Economic valuation OF NATURAL RESOURCES

1. Rupert Deluna SCHOOL OF APPLIED ECONOMICS Economic valuation OF NATURAL RESOURCES

2. Introduction • 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 theproject

3. Introduction • 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

5. Definition of the total economic value of an environmental resource

6. Definition of the total economic value of an environmental resource 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)

7. Economic valuation perspective Instrumental vs. intrinsic valuation. Monetary vs. physical indicators. Direct vs. indirect values. Value of levels vs. changes of levels. Holistic vs. reductionist approaches. Expert vs. general public assessments. Alternative perspectives on valuation

8. Technical Evaluation • Net Present Value (NPV) NPV = • Internal Rate of Return (IRR) = ( b – c )t ( 1 + r )t n ∑ t = 1 Ct ( 1 + i )t ( b – c )t ( 1 + i )t n n ∑ ∑ t= 1 t= 1

9. Technical Evaluation continued …. • Benefit – Cost ration (BCR) ( b – c )t ( 1 + r )t n ∑ t = 1 BCR = Ct ( 1 + i )t n ∑ t= 1

10. Basic Valuation Principles • 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

11. Willingness to Pay (WTP) • WTP = P + CS P’ $ Consumer Surpluses Demand (WTP) P0 Producer Revenues Quantity Q0 Q’

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

13. Valuation Methods Valuation Methods are divided into two: • Direct Methods seek to infer individuals’ preferences for the environment; -Stated Preference Methods • Indirect Methods seek to recover estimates of individuals’ willingness to pay for environmental quality by observing their behavior in related markets. -Revealed Preference Methods

14. Valuation methods (Market based) Direct Methods • Market Price Method (MPM) • Hedonic Pricing Method (HPM) • Travel Cost Method (TCM) Indirect Methods • Contingent Valuation Method (CVM) • Contingent Choice Methods (CCM) • Contingent Ranking Method (CRM)

15. Travel Cost Method • 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.

16. Travel Cost Method Cont’d • 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.

17. Key attributes /assumptions of TCM: • 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.

18. 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.

19. 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).

20. Step by Step procedure for TCM • Sample selection and survey (P observations) Random sampling is appropriate but seasonality must be considered to obtain representative sample a. Sampling b. Survey Questionnaire

21. Step by Step procedure for TCM 2. Elaboration of calculated variables and statistical description of data Descriptive statistics allow to get a first idea of the nature of the data collected.

22. Step by Step procedure for TCM 3. Choice of the functional form for the individual demand curve. Appropriate statistical tests need to be conducted to select a better specification among the available functional forms.

23. Step by Step procedure for TCM 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

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

25. Step by Step procedure for TCM 6. Aggregation of sample CS and further elaboration of CS Sample CS per visit must be multiplied by the total annual number of visits

26. WORKSHOP • THE ECONOMIC VALUE OF THE BAT CAVE IN TAMBO, ISLAND GARDEN CITY OF SAMAL (IGACoS): A Travel Cost Approach • Introduction to Shazam