Econ 231: Natural Resources and Environmental Economics SCHOOL OF APPLIED ECONOMICS

 Environmental valuation is concerned with putting values to natural resources.  It would provide a means for comparing the importance of recreation with that of other uses of the same resources,  the value of the recreation to be provided by a proposed recreation site would provide one measure of the desirability of making the necessary investment in the project

 the value of the recreation would provide a ceiling to any fees that might be charged for its use  Thus, we need to impute values that reflect the true social costs and benefits of recreational activities using some techniques of valuation of environmental resources. If the economic costs and benefits of outdoor recreation sites are not estimated using accepted environmental valuation techniques, conservation benefits could not be nearly approximated.

4 Definition of the total economic value of an environmental resource

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7 The major contribution of environmental economists has been in the area of the valuation of environmental goods and services, i.e. methods for measuring the demand curves for goods for which there are no markets (nonmarket valuation) Definition of the total economic value of an environmental resource

 Value of a resource = marginal opportunity cost = highest amount that someone is willing to pay for it in an alternative use  Value of a benefit = amount that someone is willing to pay for it  Willingness to pay (WTP) values Basic Valuation Principles

 Based on WTP values  3 ways 1. Observe prices in various markets 2. Observe individual expenditures of money and time 3. Ask people what they are willing to pay for goods Valuation of benefits and cost

Valuation Methods are divided into two: I. Revealed Preference Methods-seek to recover estimates of individuals’ willingness to pay by observing their behavior in related markets. 1. Direct Proxy involves cost or price that approximate values negative/positive externalities i.e., Opportunity Cost, Productivity Loss and cost of illness

2. Indirect Proxy assumed that non marketed good or service affects preferences of consumers about other marketed goods or services. Common methods: a) Travel Cost Method (TCM) b) Hedonic Pricing Method (HPM) Valuation Methods (Non-Marketed Goods and Services)

II. Stated Preference Methods-seek to recover estimates of individuals’ willingness to pay based on people’s responses to hypothetical questions for a change in environmental services. Method: 1. Contingent Valuation Method (CVM) 2. Contingent Choice Methods (CCM) 3. Contingent Ranking Method (CRM) Valuation Methods (Non-Marketed Goods and Services)

 TCM is the oldest technique of valuation of environmental resources.  TCM is one of the techniques used to value non- market environmental goods using households' consumption characteristics in related markets.  TCM is often used to assess the value of parks, lakes and similar public areas which host a good deal of recreational activity; it is predominantly used in outdoor recreation modeling with several recreational activities. Travel Cost Method

 The fundamental insight that drives this model is that if a consumer wants to use the recreational services of a site he/she has to visit it.  The travel cost to reach the site is considered as the implicit or the surrogate price of the visit, and changes in the travel cost will cause a variation in the quantity of visits.  Observation of these visitations across individuals will permit the estimation of demand functions and the derivation of the welfare measure. Travel Cost Method

P0P0 Q0Q0 Total Consumer Expenditure P’ PhP Quantity Consumer Surpluses Demand (WTP) Q’ Willingness to Pay (WTP)

TC1 V1 Total Consumer Expenditure TC* PhP Quantity Consumer Surpluses Demand (WTP) V* TCM Concept

 The demand for visit to the site can be estimated based on the number of trips that the people make at different levels of travel cost.  Although people cannot be observed through buying units of environmental good, the cost of the travel is the price paid for the recreational enjoinment. TCM Hypothesis

 Admission fees (often low or non-existent) to recreation areas are an inadequate measure of the value of a visit to recreation site and the cost of round-trip travel is a proxy measure of WTP to visit a recreation site;  Recreation site users will react to changes in gate fees in the same manner that they react to changes in travel cost. Key attributes /assumptions of TCM:

 The basic method assumes the case of a pure visitor, i.e., the trip to the site is for the sole purpose of visiting the site.  TCM uses the costs of travel and the value of travel time as a proxy for WTP for outdoor recreation sites. Key attributes /assumptions of TCM:

 Specifically, the total sum of expenditure of services obtained from a site visit consists of the following 4 elements.  Direct travel expenses (e.g. money expenditure on fuel transport, hotels, etc.).  Time cost of travel (opportunity cost of travel time)  Cost of time spent at the site (opportunity cost of on-site time).  Entrance fee (if any). Key attributes /assumptions of TCM:

1. Sample selection and survey (P observations) Random sampling is appropriate but seasonality must be considered to obtain representative sample a. Sampling b. Survey Questionnaire

2. Elaboration of variables and statistical description of data Descriptive statistics allow to get a first idea of the nature of the data collected.

3. Choice of the functional form for the individual demand curve. V = f (TC, X) Appropriate statistical tests need to be conducted to select a better specification among the available functional forms.

4. Estimation of the demand function of the recreational service V = f (TC, X) Individuals with the same (modeled) features behave in the same way

5. Calculation of Consumer Surplus Formulas of CS depend on the specific functional form selected for the demand in the previous step

6. Aggregation of sample CS and further elaboration of CS Sample CS per visit must be multiplied by the total annual number of visits Annual Economic Value= CS * Total number of visits