A Quick Intro to Non-Market Valuation

1. A Quick Intro to Non-Market Valuation • Theory of economic value. • Economic value and the environment. • Major valuation techniques. • Valuation of wetlands.

2. Theory of Economic Value • Market goods – goods that are traded in markets and, therefore, have observable prices. • Non-markets goods – goods that are not traded in markets and, therefore, do not have observable prices.

3. Theory of Economic Value • Resources are scarce=>using up resources in one way prevents us from using them in another way. • Opportunity cost: the cost in terms of the best alternative use forgone.

4. Theory of Economic Value • Examples of opportunity cost: • Designating a mountain area as a national park: the opportunity cost is the lost opportunities to extract minerals or timber from the region. • Converting a parcel of forestland into an urban development: the opportunity cost is the lost habitat for wildlife and the loss of forest-related recreation. • Extracting irrigation water from a river: the opportunity cost is the reduced quality of the river as a source of fishing-related recreation.

5. Theory of Economic Value • The economic value of something is dependent on what we are willing to give up to have it. • Designating a national park: the value of the something that is given up can be the commercial value of the minerals and the timber. • Converting a forested parcel to urban: how do we define the value of the lost habitat? • Irrigation water: how do we define the value of the reduced quality of the fishery?

6. Theory of Economic Value • The simplest measure of value is income(i.e. $$). • With this measure, we’re putting all economic value into monetary terms. • Money is simply a medium of exchange, it has no inherent value.

7. Theory of Economic Value • Converting a forested parcel to urban: • Relevant population: nearby homeowners. • Value dependent on: proximity to forest. • What is their willingness to pay to prevent the urban conversion of the nearby forestland? • Irrigation water: • Relevant population: fishers who use the stream. • Value dependent on: the number of fish in the stream. • What is their willingness to pay to improve the catch-rate in the fishery?

8. Theory of Economic Value • Willingness to pay (WTP): how much income an individual is willing to give up to secure some change in a good of interest. • What is being valued is a prospective change in environmental quality. • Economic value only has meaning when it is defined over a change in environmental quality. • Economic value is context-dependent.

9. Theory of Economic Value U0: utility curve This individual is indifferent between income/environmental quality combinations of (Y0,Q0) and (Y1,Q1).

10. Economic Value and the Environment • How to value economic benefits of environmental changes? • The change in utility caused by a change in the quality / quantity of the environmental good in question. • Methodologically we use two techniques: • Stated Preference – directly ask people their resource values. • Revealed Preference – infer people’s values by observing their behavior in markets (e.g. housing).

11. Non-Market Valuation Methods • Revealed Preference Methods -value is inferred from behavior in markets for related goods. • Hedonic Pricing • Travel Cost • Stated preference approaches –value is obtained directly from individuals through hypothetical surveys. • Contingent Valuation Method (CVM).

12. Economic Value and the Environment • Use values – value derived through interaction with the environmental good. • Non-Use values -value derived by an individual without direct interaction with the good.

13. Direct: Bird-watching, duck-hunting, fisheries, etc. Indirect: Nutrient retention, flood control, recharge, etc. Use values Option: potential future uses, future value of information Existence: biodiversity, culture, bequest, etc. Non-use values Economic Value Total Economic Value of a Wetland

14. Hedonic Pricing Models – Housing Market • Ex/ What determines the value of a house? • Site characteristics: number of bedrooms, age of house, garage, etc. • Neighborhood characteristics: distance from downtown, distance from UW, etc. • Environmental characteristics: noise levels, air quality, scenic views, proximity to dis-amenities (i.e. landfills), etc.

15. Hedonic Pricing Models • Example/ Consider two houses which are identical in every way (i.e. same size, same age, etc.) except their distance to a wetland. • House A (1/4 mile from the wetland) sells for $90,000. • House B (1/2 mile from the wetland) sells for $89,000. • Value of moving an extra ¼ mile closer to the wetland is equal to $1000.

16. Hedonic Pricing Models and Value of Urban Wetland Services • Mahan et al. (2000): • 14,000 home sales in Portland, OR. • Decreasing distance to wetlands by 300 m – from an initial distance of 1.6 km– increases property values by $436. • Increase in wetland size of 1ha increases property values by $24. • Lupi et al. (1991): • St. Paul, MN. • Increase in wetland size of 1ha increases property values by $19. • Increase in value greater in areas with few wetlands.

17. A Digression: Non-Market Valuation and Scarcity • There is a direct link between scarcity and economic value. • If wetlands are scarce, they are more likely to be valuable. • Water-diamonds paradox is classic example of scarcity driving value. • Urban wetlands • Natural areas are generally scarce in urban areas => high benefits of preservation / restoration. • Undeveloped land is also scarce => high costs of preservation / restoration.

18. Travel Cost Models • Travel Cost • Typically used to value outdoor recreation. • Process of a simple travel cost study: • Survey visitors to a recreation site and ask questions on the distance traveled to the site, how often they visit, similar sites, income etc. • Estimate a demand curve for the site. • Economic value of the site derived from consumer surplus.

19. Travel Cost Models • Travel cost models Travel cost (price) Consumer Surplus Trip Demand TC’ T* # of trips

20. Contingent Valuation Method (CVM) • CVM estimates non-market benefits of a good by simply asking respondents how they would behave if such a market existed. • Ex/ How much would you be willing to pay for a change in air quality? • Major issue with CVM: hypothetical bias => ask a hypothetical question, get a hypothetical answer.

21. CVM Study on Whooping Cranes in Wisconsin • Estimated Willingness-to-Pay (WTP):

22. CVM study on a riverfront park in Corvallis, OR • The test was done using a referendum vote on the Corvallis Riverfront Commemorative Park. • The citizens of Corvallis voted on a referendum concerning whether to develop the park in November 1998. • CVM survey was sent out a few weeks before the vote. • WTP: • Actual voting:$51.75 per household. • CVM survey: $52.27 per household.

23. A Note on Benefit Transfer • Transfer values calculated at one “study” site to another “policy” site. • Easiest approach is unit value transfer. • Projected impacts of a policy can be measured in divisible units (hours of recreation, fish catch-rate, etc.). • Important to understand the environmental change you are attempting to value. • Context is important => benefit transfer for urban wetlands should come from other urban wetlands.

24. Market Valuation • Production costs => typically used in areas where wetlands contribute to production of market goods (e.g. commercial fisheries). • Replacement costs: • What is replacement cost of providing a wetland’s ecosystem services? • Ex/ Cost of replacing water filtration capabilities of undeveloped watersheds for NY City was estimated at $6-8 billion in 1996.

25. Concluding Questions • Should we be putting monetary values on environmental goods and services? • What is the future of contingent valuation?