Return to Home Page GEOG 370 May 5, 2014 1

Monetary-based ($£) Ecosystem Valuation Methods (a) Market Prices – Revealed Willingness to Pay 1) Market Price Method Estimates economic values for ecosystem products or services that are bought and sold in commercial markets. 2) Productivity Method Estimates economic values for ecosystem products or services that contribute to the production of commercially marketed goods 3) Hedonic Pricing Method Estimates economic values for ecosystem or environmental services that directly affect market prices of some other good. Most commonly applied to variations in housing prices that reflect the value of local environmental attributes. 4) Travel Cost Method Estimates economic values associated with ecosystems or sites that are used for recreation. Assumes that the value of a site is reflected in how much people are willing to pay to travel to visit the site. 2

Monetary-based ($£) Ecosystem Valuation Methods (b) Circumstantial Evidence – Imputed Willingness to Pay 5) Damage Cost Avoided, Replacement Cost, and Substitute Cost Methods Estimate economic values based on costs of avoided damages resulting from lost ecosystem services, costs of replacing ecosystem services, or costs of providing substitute services.  Surveys – Expressed Willingness to Pay 6) Contingent Valuation Method Estimates economic values for virtually any ecosystem or environmental service. The most widely used method for estimating non-use, or “passive use” values. Asks people to directly state their willingness to pay for specific environmental services, based on a hypothetical scenario. 7) Contingent Choice Method Estimates economic values for virtually any ecosystem or environmental service. Based on asking people to make tradeoffs among sets of ecosystem or environmental services or characteristics. Does not directly ask for willingness to pay—this is inferred from tradeoffs that include cost as an attribute. 8) Benefit Transfer Method Estimates economic values by transferring existing benefit estimates from studies already completed for another location or issue. 3

Applying Ecosystem Value Estimates – B-C Analysis: Step 1: The first step is to specify and describe the policy or action to be evaluated, including such information as its location, timing, and the people who will be affected. Step 2: The second step is to describe and quantify the effects of the policy or program that will lead to benefits and costs to society. Step 3: The third step is to estimate the social costs and benefits. Step 4: The final step is to compare benefits and costs of the proposed project.  4

B-C Analysis continued: B-C for one or several alternatives Compares both benefits & costs Bt/(1+r)t, where Bt is the benefit to be received in year t, and r is the discount rate Ct/(1+r)t, where Ct is the cost to be received in year t, and r is the discount rate n B/C = ∑ Bt/(1+r)t , where B/C = present value B/C ratio t=0 Ct/(1+r)t What is to be B-C goal? max. net PV (PVB-PVC = net PV)? Max. B/C ratio? How to choose r? How to treat “negative effect” – as positive costs or negative benefits? How to treat scale effects? 5

B-C Analysis vs. Cost-Effectiveness: Both B-C and C-E use discounting C-E compares several alternatives C-E – Maximize benefits with fixed costs/resources, or C-E – Minimize cost/resources with fixed benefit C-E sometimes can better deal with common asymmetry of benefit and cost data, i.e., often (environmental/ecosystem) costs are better know than (environmental/ecosystem) benefits. 6

Market Price Method: Application of the market price method requires data to estimate consumer surplus and producer surplus.  To estimate consumer surplus, the demand function must be estimated.  This requires time series data on the quantity demanded at different prices, plus data on other factors that might affect demand, such as income or other demographic data.  To estimate producer surplus, data on variable costs of production and revenues received from the good are required. The total net economic benefit, or economic surplus, is the sum of consumer surplus and producer surplus. Changes in net economic benefit can be equated with value of ecosystem services. 7

Example: Market Price Method (est. pollution costs) Consumer surplus: before after ($10 - $5)/lb x 10000 lb/2 = $25000 ($10 - $7)/lb x 6000l b/2 = $9000 Consumer surplus = $9000 - $25000 = -$16,000 (loss in benefits) Producer surplus: revenue = $1/lb x 10000 lb = $10,000 $1.5/lb x 6000 lb = $9,000 (variable) costs = $0.5/lb x 10000 lb = $5000 $0.6/lb x 6000 lb = $3,600 producer surplus = $1,0000 - $5,000 - $5,000 $9,000 - $3,600 = $5,400 Producer surplus = $5,400 - $5,000 = $400 (gain in producer surplus) Net economic effect (est. pollution cost)- $16,000 + $400 = -$15,600 i.e., est. pollution damages = $15,600 or (min.) value of ES provided “clean water” 8

Productivity, Net Factor Income, or Derived Value Methods: Application: to estimate the economic value of ecosystem products or services that contribute to the production of commercially marketed goods Easiest applications: cases where the ES in question is a perfect substitute for other inputs cases where only producers of final good benefit from changes in quantity or quality of the ES Data needs: costs of production for the final good supply and demand for the final good supply and demand for other factors of production 9

Hedonic Pricing Method: May be used to estimate economic benefits or costs associated with: environmental quality, including air pollution, water pollution, or noise environmental amenities, such as aesthetic views or proximity to recreational sites May used to estimate the value of environmental amenities that affect prices of marketed goods: use residential housing prices to estimate the value of environmental amenities.  based on the assumption that people value the characteristics of a good, or the services it provides, rather than the good itself.  prices will reflect the value of a set of characteristics, including ES, that people consider important when purchasing the good. Data needs: cross-section and/or time-series data on property values, and household characteristics index of ES/environmental quality use multiple regression Complications: Non linear prices Auto-correlation 10