Outline of presentation

1. Outline of presentation • Travel cost method – concept, example, assumptions • Consumer surplus related to TCM • Visitor’s table • Demand curve • Concerns regarding TCM • Hedonic Pricing Method • Example – house pricing • Advantages and disadvantages of HPM

2. Travel Cost Method The value of recreation function of a forest and nature conservation cannot be determined with market prices alone. Often no entry fee or a very low one has to be paid for a visit. In TCM, a surrogate price is introduced, namely the cost to be paid for the trip including the transport cost plus travel time.

3. To explain the TCM, a hypothetical example is introduced. The inhabitants of A has less travel cost (Rs 5000) and therefore pays more visits than an inhabitant of zone B (Rs 11500). The curve is downward sloping from left to right. For the first visit, an inhabitant of zone C is willing to pay Rs 32500. He pays so many visits until his marginal Willingness To Pay (WTP) equals marginal costs. His Consumer Surplus (CS) for this number of visits is (17*0.5 (32.5-5)= Rs 233750).

4. TCM is based on following implicit assumptions (Sinden and Worrell, 1979): • All users obtain the same benefit equal to travel cost (marginal) of most distant user • Travel cost is a reliable proxy for price • Demand curve for all distance zones have same slope.

5. Consumer surplus of visitors by using TCM • The visitors of a hypothetical site originate from three zones. Within each zone all visitors have equal travel cost and due to this there are different participation rates and the following figure gives relationship between travel cost and participation rate. 30 Cost Rs 1000 C 20 B 10 10 A 5 Participation rate (%) 5 15 10 20

6. The above figure gives the relationship between travel cost and participation rate. • The participation rate has been calculated in the table below. Using the participation rate curve for different costs the following Visitor table is made.

7. Visitor table for a hypothetical site

8. Construction of Demand curve based on the Visitor table • Based on the above visitor table The following Demand curve for the hypothetical recreation area is constructed: 20 Cost Rs 1000 15 10 5 5 10 15 No of visits

9. Total consumer surplus can be calculated from the demand curve by computing the area under demand curve (0.5 * Rs 20,000 * 14600 = Rs 146 million) • Based on the above valuation, we can say that the value of the hypothetical site is Rs 146 million.

10. Concerns regarding TCM • Should disaggregate models be applied? • Characteristics of population independent variable • Time is negative factor in TCM • TCM can be used only in urban setting • What is the effect of crowding?

11. 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.

12. HPM Environmental quality is not directly observed but based on demand for other goods while such goods in TCM are travel costs, in HPM such goods are residential property. According to Pearce and Markandya, 1989 Pi = (PDi, Ni, Ai, Ei) Where, The price (P) of property (i) is determined by: Property describing variables (PD): # rooms, space for parking) Neighbourhood variables (N): distance to school, market Accessibility variables (A): distance to bus station, railway station Environmental variables (E): Air quality, noise nuisance, parks and forests, beaches etc.. Clean air, low noise level, short distance to beaches, park, forest – positive effect on the price of residential property. Also number and type of trees may have positive effect.

13. Influence of the characteristics of a house in Athens (USA) on its price (Source: Anderson and Cordell, 1988) Selling price = + $855 (Constant) + $13 (sq. footage of house) + $ 1702 (number of amenities) + $ 1992 (lot size in acres) + $ 2270 (no of bathrooms) + $ 290 * number of trees on the lot • $ 56 age of house + $ 1181 (if central conditioning is present) N = 844 R2 = 0.79

14. Research by Willis and Garrod (1992) in Great Britain showed a positive effect of the neighbourhood of broadleaved trees on the value of residential properties while coniferous trees had a negative influence in value.

15. Advantages of the Hedonic Pricing Method: Advantages • 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

16. Disadvantages of Hedonic Pricing Method Mäler (1977) pointed to the problems related to the assumption concerned with working of the property market and to technical assumptions, governments influence is not mentioned. Statistical significance is lacking (Allen et al 1985)

17. THANKS