The Concept of Total Economic Value

1. The Concept of Total Economic Value Budiono Fakultas Ekonomi Universitas Padjadjaran

2. Background Salah satu faktor utama penyebab terjadinya degradasi lingkungan (polusi, deforestrasi, kerusakan ekosistem, dsb.) adalah kegagalan pasar (market failure) dalam memberikan nilai ekonomi yang tepat kepada jasa sumberdaya alam (dan lingkungan). Banyak jasa yang disediakan oleh lingkungan tidak mempunyai nilai pasar (market value) karena ketidakadaan pasar atau tidak ada informasi yang jelas tentang harga (=nilai) lingkungan sehingga ada kecenderungan harga lingkungan underpriced yang kemudian menimbulkan excess demand. Indonesia yang menempati urutan ke-4 negara terkaya dalam sumberdaya alam (World Bank, 1998) menghadapi berbagai permasalahan utama dan penting terkait dengan sumberdaya alam dan lingkungan, bahkan ada kecenderungan terkait dengan natural resource curse. Penilaian yang tepat bagi nilai lingkungan sangat penting terutama dalam kaitan penggunaan sumberdaya alam bagi kesejahteraan masyarakat yang seringkali harus melakukan realokasi sumberdaya untuk penciptaan output, baik di sektor manufaktur, perumahan, atau pun sektor ekonomi lainnya. (Economics is the science of choice).

4. Imputing Values for Non-marketed goods and services Kenyataan bahwa baik individu ataupun pembuat kebijakan harus mengambil keputusan tentang penggunaan sumberdaya alam dan realokasi sumberdaya, sangatlah penting untuk mengetahui nilai sumberdaya yang direalokasi (what is being trade-off against what). It is not possible to know that unless we have some idea of the economic value of environmental assets. To make comparisons involving an unpriced goods or service, it is necessary to impute a value. The discipline of economics has developed techniques whereby such values can be imputed.

6. Total Economic Value The expression of total economic value bears as an attempt to overcome the traditional evaluation of environmental goods, exclusively based on the use value attributed to goods considering direct benefits enjoyed by final consumers. It seems that the expression �total economic value� appeared for the first time in an essay by Peterson and Sorg in 1987, �Toward the measurement of total economic value�. Then the term was more and more used by other environmental economists, among whom Turner and Pearce (1996). The use value derives from a concrete use of environmental goods. Even the value attributed to goods to individuals is included in the use value, because they enjoy to see a landscape or the can swim in a lake; even those ones can be considered users of environmental goods, even if in a unappropriate and under-destructive manner. Every use, in any moment and by anyone are realized to create use values, which are more or less measurable since they derive from their current use. But the total economic value is not only use value; it is given by the sum of use and nonuse values referring to intrinsic benefits, i.e. those deriving from the mere existence of environmental goods. The first economist, who identified the total economic value double feature, was Kutrilla (1995). After Kutrilla the scholars interested in this topics have not been limited to theorical analysis of the total economic value and of its components, but their attention is centred on an empirical analysis which allows them to identify the main features especially of non-use value and the different methods usable for their measurement.

7. - The categories of values supported by environmental systems are represented in this figure. - Coral reefs support a variety of goods, services, functions and other, non-use values, that fall into these categories. - The literature tends to split them in this way, but more in terms of research focus i.e. those that estimate use values tend not to look at non-use and vice versa. - This tends to separate the two categories and undermine the concept of TEV. - We should keep in mind that all of these categories are important and may have significant policy relevance (depending on specific objectives). Use values tend to be those that can be easily observed in the market. Direct Use � those values supported by reefs systems that have a direct impact to welfare through market transactions Indirect Use � those values supported by reefs systems that have an indirect impact to welfare through market transactions Option Values � the value of preserving something today, to exploit in the future Non-use values tend to be those which are not traded on the market, but people ascribe value to them none-the-less. Quasi-option � value of delaying a decision today to see the potential of exploiting in the future. Existence � the value of its existence unrelated to any use Bequest � the value of preserving the resource for future generations (for them to exploit or not) - Now that we have looked at the types of values that coral reefs support, lets consider how they can be estimated. - In the coral reef valuation literature, these are the most frequently used methods. PC � based on observable changes in the market. Market transactions TCM � based on economic interpretations of behaviour; relating to travel and tourism. Real and hypothetical markets. RC � cost of replacing an ecosystem function if/when system is unable to provide it (coastal protection) CVM � based on hypothetical markets, can be used for use and non-use value. Expressions of value. If we go back to our categories of values, we can see how these methods are capable of estimating values from all of them So, now lets look into the review of literature from Southeast Asia and the Caribbean- The categories of values supported by environmental systems are represented in this figure. - Coral reefs support a variety of goods, services, functions and other, non-use values, that fall into these categories. - The literature tends to split them in this way, but more in terms of research focus i.e. those that estimate use values tend not to look at non-use and vice versa. - This tends to separate the two categories and undermine the concept of TEV. - We should keep in mind that all of these categories are important and may have significant policy relevance (depending on specific objectives). Use values tend to be those that can be easily observed in the market. Direct Use � those values supported by reefs systems that have a direct impact to welfare through market transactions Indirect Use � those values supported by reefs systems that have an indirect impact to welfare through market transactions Option Values � the value of preserving something today, to exploit in the future Non-use values tend to be those which are not traded on the market, but people ascribe value to them none-the-less. Quasi-option � value of delaying a decision today to see the potential of exploiting in the future. Existence � the value of its existence unrelated to any use Bequest � the value of preserving the resource for future generations (for them to exploit or not) - Now that we have looked at the types of values that coral reefs support, lets consider how they can be estimated. - In the coral reef valuation literature, these are the most frequently used methods. PC � based on observable changes in the market. Market transactions TCM � based on economic interpretations of behaviour; relating to travel and tourism. Real and hypothetical markets. RC � cost of replacing an ecosystem function if/when system is unable to provide it (coastal protection) CVM � based on hypothetical markets, can be used for use and non-use value. Expressions of value. If we go back to our categories of values, we can see how these methods are capable of estimating values from all of them So, now lets look into the review of literature from Southeast Asia and the Caribbean

8. Example: Total Economic value of forests

9. Methods for the monetary evaluation of the environment

10. Approaches to Valuation Non-Demand Curve Approach Dose-Response Approach requires the existence of data linking human, plant or animal physiological response to pollution stress. If for example, a given level of pollution is associated with a change in output then it is usually the case that the output can be valued at market or shadow prices. The Replacement Cost technique looks at the cost of replacing or restoring a damaged asset and uses this cost as a measure of the benefit of restoration. Mitigation Behavior can sometimes be observed in the pollution context. Householders may purchase insulation to defend their homes from noise pollution, as a substitute for a reduction in noise at source. In the Opportunity Cost Approach no direct attempt is made to value environmental benefits. Instead, the benefits of the activity causing environmental degradation are estimated in order to set a benchmark for what the environmental benefits would have to be for the development not to be worthwhile.

11. Demand Curve Approach 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. 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. 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.

12. Travel Cost Method Advantages of the Travel Cost Method: The travel cost method closely mimics the more conventional empirical techniques used by economists to estimate economic values based on market prices. The method is based on actual behavior�what people actually do�rather than stated willingness to pay�what people say they would do in a hypothetical situation. The method is relatively inexpensive to apply. On-site surveys provide opportunities for large sample sizes, as visitors tend to be interested in participating. The results are relatively easy to interpret and explain.

13. Issues and Limitations of the Travel Cost Method: The travel cost method assumes that people perceive and respond to changes in travel costs the same way that they would respond to changes in admission price. The most simple models assume that individuals take a trip for a single purpose � to visit a specific recreational site. Thus, if a trip has more than one purpose, the value of the site may be overestimated. It can be difficult to apportion the travel costs among the various purposes. Defining and measuring the opportunity cost of time, or the value of time spent traveling, can be problematic. Because the time spent traveling could have been used in other ways, it has an "opportunity cost." This should be added to the travel cost, or the value of the site will be underestimated. However, there is no strong consensus on the appropriate measure�the person�s wage rate, or some fraction of the wage rate�and the value chosen can have a large effect on benefit estimates. In addition, if people enjoy the travel itself, then travel time becomes a benefit, not a cost, and the value of the site will be overestimated. The availability of substitute sites will affect values. For example, if two people travel the same distance, they are assumed to have the same value. However, if one person has several substitutes available but travels to this site because it is preferred, this person�s value is actually higher. Some of the more complicated models account for the availability of substitutes. Those who value certain sites may choose to live nearby. If this is the case, they will have low travel costs, but high values for the site that are not captured by the method.

14. Issues and Limitations of the Travel Cost Method: Interviewing visitors on site can introduce sampling biases to the analysis. Measuring recreational quality, and relating recreational quality to environmental quality can be difficult. Standard travel cost approaches provides information about current conditions, but not about gains or losses from anticipated changes in resource conditions. In order to estimate the demand function, there needs to be enough difference between distances traveled to affect travel costs and for differences in travel costs to affect the number of trips made. Thus, it is not well suited for sites near major population centers where many visitations may be from "origin zones" that are quite close to one another. The travel cost method is limited in its scope of application because it requires user participation. It cannot be used to assign values to on-site environmental features and functions that users of the site do not find valuable. It cannot be used to value off-site values supported by the site. Most importantly, it cannot be used to measure nonuse values. Thus, sites that have unique qualities that are valued by non-users will be undervalued. As in all statistical methods, certain statistical problems can affect the results. These include choice of the functional form used to estimate the demand curve, choice of the estimating method, and choice of variables included in the model.

15. Contingent Valuation Method The contingent valuation method involves directly asking people, in a survey, how much they would be willing to pay for specific environmental services. In some cases, people are asked for the amount of compensation they would be willing to accept to give up specific environmental services. It is called �contingent� valuation, because people are asked to state their willingness to pay, contingent on a specific hypothetical scenario and description of the environmental service.

16. Advantages of the Contingent Valuation Method:  Contingent valuation is enormously flexible in that it can be used to estimate the economic value of virtually anything. However, it is best able to estimate values for goods and services that are easily identified and understood by users and that are consumed in discrete units (e.g., user days of recreation), even if there is no observable behavior available to deduce values through other means. CV is the most widely accepted method for estimating total economic value , including all types of non-use, or �passive use,� values. CV can estimate use values , as well as existence values , option values , and bequest values . Though the technique requires competent survey analysts to achieve defensible estimates, the nature of CV studies and the results of CV studies are not difficult to analyze and describe. Dollar values can be presented in terms of a mean or median value per capita or per household, or as an aggregate value for the affected population. CV has been widely used, and a great deal of research is being conducted to improve the methodology, make results more valid and reliable, and better understand its strengths and limitations.

17. Issues and Limitations of the Contingent Valuation Method: CV assumes that people understand the good in question and will reveal their preferences in the contingent market just as they would in a real market. However, most people are unfamiliar with placing dollar values on environmental goods and services. Therefore, they may not have an adequate basis for stating their true value. The expressed answers to a willingness to pay question in a contingent valuation format may be biased because the respondent is actually answering a different question than the surveyor had intended. Rather than expressing value for the good, the respondent might actually be expressing their feelings about the scenario or the valuation exercise itself. Some researchers argue that there is a fundamental difference in the way that people make hypothetical decisions relative to the way they make actual decisions. For example, respondents may fail to take questions seriously because they will not actually be required to pay the stated amount. Responses may be unrealistically high if respondents believe they will not have to pay for the good or service and that their answer may influence the resulting supply of the good. Conversely, responses may be unrealistically low if respondents believe they will have to pay.

18. Issues and Limitations of the Contingent Valuation Method: The payment question can either be phrased as the conventional �What are you willing to pay (WTP) to receive this environmental asset?�, or in the less usual form, �What are you willing to accept (WTA) in compensation for giving up this environmental asset?� In theory, the results should be very close. However, when the two formats have been compared, WTA very significantly exceeds WTP. Critics have claimed that this result invalidates the CVM approach, showing responses to be expressions of what individuals would like to have happen rather than true valuations. Respondents may give different willingness to pay amounts, depending on the specific payment vehicle chosen. For example, some payment vehicles, such as taxes, may lead to protest responses from people who do not want increased taxes. Others, such as a contribution or donation, may lead people to answer in terms of how much they think their �fair share� contribution is, rather than expressing their actual value for the good. Strategic bias arises when the respondent provides a biased answer in order to influence a particular outcome. If a decision to preserve a stretch of river for fishing, for example, depends on whether or not the survey produces a sufficiently large value for fishing, the respondents who enjoy fishing may be tempted to provide an answer that ensures a high value, rather than a lower value that reflects their true valuation. Information bias may arise whenever respondents are forced to value attributes with which they have little or no experience. In such cases, the amount and type of information presented to respondents may affect their answers Non-response bias is a concern when sampling respondents, since individuals who do not respond are likely to have, on average, different values than individuals who do respond.

19. Hedonic Pricing Method The hedonic pricing method is used to estimate economic values for ecosystem or environmental services that directly affect market prices. It is most commonly applied to variations in housing prices that reflect the value of local environmental attributes. It can 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 The basic premise of the hedonic pricing method is that the price of a marketed good is related to its characteristics, or the services it provides. For example, the price of a car reflects the characteristics of that car�transportation, comfort, style, luxury, fuel economy, etc. Therefore, we can value the individual characteristics of a car or other good by looking at how the price people are willing to pay for it changes when the characteristics change. The hedonic pricing method is most often used to value environmental amenities that affect the price of residential properties.

20. Advantages of the Hedonic Pricing Method:  The method�s main strength is that it can be used to estimate values based on actual choices. Property markets are relatively efficient in responding to information, so can be good indications of value. Property records are typically very reliable. Data on property sales and characteristics are readily available through many sources, and can be related to other secondary data sources to obtain descriptive variables for the analysis. The method is versatile, and can be adapted to consider several possible interactions between market goods and environmental quality.

21. Issues and Limitations:  The scope of environmental benefits that can be measured is limited to things that are related to housing prices. The method will only capture people�s willingness to pay for perceived differences in environmental attributes, and their direct consequences. Thus, if people aren�t aware of the linkages between the environmental attribute and benefits to them or their property, the value will not be reflected in home prices. The method assumes that people have the opportunity to select the combination of features they prefer, given their income. However, the housing market may be affected by outside influences, like taxes, interest rates, or other factors. The method is relatively complex to implement and interpret, requiring a high degree of statistical expertise. The results depend heavily on model specification. Large amounts of data must be gathered and manipulated. The time and expense to carry out an application depends on the availability and accessibility of data.