1. Valuation Methods focus on conventional market approaches Session Objectives: Identify key steps in valuing the environment Use selected methods to analyze environmental issues

2. Agenda Explain major valuation methods Exercises Discussions

3. Concepts of Techniques Doze response Human capital Replacement cost Prevention cost Travel cost Hedonic pricing Benefit transfer Contingent valuation

4. Dose-Response Method Dose - cause of an environmental impact such as pollution Response - resulting environmental impact Impact shows up in changes in quantity or price of marketed inputs or outputs Measures the value of impact in terms of changes in total surplus (consumer plus producer surplus)

5. Changes in Total Surplus P Q D S S’ Consumer Surplus Producer Surplus

6. Application of D-R Method Often used if causal relationships are known (effects of pollution on health, physical effects on materials/building, aquatic ecosystems, vegetation, and soil erosion) Physical dose-response function multiplied by a unit “price” or value per unit of physical damage to give a “monetary function”.

7. Illustration of D-R Method Doze-response:1 ton of untreated water > loss of fish catch 50 kg per fishing season Average market price = $5 Total discharge of untreated water 200 tons Value of damage caused by untreated water: 200 x 5 = $1,000 If the response leads to a change in existing market price, use a predicted new price

8. Limitations A dose may lead to responses from different input & output sectors - difficult to predict the new price A response may be due to different types of doses - difficult to isolate the effects The method cannot estimate non-use values Mostly used in estimating pollution-related damages only.

9. Human Capital Method A sub-set of the Dose-Response method Assess the health effect of an environmental change Estimate the loss of working days or statistical life for the affected population Estimate the total present value of forgone income

10. Replacement Cost Estimate the cost of replacing or restoring a damaged environmental asset to its original state or an established standard A measure of the cost of damage or benefit of restoration (WTP for restoration)? Applicable if there is an environmental standard that must be met Efficient if the standard meets MB=MC

11. Prevention Cost Get data on an environmental change & related preventive measures Observe people’s expenditures on associated preventive measures Reflect the value people attach to environmental quality, or benefits of reduced environmental damage Assume prevention is technically possible

12. Prevention Cost: Illustration Environmental change: soil erosion Associated preventive measure: plant trees For reducing soil erosion by 1m 3, plant 2 trees Cost of planting a tree = $5 Value per 1m 3 of soil erosion = $10 Observed soil erosion = 500m 3 Total prevention cost: 500 x 10 = $5,000

13. Travel Cost Estimate recreational (use) value of natural resources and their quality changes Value expressed in terms of the costs of travel and time Costs estimated through surveys There are many different models Expensive to carry out travel cost studies

14. Travel Cost: Illustration I

15. Travel Cost: Illustration II Postulate a linear relationship: –V/Pop = a - b x TC (for each city) Regression analysis (Ordinary Least Square) gives the equation: –V/Pop = 0.5 - 0.1TC (for each city)

16. Travel Cost: Illustration I

17. Travel Cost: Illustration IV Travel cost per visit 5432154321 01 0.2 0.3 0.4 0.5 Per capita visit 1 2 3 4

18. Hedonic Pricing Different prices of the same product may reflect different environmental quality of the product (such as a house) Isolate the price differences attributable only to different environmental quality (such as air quality) using econometric techniques The difference is the value of the difference in environmental quality (benefit of improvement) Can be applied to different wages due to different job-related environmental risks

19. Benefit Transfer Find previous studies that have estimated economic benefits of a similar environmental change Transfer those estimates to the site of interest with adjustments to account for differences in social, economic, and environmental characteristics between the previous sites and the new site It is an inexpensive approach, still in its infancy

20. Contingency Valuation A hypothetical scenario of the specific terms under which the good/service is to be offered Give the description to respondents & ask them their WTP for environmental improvement or WTA to avoid deterioration under the specific terms Ask questions on socio-economic and demographic characteristics for econometric analysis Not easy to do!