A Quick Intro to Non-Market Valuation Theory of economic value. Economic value and the environment. Major valuation techniques. Valuation of wetlands.

Theory of Economic Value Market goods – goods that are traded in markets and, therefore, have observable prices. Non-markets goods – goods that are not traded in markets and, therefore, do not have observable prices.

Theory of Economic Value Resources are scarce => using up resources in one way prevents us from using them in another way. Opportunity cost: the cost in terms of the best alternative use forgone.

Theory of Economic Value Examples of opportunity cost: Designating a mountain area as a national park: the opportunity cost is the lost opportunities to extract minerals or timber from the region. Converting a parcel of forestland into an urban development: the opportunity cost is the lost habitat for wildlife and the loss of forest-related recreation. Extracting irrigation water from a river: the opportunity cost is the reduced quality of the river as a source of fishing-related recreation.

Theory of Economic Value The economic value of something is dependent on what we are willing to give up to have it. Designating a national park: the value of the something that is given up can be the commercial value of the minerals and the timber. Converting a forested parcel to urban: how do we define the value of the lost habitat? Irrigation water: how do we define the value of the reduced quality of the fishery?

Theory of Economic Value The simplest measure of value is income (i.e. $$). With this measure, we’re putting all economic value into monetary terms. Money is simply a medium of exchange, it has no inherent value.

Theory of Economic Value Converting a forested parcel to urban: Relevant population: nearby homeowners. Value dependent on: proximity to forest. What is their willingness to pay to prevent the urban conversion of the nearby forestland? Irrigation water: Relevant population: fishers who use the stream. Value dependent on: the number of fish in the stream. What is their willingness to pay to improve the catch-rate in the fishery?

Theory of Economic Value Willingness to pay (WTP): how much income an individual is willing to give up to secure some change in a good of interest. What is being valued is a prospective change in environmental quality. Economic value only has meaning when it is defined over a change in environmental quality. Economic value is context-dependent.

Theory of Economic Value U0: utility curve This individual is indifferent between income/environmental quality combinations of (Y0,Q0) and (Y1,Q1).

Economic Value and the Environment How to value economic benefits of environmental changes? The change in utility caused by a change in the quality / quantity of the environmental good in question. Methodologically we use two techniques: Stated Preference – directly ask people their resource values. Revealed Preference – infer people’s values by observing their behavior in markets (e.g. housing).

Non-Market Valuation Methods Revealed Preference Methods - value is inferred from behavior in markets for related goods. Hedonic Pricing Travel Cost Stated preference approaches –value is obtained directly from individuals through hypothetical surveys. Contingent Valuation Method (CVM).

Economic Value and the Environment Use values – value derived through interaction with the environmental good. Non-Use values - value derived by an individual without direct interaction with the good.

Total Economic Value of a Wetland Direct: Bird-watching, duck-hunting, fisheries, etc. Indirect: Nutrient retention, flood control, recharge, etc. Option: potential future uses, future value of information Existence: biodiversity, culture, bequest, etc. Economic Value Use values Non-use values

Hedonic Pricing Models – Housing Market Ex/ What determines the value of a house? Site characteristics: number of bedrooms, age of house, garage, etc. Neighborhood characteristics: distance from downtown, distance from UW, etc. Environmental characteristics: noise levels, air quality, scenic views, proximity to dis-amenities (i.e. landfills), etc.

Hedonic Pricing Models Example/ Consider two houses which are identical in every way (i.e. same size, same age, etc.) except their distance to a wetland. House A (1/4 mile from the wetland) sells for $90,000. House B (1/2 mile from the wetland) sells for $89,000. Value of moving an extra ¼ mile closer to the wetland is equal to $1000.

Hedonic Pricing Models and Value of Urban Wetland Services Mahan et al. (2000): 14,000 home sales in Portland, OR. Decreasing distance to wetlands by 300 m – from an initial distance of 1.6 km– increases property values by $436. Increase in wetland size of 1ha increases property values by $24. Lupi et al. (1991): St. Paul, MN. Increase in wetland size of 1ha increases property values by $19. Increase in value greater in areas with few wetlands.

A Digression: Non-Market Valuation and Scarcity There is a direct link between scarcity and economic value. If wetlands are scarce, they are more likely to be valuable. Water-diamonds paradox is classic example of scarcity driving value. Urban wetlands Natural areas are generally scarce in urban areas => high benefits of preservation / restoration. Undeveloped land is also scarce => high costs of preservation / restoration.

Travel Cost Models Travel Cost Typically used to value outdoor recreation. Process of a simple travel cost study: Survey visitors to a recreation site and ask questions on the distance traveled to the site, how often they visit, similar sites, income etc. Estimate a demand curve for the site. Economic value of the site derived from consumer surplus.

Travel Cost Models Travel cost models Travel cost (price) Consumer Surplus Trip Demand TC’ T* # of trips

Contingent Valuation Method (CVM) CVM estimates non-market benefits of a good by simply asking respondents how they would behave if such a market existed. Ex/ How much would you be willing to pay for a change in air quality? Major issue with CVM: hypothetical bias => ask a hypothetical question, get a hypothetical answer.

CVM Study on Whooping Cranes in Wisconsin Estimated Willingness-to-Pay (WTP): Actual Donation Contingent Donation Highly Certain Contingent Donation E{WTP} $21.21 $69.38 $31.70 90% Confidence interval for E{WTD} [16.84, 30.86] [54.96, 103.33] [18.5, 44.9]

CVM study on a riverfront park in Corvallis, OR The test was done using a referendum vote on the Corvallis Riverfront Commemorative Park. The citizens of Corvallis voted on a referendum concerning whether to develop the park in November 1998. CVM survey was sent out a few weeks before the vote. WTP: Actual voting: $51.75 per household. CVM survey: $52.27 per household.

A Note on Benefit Transfer Transfer values calculated at one “study” site to another “policy” site. Easiest approach is unit value transfer. Projected impacts of a policy can be measured in divisible units (hours of recreation, fish catch-rate, etc.). Important to understand the environmental change you are attempting to value. Context is important => benefit transfer for urban wetlands should come from other urban wetlands.

Market Valuation Production costs => typically used in areas where wetlands contribute to production of market goods (e.g. commercial fisheries). Replacement costs: What is replacement cost of providing a wetland’s ecosystem services? Ex/ Cost of replacing water filtration capabilities of undeveloped watersheds for NY City was estimated at $6-8 billion in 1996.

Concluding Questions Should we be putting monetary values on environmental goods and services? What is the future of contingent valuation?