![[Skip Navigation]](/images/pixel.gif){kind=tracking}
|
Restoration Economics
Environmental ValuationEnvironmental Valuation: Principles, Techniques, and Applications
IntroductionFrom scenic beauty and recreational opportunities to direct inputs into the production process, environmental resources provide a complex set of values to individuals and benefits to society. Coastal areas, for example, offer scenic panoramas and radiant sunsets. Fish and other edible sea life caught in coastal areas provide a rich and nutritious source of food to consumers. Beaches are also excellent recreation areas, used for relaxation, exercise, or bird watching. These are only the direct benefits. There are also values that are not directly tied to use, such as climate modulation, physical protection, and stewardship for future generations. All of these benefits are relevant in environmental valuation. Environmental ValuesUse values, such as fishing and hiking, are the more direct and quantifiable category of environmental values, but they capture only a portion of the total economic value of an environmental asset. Indirect-use values, non-use values, and intrinsic values are also associated with preserving environmental resources. Total economic value is represented by the following equation: Total economic value = direct-use value + indirect-use value + non-use value + intrinsic value Indirect-use values associated with coastal areas include biological support, physical protection, climate modulation, and global life support. Non-use values are less direct, less tangible benefits to society and include option and existence values. The option value is the value an individual places on the potential future use of the resource, for example, benefits a beach would offer during future trips to the coastal area. Existence values include bequest, stewardship, and benevolence motives. Bequest value is the satisfaction gained through the ability to endow a natural resource on future generations. The stewardship motive is derived from an altruistic sense of responsibility toward the preservation of the environment and a desire to reduce environmental degradation. The benevolence motive reflects the desire to conserve an environmental resource for potential use by others. Finally, the intrinsic value of nature reflects the belief that all living organisms are valuable regardless of the monetary value placed on them by society. Table 1 presents a typology of environmental values. Table 1. Categories of Environmental Values (adapted from Spurgeon 1998)
It is important to note that there are certain environmental assets that are absolutely essential to the support of animal life, and that the total value of these assets is not definable. Marginal changes, however, in the productivity and security of even irreplaceable environmental assets (e.g., the degradation of part of a large ecosystem or environmental resources essential to human life) can be captured in terms of total economic value. For example, the total economic value of air and water quality are immeasurably large because extreme degradation of either would result in irreversible and catastrophic damage to the capacity of this planet to support human and other life. However, we can observe the finite value that society places on small losses of even those assets that are absolutely essential for sustaining life. For instance, society has proven willing to accept some degradation of air quality to improve the efficiency and convenience of transportation. In this particular example, individual choices are not a good indicator of the value of air quality since most of the costs of reduced air quality are externalized or passed on to others. Methods for Valuing the EnvironmentEnvironmental valuation is largely based on the assumption that individuals are willing to pay for environmental gains and, conversely, are willing to accept compensation for some environmental losses. The individual demonstrates preferences, which, in turn, place values on environmental resources. That society values environmental resources is certain; monetizing the value placed on changes in environmental assets such as coastal areas and water quality is far more complex. Environmental economists have developed a number of market and non-market-based techniques to value the environment. Figure 2 presents some of these techniques and classifies them according to the basis of the monetary valuation, either market-based, surrogate market, or non-market-based.
Market-Based Methods. Economists generally prefer to rely on direct, observable market interactions to place monetary values on goods and services. Markets enable economists to measure an individual's willingness to pay to acquire or preserve environmental services. In turn, consumers reveal their preferences through the choices they make in allocating scarce resources among competing alternatives. There are a number of market-based methods of environmental valuation. This article identifies and discusses three market-based techniques: a) factor of production approach, b) change in producer/consumer surplus, and c) examination of defensive expenditures. The value of a natural resource can be monetized based on its value as a factor of production. An Economic View of the Environment notes that the output of any firm is a function of several important inputs (e.g., land, capital, natural resources), which are collectively known as "factors of production." In their role as factors of production, raw materials and environmental inputs are used in the production of other goods.When a natural resource has direct value as a factor of production and the impact of environmental degradation on future output of that resource can be accurately measured, the resultant monetary value of the decline in production or higher cost of production can be measured. For example, a decline in water quality could have a direct and detrimental impact on the productivity and health of shellfish beds. This technique is methodologically straightforward; however, it is limited to those resources that are used in the production process of goods and services sold in markets. Because many goods and services produced by the environment are not sold in markets, the factor of production method generally fails to capture the total value of the resource to society. The standard method used to measure the net economic benefit of a good or service in a market involves an examination of consumer and producer surplus. As noted in An Economic View of the Environment, consumer surplus is the difference between what each customer is willing to pay and the price of the good or service and is represented by the area falling above the price line and below the demand curve. Consumer surplus in Figure 3 is represented by Area abc. Producer surplus is the difference between what a producer is paid for a good or service and what it costs to supply, and is represented by Area bcd. The total economic benefit of a sale is the sum of the consumer and producer surplus.
Measuring the producer surplus often involves the use of complicated econometric (economic statistical) techniques. As noted in Lipton and others (1995), however, the careful measurement of a small number of variables sometimes can be used to estimate the impact of an action on producer surplus. This study presents a hypothetical scenario in which habitat degradation leads to reduced catches of striped bass in Chesapeake Bay. In this example, the catch falls from 8,000 to 5,000 pounds per day. The before-after portrait of the producer surplus in this scenario is presented in Table 2. Table 2. Impact of Habitat Degradation on Producer Surplus
Table 2 shows that the decline in habitat has reduced the daily catch by 3,000 pounds. In turn, commercial fishermen are expending more resources (fuel, labor) per pound of fish caught. That is, as the fish population declines, variable costs rise because more effort is required to land the same catch. Finally, this analysis holds the price-per-pound constant, although the basic principles of supply and demand suggest that prices would likely increase as the supply of fish declines. In reality, the ex-vessel price would likely rise in response to the declining catch rate as consumers bid up the price for the dwindling supply of striped bass (a discussion on consumer surplus follows). Based on this analysis, the producer surplus resulting from the commercial fishing of striped bass has declined by $22,400 ($38,400 - $16,000) as a result of habitat degradation. Producer surplus is only half the total economic picture. To capture the entire economic impact of the decline in the striped bass catch, the analyst must also measure the change in consumer surplus. When measuring consumer surplus, a demand curve must be constructed to quantify the area of Figure 2 represented by Area abc. Measuring the consumer surplus, however, generally involves the use of econometric techniques and requires time series information on the market price of the good or service and the quantity consumed at each price level, along with other factors affecting the demand for the product. Provided all of this information is available, the analyst can construct a product demand curve to measure the expansion or contraction of consumer surplus in response to changing environmental conditions and corresponding shifts in the quantity supplied and price. A final market-based valuation method is that of defensive expenditures, which are made on the part of industry and the public either to prevent or counteract the adverse effects of pollution (Feather 1995) or other environmental stressors. The defensive expenditures method, also known as the averting behavior approach, monetizes an environmental externality by measuring the resources expended to avoid its negative impacts on a surrounding community. Types of defensive expenditures include water purification devices, beach nourishment, and replanting seagrasses. Surrogate Market Methods. In the absence of clearly defined markets, the value of environmental resources can be derived from information acquired through surrogate markets. The most common markets used as surrogates when monetizing environmental resources are those for property and labor. The surrogate market methods discussed below are the hedonic price method and the travel cost method, with a brief look at the use of random utility models for environmental valuation. The hedonic price method of environmental valuation uses surrogate markets for placing a value on environmental quality. The real estate market is the most commonly used surrogate in hedonic pricing of environmental values. Air, water, and noise pollution have a direct impact on property values. By comparing properties with otherwise similar characteristics or by examining the price of a property over time as environmental conditions change and correcting for all nonenvironmental factors, information in the housing market can be used to estimate people's willingness to pay for environmental quality. The travel cost method is employed to measure the value of a recreational site by surveying travelers on the economic costs they incur (e.g., time and out-of-pocket travel expenses) when visiting the site from some distance away. These expenditures are considered an indicator of society's willingness to pay for access to the recreational benefits provided by the site. To better understand the travel cost method, consider the case of coastal pollution resulting in closure of a recreational beach. To estimate the associated lost value of recreational benefits, the first step of a travel cost analysis would be to survey individuals about the number of trips and expenses incurred during each trip to the beach. The second step is to examine the relationship between the expense incurred and the total number of trips taken (Table 3). Thus, the travel cost method enables the analyst to develop an implicit demand curve for the recreational benefits offered by the site per person, which can then be multiplied by the number of people in each cost category (generally judged by estimating costs associated with various distances from the site). In turn, the demand curve can be used to measure consumer surplus and monetize the direct, use value of the site. Table 3. Trip Expense and Number of Trips to a Recreation Beach
The travel cost method can be used to measure not only the elimination of a site but also the impact of access restrictions and changes in environmental quality. The travel cost method, however, is limited in application and captures only direct recreational benefits and only when there are measurable travel costs to examine. Finally, the travel cost method does not measure non-use and intrinsic values or other sources of value, such as commercial values. Random utility models (RUMs) are econometric models that, among other uses, permit the estimation of preferences among different recreational areas with varying characteristics. The RUM, with its ability to assess competing multiple sites with varying recreational characteristics, holds considerable appeal for economists. Consider three beaches with characteristics that vary based on location, water quality, landscape features, access, existence of lavatories, and other services. These characteristics can be transformed into discrete and continuous variables used to assess consumer preference by examining location preference and the total cost of trips taken (Table 4). Based on the data collected through surveys of various sites, the RUM estimates the probability that an individual will visit one site out of several sites based on site characteristics. Varying the quality of those characteristics (e.g., water quality, landscape features) permits the analyst to assess how recreational travelers value changes in environmental quality at particular sites. A RUM is not specific to surrogate market techniques. Rather, a RUM is an estimation procedure that can be combined with surrogate and non-market techniques used in valuing, for example, recreational areas and wetland area restoration. Travel cost studies often use RUMs; however, they may also be applied in stated preference studies that use choice experiments. Table 4. Expenditures per Trip and Number of Trips Taken (Adapted from Lipton 1995)
Non-Market Methods. The Contingent Valuation Method (CVM) is a non-market-based technique that elicits information concerning environmental preferences from individuals through the use of surveys, questionnaires, and interviews. When deploying the contingent valuation method, the examiner constructs a scenario or hypothetical market involving an improvement or decline in environmental quality. The scenario is then posed to a random sample of the population to estimate their willingness to pay (e.g., through local property taxes or utility fees) for the improvement or their willingness to accept monetary compensation for the decline in environmental quality. The questionnaire may take the form of a simple open-ended question (e.g., how much would you be willing to pay) or may involve a bidding process (e.g., would you accept $10, would you accept $20) or take-it-or-leave-it propositions. Based on survey responses, examiners estimate the mean and median willingness to pay for an environmental improvement or willingness to accept compensation for a decline in environmental quality.
The CVM is extremely flexible and can be used to value most any environmental asset. Further, CVM and other non-market methods are required accurately to capture non-use values. This is a significant point in a world comprised of ecosystems under great stress from human impacts, where increasing attention is being given to non-use values. For example, the Warrawong Earth Sanctuary in southern Australia, an organization similar to the Nature Conservancy in the U.S., has been purchasing and restoring swamps in southern Australia for as little as 40 cents an acre. This large land mass is today referred to as the "Little Jurassic Park," because it supports a wide range of plant and animal species. Australian zoos have donated rare platypuses to the range. The sanctuary design is predicated on strong biocentric or ecocentric values. Each year, tens of thousands of visitors pass through the sanctuary. The question faced by social scientists, which can be somewhat addressed through non-market environmental valuation methods, is how to place a value on such an environmental resource. The primary disadvantage of CVM is that it may not yield accurate results due to biases that may be introduced in the survey or through respondents' behavior. These biases include strategic bias, where the respondent's belief that his answers may be used to affect government policy leads him to intentionally understate or overstate his willingness to pay to achieve the desired policy result. The payment vehicle cited in the questionnaire may also result in bias due to an aversion to certain taxes or fees. The availability of information or misperceptions concerning environmental quality can also result in bias. To minimize bias, analysts must be extremely careful in how they design surveys and conduct interviews. An extensive body of economic literature addresses the sources of inaccuracy in CV studies and the development of methods to deal with specific issues of survey design and implementation. A primary source of information is the Report of the NOAA Panel on Contingent Valuation, a document detailing the findings of a blue ribbon panel convened by the National Oceanic and Atmospheric Administration (NOAA), and chaired by two Nobel Laureates, which examined the drawbacks to CVM, investigated key issues surrounding the design of CV surveys, and presents guidelines for completing CV studies (Arrow and others, 1993). Contingent valuation studies are focused on valuing specific changes in environmental conditions, such as those related to a coastal restoration project. Thus, individuals who are surveyed in CV studies are typically presented with a specific program or action and asked to value it in its entirety. Conversely, in choice experiments respondents are presented with a menu of alternatives relative to environmental policy options, such that preferences for various components or attributes can be examined at a more refined level. Whereas CVM produces a single value for a change in environmental quality, choice experiments provide independent values for the individual attributes of an environmental program. The emphasis on examining the attributes of the program reduces bias attributed to yea-saying (simply approving of the general policy and agreeing to fund it at an excessively high level) and provides the analyst with a more complete understanding of individual preferences. Choice experiments were applied to the assessment of water supply options for the Australian Capital Territory (ACT). The objective of the ACT choice experiment study was to examine community preferences relating to various options for supplying water necessary to meet the demands of the area's growing population, while focusing attention on resultant environmental costs (Blamey and others, 1999). The study examined five policy options, including damming, water recycling, and demand management, and assessed community preferences relative to a) water availability for household use, b) water quality, c) cost of water to household, d) impact on the aquatic and riparian environment, e) maintenance of animal habitat, and f) impact on urban environment. By examining the attributes associated with water supply options rather than the options themselves, the study was able to avoid "hot-button" emotional responses to damming and focus on what truly mattered to respondents. Based on the application of the choice experiment approach, a combined demand management/water recycling approach was designated as the preferred option. One of the damming alternatives placed second. ConclusionEnvironmental valuation techniques are primarily driven by the principle that individuals are self-interested and demonstrate preferences that form the basis of market interactions. These market interactions demonstrate how individuals value environmental goods and services. The market-based nature of economic theory emphasizes the maximization of human welfare. The market, in turn, determines resource allocation based on the forces of supply and demand. The environment, thus, is used as an instrument to achieve human satisfaction. In turn, the environment can be treated like any other commodity and its associated value can be broken down into many elements. For example, the value of coastal areas could be theoretically quantified based on the value of the products it offers (e.g., fish, crabs, clams, recreation, and bird watching). In this manner, environmental valuation can be viewed as a mechanistic approach in which the total value of an environmental system is assessed in terms of the value of its individual parts. Existence values are not demonstrated in the marketplace and are at least somewhat based on unselfish motives making them problematic to environmental analysts. To quantify existence values accurately within the framework of environmental valuation is difficult. Revealed preference methods (e.g., travel cost method and hedonic pricing methods) measure the demand for the environmental resource by measuring the demand for associated market goods. Existence values are not adequately captured using these methods. Existence values are only revealed through surveys of individual willingness to pay for the environmental resource or willingness to accept compensation for environmental losses. References*Some of the documents below are in Adobe portable document format (PDF) and requires Adobe Acrobat Reader. Arrow, K., and others. 1993. Report of the NOAA Panel on Contingent Valuation. Federal Register. Volume 58, Number 10. Pages 4601 to 4614. Available at: http://www.darp.noaa.gov/library/pdf/cvblue.pdf Blamey, R., J. Gordon, and R. Chapman. 1999. "Choice modeling: assessing the environmental values of water supply options. " Australian Journal of Agricultural and Resource Economics. Volume 43, Number 3. Pages 337 to 357. Feather, T., and others. 1995. Review of Monetary and Nonmonetary Valuation of Environmental Investments. IWR Report 95-R-2. U.S. Army Corps of Engineers. Alexandria, VA. Available at: http://www.iwr.usace.army.mil/iwr/pdf/95r02.pdf Lipton, D., and others. 1995. Economic Valuation of Coastal Resources: A Handbook for Coastal Resource Policymakers. NOAA Coastal Ocean Program Decision Analysis Series No. 5. NOAA Coastal Ocean Office. Silver Spring, MD. Available at: http://www.mdsg.umd.edu/Extension/valuation/handbook.htm Spurgeon, J. 1998. "The Socio-Economic Costs and Benefits of Coastal Habitat Rehabilitation and Creation." Marine Pollution Bulletin. Volume 37, Number 8-12, Pages 373 to 382. Additional Information SourcesCarson, R., and others. 1996. Was the NOAA Panel Correct about Contingent Valuation? Discussion Paper 96-20. Resources for the Future. Washington, D.C. Available at: http://www.rff.org/Documents/RFF-DP-96-20.pdf Cole, R., and others. 1996. Linkages Between Environmental Outputs and Human Services. IWR Report 96-R-4. U.S. Army Corps of Engineers. Alexandria, VA. Available at: http://www.iwr.usace.army.mil/iwr/pdf/96r04.pdf Farber, S. "The Value of Coastal Wetlands for Recreation: An Application of Travel Cost and Contingent Valuation Methodologies." Journal of Environmental Management. Volume 26. Pages 299 to 312. Field, B.C. 1994. Environmental Economics: An Introduction. McGraw-Hill, New York , NY. Garrod, G., and K. Willis. 2000. Economic Valuation of the Environment: Methods and Case Studies. Edward Elgar. Northampton, MA . Harrington, K., and T. Feather. 1996. Evaluation of Environmental Investments Procedures: Overview Manual. IWR Report 96-R-30. U.S. Army Corps of Engineers. Alexandria, VA. Available at: http://www.iwr.usace.army.mil/iwr/pdf/96r30.pdf Hartwick, J., and N. Olewiler. 1998. The Economics of Natural Resource Use. Addison Wesley Longman. New York, NY. Lazo, J., G. McClelland, and W. Schulze. 1997. "Economic Theory and Psychology of Non-use Values." Land Economics. Volume 73, Number 3. Pages 358 to 371. Leeworthy, V. and J. Bowker. 1997. Nonmarket Economic User Values of the Florida Keys / Key West . National Oceanic and Atmospheric Administration. Silver Spring, MD. Available at: http://marineeconomics.noaa.gov/SocmonFK/publications/97-30.pdf Mahan, B. 1997. Valuing Urban Wetlands: A Property Pricing Approach. IWR Report 97-R-1. U.S. Army Corps of Engineers. Alexandria, VA. Available at: http://www.iwr.usace.army.mil/iwr/pdf/97r01.pdf Smith, V., G. Houtven, and S. Pattanayak. 1999. Benefit Transfer as Preference Calibration. Discussion Paper 99-36. Resources for the Future. Washington, D.C. Available at: http://www.rff.org/rff/Documents/RFF-DP-99-36.pdf |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
