk due to risk

aversion.
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Ecosystem valuation:
http://www.ecosystemvaluation.org/1-02.htm

Travel cost method:

http://www.ecosystemvaluation.org/travel_costs.htm

Hedonic pricing:
http://www.ecosystemvaluation.org/hedonic_pricing.htm

http://www.defra.gov.uk/environment/natural/ecosystems-
services/valuing-ecosystem-services/

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References
Perman et al or Field as identified in the module handbook;

To get a good overview please see simple overviews and discussions at:
http://www.ecosystemvaluation.org/hedonic_pricing.htm
http://www.ecosystemvaluation.org/travel_costs.htm
http://www.ecosystemvaluation.org/contingent_valuation.htm

For Barbier et al (1997) see:

https://www.ramsar.org/sites/default/files/documents/pdf/lib/lib_valuation_e.pdf

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