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GEOG 370
May 7, 2013
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Assessing the value of the negative effects of
closing the trestle bridge Method 1-the worth
of having the bridge.
Assume steel alloy is only way of having
uninterrupted service. P 191,524 is thus
minimum PV of having 50 years of uninterrupted
service. P R(USPW) Pab 191,524 R (USPW
i0.06, n50) 191,524 R(15.762)
191,524/15.762 12,150 annual value of
having a bridge, so monthly value of having
bridge 12,150/12 1013 P 1013 (SPPW
i0.06, n25) 1013 (0.233) 236 Hence,
the negative effect of being without a bridge for
one bridge for 1 month 25 years from now would
have present value of at least 236
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Assessing the value of the negative effects of
closing the trestle bridge Method 2- the
opportunity cost of not having the bridge for 1
month 25 years from now.
Assume 1000 necessary crossings per day, and
about 500 unnecessary crossing per day. Without
bridge the closest route requires alternative
with extra driving of 30 miles/trip. Therefore,
daily cost 1000 trips x 30 mi/trip x 0.15/mi
4500. If necessary crossings are assumed to be
undertaken 20 days/month, the monthly cost would
be 4500 x 20 90,000. P 90,000 (SPPW
i0.06, n25) 90,000 (0.233)
20,970 negative effect Still not enough to
offset the cost difference, but the
inconvenience, an intangible negative impact of
not having the bridge for a month, might be more
than enough to shift the preference to the steel
alloy bridge.
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Assessing Storm risk costs
Assume 100-year storm will require trestle
bridge to be replaced. Such a storm would occur
with a probability of 0.01 that in any year the
bridge will be destroyed. Using binomial
probability tables for n 50 and p 0.01, we
find the probability of having any number of
floods during the next 50 years Probability
Number of 100-year storms
0.60 0 0.31 1 0.08 2
0.01 3 If a storm occurs during next 50 years,
the additional cost incurred would be an extra
80,000 (unless storm occurs happens to occur in
the year in which the bridge was schedule to be
replaced, and an additional negative benefit of
90,000 for each month the region is without the
bridge. Costs depend on years (time) in which
the storm(s) occur(s). Estimate the PV of the
additional costs by averaging its time of
occurrence.
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Assessing additional costs for 3 100-year storm
For three storms Cost 80,000 80,000 (SPPW
i0.06, n13) 80,000 (SPPW i0.06, n25)
80,000 (SPPW i0.06, n37) 4000(USPW i0.06,
n50) 80,000 80,000(0.4688)
80,000(0.233) 80,000(0.1158) 4000(15.762)
80,000 37,504 18,640 9,264
63,048 208,488 negative effects
90,000(SPPW i0.06, n13) 90,000(SPPW i0.06,
n25) 90,000(SPPW i0.06, n37)
90,000(0.4688)
90,000(0.233) 90,000(0.1158)
42,192 20,970 10,422
73,584 208,488 73,584
Ptb3storm 282,072
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Table. Present value of estimated costs
negative effects
Alternatives State of nature Probability Stee
l alloy Trestle bridge Bridge w/risk 0
storm 0.60 191,524 182,658 109,595
1 storm 0.31 191,524
222,268 68,903 2 storms 0.08 191,524
222,268 17,781 3 storms 0.01 191,524
282,072 2,821 Expected value (costs
negative effects 191,524
199,100
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Questions relating to the performance of public
undertakings

1. Are the programs objectives appropriate? Are
   they desirable for a social welfare standpoint?
   (Addressed in policy analysis.)

• Is the program economically efficient? Are the
  intended
• effects worth the costs? (Addressed in
  cost-benefit analysis.)

3) Is the program effective? Are the objectives
being achieved? (Addressed in program
evaluation.)
4) Is the operation technologically efficient?
Are resources being used to get the maximum
result? (Addressed in cost-effectiveness
analysis.)
5) Is the scope of the undertaking adequate? Are
objectives and results commensurate with the
need? (Addressed by program analysis and program
evaluation.)
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Comparison of B/C and Cost Effectiveness
Benefit-Cost Cost-effectiveness
Geared to Economic efficiency Technological efficiency
Measurement units dollars Various measures
Variable components Benefits Costs a) Minimize Costs, with benefits fixed b) Maximize benefits with costs fixed
Main question Whether the program is justified How resources should be used in a program
Scope Global, comprehensive Narrow, focused
Usual application Capital projects Ongoing, operating programs
Time frame Long-term Short-term
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Introduction to Ecosystem Functions Services

• Ecosystem Functions and Services
• Ecosystem functions are the physical, chemical,
  and biological processes or attributes that
  contribute to the self-maintenance of an
  ecosystem in other words, what the ecosystem
  does. Some examples of ecosystem functions are
  provision of wildlife habitat, carbon cycling, or
  the trapping of nutrients.  Thus, ecosystems,
  such as wetlands, forests, or estuaries, can be
  characterized by the processes, or functions,
  that occur within them. 
• Ecosystem services are the beneficial outcomes,
  for the natural environment or people, that
  result from ecosystem functions. Some examples of
  ecosystem services are support of the food chain,
  harvesting of animals or plants, and the
  provision of clean water or scenic views.  In
  order for an ecosystem to provide services to
  humans, some interaction with, or at least some
  appreciation by, humans is required. Thus,
  functions of ecosystems are value-neutral, while
  their services have value to society. BUT
  ecosystems have value regardless of human
  interaction!

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Difficulties with Environmental Valuation
Non-Market Goods  Most environmental goods, such
as clean air and water, and healthy fish and
wildlife populations, are not traded in markets.
Their economic value - how much people would be
willing to pay for them in dollars is not
revealed in market prices. The only option for
assigning dollar values to them is to rely on
non-market valuation methods. Non-Rival
Goods  One person's consumption of most goods
(apples or housing) reduces the amount available
for everyone else. Environmental goods are
different. Clean water and air, beautiful views,
and to some extent outdoor recreation, can be
enjoyed by everyone in the same way as radio and
television. The economic value of non-rival or
public goods is the sum of all people's
willingness to pay. Non-exclusive Goods  People
cannot be excluded from enjoying most
environmental goods and the cost of trying to
exclude them is prohibitive. Other than increases
in onsite hunting and fishing opportunities,
which may be a source of economic benefit to
farmers, the environmental benefits of most
conservation practices are non-exclusive. The
free rider problem makes it impractical for
farmers to recoup the cost of on-farm
conservation investments from those who benefit
from off-farm environmental improvements.  Insepa
rable Goods  Conservation practices at a given
site contribute in many roundabout ways to
environmental goods and result in environmental
and economic benefits that accrue over great
distances in time and space. It may be impossible
to separate the economic benefits that result
from one conservation practice undertaken at one
site from another undertaken at another site.
Worse, it may be impossible to separate the
aggregate benefits of those practices from those
of other environmental investments.
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Ecosystem Services Glossary
Benefit-Cost analysis a comparison of economic
benefits and costs to society of a policy,
program, or action.  Bequest Value (option
demand) the value that people place on knowing
that future generations will have the option to
enjoy something. Consumer surplus the
difference between the price actually paid for a
good, and the maximum amount that an individual
is willing to pay for it. Thus, if a person is
willing to pay up to 3 for something, but the
market price is 1, then the consumer surplus for
that item is 2.  This measure approximates, and
is bounded by, the more technically precise
measures of economic benefit compensating 
variation or equivalent variation. Compensating
variation - the amount of money that leaves a
person as well off as they were before a change. 
Thus, it measures the amount of money required to
maintain a persons satisfaction, or economic
welfare, at the level it was at before the
change. 
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Glossary
Complementary goods goods that are often
purchased together, such as bread and butter.
Demand curve the graphical representation of
the demand function. The demand function relates
price and quantity demanded. It tells how many
units of a good will be purchased at different
prices. In general, at higher prices, less will
be purchased, so demand curves slope downward. 
The market demand function is calculated by
adding up all of the individual consumers demand
functions. Demand function the mathematical
function that relates price and quantity demanded
for goods or services.  It tells how many units
of a good will be purchased at different prices. 
The market demand function is calculated by
adding together all of the individual consumers
demand functions. Discount rate the rate used
to reduce future benefits and costs to their
present time equivalent. Economic efficiency
the allocation of goods to their highest relative
economic value.
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Glossary
Ecosystem functions the physical, chemical, and
biological processes or attributes that
contribute to the self-maintenance of the
ecosystem in other words, what the ecosystem
does. Some examples of ecosystem functions are
wildlife habitat, carbon cycling, or trapping
nutrients. Ecosystem services the beneficial
outcomes, for the natural environment, or for
people, that result from ecosystem functions.
Some examples of ecosystem services are support
of the food chain, harvesting of animals or
plants, clean water, or scenic views.  In order
for an ecosystem to provide services to humans,
some interaction with, or at least some
appreciation by, humans is required. Equivalent
variation - the amount of money that leaves a
person as well off as they would be after a
change.  Thus, it measures the amount of money
required to maintain a persons satisfaction, or
economic welfare, at the level it would be at
after a change. Existence value the value
that people place on simply knowing that
something exists, even if they will never see it
or use it. Externalities - uncompensated side
effects of human actions.  For example, if a
stream is polluted by runoff from agricultural
land, the people downstream experience a negative
externality.
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Glossary
Fixed costs production costs that are not
related to the level of production also referred
to as overhead costs. Geographical Information
System (GIS) a computer mapping system that
links databases of geographically-based
information to maps that display the
information.  For more information, see
www.esri.com. Market failure the inability of
markets to reflect the full social costs or
benefits of a good, service, or state of the
world.  Therefore, markets will not result in the
most efficient or beneficial allocation of
resources. Net economic benefit the net
economic benefit is the total economic benefit
received from a change in the state of a good or
service, measured by the sum of consumer surplus
plus producer surplus, less any costs associated
with the change. Net Present value the
current value of net benefits (benefits minus
costs) that occur over time.  A discount rate is
used to reduce future benefits and costs to their
present time equivalent.
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Glossary
Non-use values, also referred to as passive use
values values that are not associated with
actual use, or even the option to use a good or
service. Opportunity Cost The value of the
best alternative to a given choice, or the value
of resources in their next best use.  In regard
to time, the opportunity cost of time spent on
one activity is the value of the best alternative
activity that the person might engage in at that
time. Option value the value that people
place on having the option to enjoy something in
the future, although they may not currently use
it. Producer surplus the difference between
the total amount earned from a good (price times
quantity sold) and the production costs. Public
goods goods that may be enjoyed by any number
of people without affecting other peoples
enjoyment.  For example, an aesthetic view is a
pure public good.  No matter how many people
enjoy the view, others can also enjoy it.
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Glossary
Substitute goods goods that you might purchase
instead of a particular good. For example,
different types of bread are substitutes for each
other. Supply Function the mathematical
function that relates price and quantity supplied
for goods or services.  The supply function tells
how many units of a good that producers are
willing to produce and sell at a given price. 
Supply Curve - the graphical representation of
the supply function.  Because producers would
like to sell more at higher prices, the supply
function slopes upward. Total economic value
the sum of all types of use and non-use values
for a good or service. Use value value
derived from actual use of a good or service. 
Uses may include indirect uses.  For example,
enjoying a television show about whales provides
an indirect use value for the whales. Variable
costs production costs that change when the
level of production changes, so that when more is
produced the costs increase as opposed to fixed
costs. Willingness to Pay the amountmeasured
in goods, services, or dollarsthat a person is
willing to give up to get a particular good or
service.
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Why are estimates of ecosystem benefits needed?

• To justify and decide how to allocate public
  spending on conservation, preservation, or
  restoration initiatives.
• To consider the publics values, and encourage
  public participation and support for
  environmental initiatives. 
• To compare the benefits of different projects or
  programs.
• To prioritize conservation or restoration
  projects.
• To maximize the environmental benefits per dollar
  spent.
• To assess tradeoffs and resource allocations even
  for decisions involving ESA, health and safety
  issues where economic considerations are
  secondary.

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Important questions that various governmental
agency staff must answer

• When and how should agency staff attempt to
  answer ecosystem benefit questions?
• What criteria and methods are being used to make
  spending decisions, and what is the justification
  for these criteria and methods?
• Are the benefits of a project or program greater
  than the cost to taxpayers?
• Is agency spending being managed to maximize
  environmental benefits?
• How do different projects compare to each other
  in terms of ecosystem benefits?
• When should agency staff provide dollar-based
  estimates of ecosystem benefits? 
• When should they answer questions about benefits
  only by demonstrating that they are using
  reasonable benefit-based project ranking criteria?

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Some overview comments on Ecosystem Valuation

• Conventional economics gt measures of economic
  value based on what people want (market
  economies), individuals, not government, should
  be the judge
• Maximum amount a person is willing to give up to
  get more of something else is fair measure of
  relative value of the two things to that person
• Measuring of values of ES in does not require
  they be bought sold in markets just estimates
  of willingness to give up to get
• Non- measures include ranking or prioritizing
  the expected benefits of environmental benefits
• Indicator-based valuation tools are often less
  expensive require less time to apply

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Some practical issues of Ecosystem Valuation

• Easy to spend lots of to assign values
• Easy for environmental program managers/decision
  makers to misuse results undermine even their
  best programs
• Risky for managers to ignore demands for more
  fiscal accountability (government especially, but
  also private sector)
• Best professional judgment, best available
  science and/or objective scientific project
  ranking criteria that ignore beneficial outcomes
  to people are prone to being extremely unpopular
  (CAO???)

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Basic Concepts of Economic Value
(net) economic benefit is often measured by
consumer surplus
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Supply Curve Producer Surplus
Total net economic benefit sum of consumer
surplus producer surplus - costs
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Typology of Ecosystem Services Complications

• Natural resources environment associated with
  market failure
• Ecosystem services are often public goods
• Overuse common if property rights are not clearly
  defined
• Ecosystem services often affected by externalities

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Monetary-based (?) Ecosystem Valuation Methods
(a)

• Market Prices Revealed Willingness to Pay
• 1) Market Price Method
• Estimates economic values for ecosystem
  products or services that are bought and sold in
  commercial markets.
• 2) Productivity Method
• Estimates economic values for ecosystem
  products or services that contribute to the
  production of commercially marketed goods
• 3) 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.
• 4) 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.

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Monetary-based (?) Ecosystem Valuation Methods
(b)

• Circumstantial Evidence Imputed Willingness to
  Pay
• 5) Damage Cost Avoided, Replacement Cost, and
  Substitute Cost Methods
• Estimate economic values based on costs
  of avoided damages resulting from lost ecosystem
  services, costs of replacing ecosystem services,
  or costs of providing substitute services. 
• Surveys Expressed Willingness to Pay
• 6) 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.
• 7) Contingent Choice Method
• Estimates economic values for virtually
  any ecosystem or environmental service. Based on
  asking people to make tradeoffs among sets of
  ecosystem or environmental services or
  characteristics. Does not directly ask for
  willingness to paythis is inferred from
  tradeoffs that include cost as an attribute.
• 8) Benefit Transfer Method
• Estimates economic values by transferring
  existing benefit estimates from studies already
  completed for another location or issue.

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Applying Ecosystem Value Estimates B-C Analysis

• Step 1 The first step is to specify and
  describe the policy or action to be evaluated,
  including such information as its location,
  timing, and the people who will be affected.
• Step 2 The second step is to describe and
  quantify the effects of the policy or program
  that will lead to benefits and costs to society.
• Step 3 The third step is to estimate the social
  costs and benefits.
• Step 4 The final step is to compare benefits and
  costs of the proposed project. 

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B-C Analysis continued

• B-C for one or several alternatives
• Compares both benefits costs
• Bt/(1r)t, where Bt is the benefit to be received
  in year t, and r is the discount rate
• Ct/(1r)t, where Ct is the cost to be received in
  year t, and r is the discount rate
• n
• B/C ? Bt/(1r)t , where B/C present
  value B/C ratio
• t0 Ct/(1r)t
• What is to be B-C goal?
• max. net PV (PVB-PVC net PV)?
• Max. B/C ratio?
• How to choose r? How to treat negative effect
  as positive costs or negative benefits? How
  to treat scale effects?

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B-C Analysis vs. Cost-Effectiveness

• Both B-C and C-E use discounting
• C-E compares several alternatives
• C-E Maximize benefits with fixed
  costs/resources, or
• C-E Minimize cost/resources with fixed benefit
• C-E sometimes can better deal with common
  asymmetry of benefit and cost data, i.e., often
  (environmental/ecosystem) costs are better know
  than (environmental/ecosystem) benefits.

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Market Price Method
Application of the market price method requires
data to estimate consumer surplus and producer
surplus.  To estimate consumer surplus, the
demand function must be estimated.  This requires
time series data on the quantity demanded at
different prices, plus data on other factors that
might affect demand, such as income or other
demographic data.  To estimate producer surplus,
data on variable costs of production and revenues
received from the good are required.
The total net economic benefit, or economic
surplus, is the sum of consumer surplus and
producer surplus. Changes in net economic
benefit can be equated with value of ecosystem
services.
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Example Market Price Method (est. pollution
costs)

• Consumer surplus before
  after
• (10 - 5)/lb x 10000 lb/2 25000
  (10 - 7)/lb x 6000l b/2 9000
• Consumer surplus 9000 - 25000 -16,000
  (loss in benefits)
• Producer surplus
• revenue 1/lb x 10000 lb 10,000
  1.5/lb x 6000 lb 9,000
• (variable) costs 0.5/lb x 10000 lb 5000
  0.6/lb x 6000 lb 3,600
• producer surplus 1,0000 - 5,000 - 5,000
  9,000 - 3,600 5,400
• Producer surplus 5,400 - 5,000 400 (gain
  in producer surplus)
• Net economic effect (est. pollution cost)-
  16,000 400 -15,600
• i.e., est. pollution damages 15,600 or (min.)
  value of ES provided clean water

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Productivity, Net Factor Income, or Derived Value
Methods

• Application to estimate the economic value of
  ecosystem products
• or services that contribute
  to the production of
• commercially marketed goods
• Easiest applications
• cases where the ES in question is a perfect
  substitute for other inputs
• cases where only producers of final good benefit
  from changes in quantity or quality of the ES
• Data needs
• costs of production for the final good
• supply and demand for the final good
• supply and demand for other factors of production

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Hedonic Pricing Method

• May 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
• May used to estimate the value of environmental
  amenities that affect prices of marketed goods
• use residential housing prices to estimate the
  value of environmental amenities.
•  based on the assumption that people value the
  characteristics of a good, or the services it
  provides, rather than the good itself. 
• prices will reflect the value of a set of
  characteristics, including ES, that people
  consider important when purchasing the good.
• Data needs
• cross-section and/or time-series data on
  property values, and household characteristics
• index of ES/environmental quality
• use multiple regression
• Complications
• Non linear prices
• Auto-correlation

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Travel Cost Method (revealed preferences)

• Alternative approaches
• 1) simple zonal travel cost approach, using
  mostly secondary data, with some
• simple data collected from visitors.
• 2) individual travel cost approach, using a more
  detailed survey of visitors.
• 3) random utility approach using survey
  and other data, and more
• complicated statistical
  techniques.
• Data needs
• number of visits from each origin zone (usually
  defined by zip code)
• demographic information about people from each
  zone
• round-trip mileage from each zone
• travel costs per mile
• the value of time spent traveling, or the
  opportunity cost of travel time
• More complicated, and thorough, applications may
  also collect information about
• exact distance that each individual traveled to
  the site
• exact travel expenses
• the length of the trip
• the amount of time spent at the site
• other locations visited during the same trip, and
  amount of time spent at each

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Damage Cost Avoided, Replacement Cost, and
Substitute Cost Methods

• Values of ecosystem services based on
• costs of avoiding damages due to lost services
• costs of replacing environmental assets, or
• costs of providing substitute services
•  
• Estimates are based on costs, thus, not
  technically correct measure of economic value
• Assumes (may or may not be correct) ES must be
  worth a least what people paid to replace them
  (salmon problem?)
• Measures of damage costs or replacement costs
  generally much easier to estimate than peoples
  willingness to pay for ES

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Contingent Valuation Method (CV or CVM)
Estimate both use and non-use values Assign
dollar values to non-use values of the
environmentvalues that do not involve market
purchases and may not involve direct
participation (bequest value, existence value,
option value) . These values are sometimes
referred to as passive use values.
contingent valuation, because people are
asked to state their willingness to pay,
contingent on a specific hypothetical scenario
and description of the environmental service.
(stated preference rather than inferring actual
choices as in "revealed preferences). People
are willing to pay for non-use, or passive use,
environmental benefits, but how much? CVM is
highly controversial.
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Contingent Choice Method (CCM)
CCM asks the respondent to state a preference
between one group of environmental services or
characteristics, at a given price or cost to the
individual, and another group of environmental
characteristics at a different price or cost. 
Focuses on tradeoffs among scenarios with
different characteristics, contingent choice is
especially suited to policy decisions where a set
of possible actions might result in different
impacts on natural resources or environmental
services.  Useful in valuation of improvements to
ecosystems, given that several service flows are
often simultaneously affected.  May also be
used to simply rank options, without focusing on
dollar values. Formats for applying contingent
choice methods Contingent RankingContingent
ranking surveys ask individuals to compare and
rank alternate program outcomes with various
characteristics, including costs. Discrete
ChoiceIn the discrete choice approach,
respondents are simultaneously shown two or more
different alternatives and their characteristics,
and asked to identify the most preferred
alternative in the choice.  Paired
Ratingvariation on the discrete choice format,
where respondents are asked to
compare 2 alternate situations and are asked to
rate them in terms of strength of preference.  
Choices that respondents make are statistically
analyzed using discrete choice statistical
techniques, to determine the relative values for
the different characteristics or attributes.  If
one of the characteristics is a monetary price,
then it is possible to compute the respondents
willingness to pay for the other characteristics.
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Benefit Transfer Method
Basic goal of benefit transfer is to estimate
benefits for one context by adapting an estimate
of benefits from some other context. More
rigorous approach involves transferring a benefit
function from another study. Different standards
for benefit transfer may be applied in different
contexts. Higher standard of accuracy may be
required when the costs of making a poor decision
are higher. Benefit transfer method is most
reliable when the original site and the study
site are very similar in terms of factors such as
quality, location, and population
characteristics when the environmental change is
very similar for the two sites and when the
original valuation study was carefully conducted
and used sound valuation techniques.
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Market Price Method

• Advantages of the Market Price Method
• The market price method reflects an individual's
  willingness to pay for costs and benefits of
  goods that are bought and sold in markets, such
  as fish, timber, or fuel wood.  Thus, peoples
  values are likely to be well-defined.
• Price, quantity and cost data are relatively
  easy to obtain for established markets.
• The method uses observed data of actual consumer
  preferences.
• The method uses standard, accepted economic
  techniques.
• Issues and Limitations of the Market Price Method
  
• Market data may only be available for a limited
  number of goods and services provided by an
  ecological resource and may not reflect the value
  of all productive uses of a resource.
• The true economic value of goods or services may
  not be fully reflected in market transactions,
  due to market imperfections and/or policy
  failures. 
• Seasonal variations and other effects on price
  must be considered.
• The method cannot be easily used to measure the
  value of larger scale changes that are likely to
  affect the supply of or demand for a good or
  service.
• Usually, the market price method does not deduct
  the market value of other resources used to bring
  ecosystem products to market, and thus may
  overstate benefits.

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Productivity Method

• Advantages of the Productivity Method
• In general, the methodology is straightforward.
• Data requirements are limited, and the relevant
  data may be readily available, so the method can
  be relatively inexpensive to apply.
• Issues and Limitations of the Productivity Method
  
• The method is limited to valuing those resources
  that can be used as inputs in production of
  marketed goods. 
• When valuing an ecosystem, not all services will
  be related to the production of marketed goods. 
  Thus, the inferred value of that ecosystem may
  understate its true value to society.
• Information is needed on the scientific
  relationships between actions to improve quality
  or quantity of the resource and the actual
  outcomes of those actions.  In some cases, these
  relationships may not be well known or
  understood.
• If the changes in the natural resource affect
  the market price of the final good, or the prices
  of any other production inputs, the method
  becomes much more complicated and difficult to
  apply.

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Hedonic Pricing Methods

• Advantages of the Hedonic Pricing Method
• The methods 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.
• 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 peoples
  willingness to pay for perceived differences in
  environmental attributes, and their direct
  consequences.  Thus, if people arent 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.

41
Travel Cost Methods

• 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 behaviorwhat
  people actually dorather than stated willingness
  to paywhat 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.
• 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 measurethe persons
  wage rate, or some fraction of the wage rateand
  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 persons 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.
• 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.

42
Advantages of the Damage Cost Avoided,
Replacement Cost, and Substitute Cost Methods 

•  
• The methods may provide a rough indicator of
  economic value, subject to data constraints and
  the degree of similarity or substitutability
  between related goods.
• It is easier to measure the costs of producing
  benefits than the benefits themselves, when
  goods, services, and benefits are non-marketed. 
  Thus, these approaches are less data- and
  resource-intensive.
• Data or resource limitations may rule out
  valuation methods that estimate willingness to
  pay.
• The methods provide surrogate measures of value
  that are as consistent as possible with the
  economic concept of use value, for services which
  may be difficult to value by other means.
• Issues and Limitations
• These approaches assume that expenditures to
  repair damages or to replace ecosystem services
  are valid measures of the benefits provided. 
  However, costs are usually not an accurate
  measure of benefits.
• These methods do not consider social preferences
  for ecosystem services, or individuals behavior
  in the absence of those services.  Thus, they
  should be used as a last resort to value
  ecosystem services. 
• The methods may be inconsistent because few
  environmental actions and regulations are based
  solely on benefit-cost comparisons, particularly
  at the national level.  Therefore, the cost of a
  protective action may actually exceed the
  benefits to society.  It is also likely that the
  cost of actions already taken to protect an
  ecological resource will underestimate the
  benefits of a new action to improve or protect
  the resource.
• The replacement cost method requires information
  on the degree of substitution between the market
  good and the natural resource. Few environmental
  resources have such direct or indirect
  substitutes.  Substitute goods are unlikely to
  provide the same types of benefits as the natural
  resource, e.g., stocked salmon may not be valued
  as highly by anglers as wild salmon.
• The goods or services being replaced probably
  represent only a portion of the full range of
  services provided by the natural resource.  Thus,
  the benefits of an action to protect or restore
  the ecological resource would be understated.
• These approaches should be used only after a
  project has been implemented or if society has
  demonstrated their willingness-to-pay for the
  project in some other way (e.g., approved
  spending for the project).  Otherwise there is no
  indication that the value of the good or service
  provided by the ecological resource to the
  affected community greater than the estimated
  cost of the project.
• Just because an ecosystem service is eliminated
  is no guarantee that the public would be willing
  to pay for the identified least cost alternative
  merely because it would supply the same benefit
  level as that service. Without evidence that the
  public would demand the alternative, this
  methodology is not an economically appropriate
  estimator of ecosystem service value.

43
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. 
• Issues and Limitations of the
  Contingent Valuation Method
• Although the contingent valuation method has
  been widely used for the past two decades, there
  is considerable controversy over whether it
  adequately measures people's willingness to pay
  for environmental quality. 
• People have practice making choices with market
  goods, so their purchasing decisions in markets
  are likely to reflect their true willingness to
  pay. 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.  For example,
  respondents may express a positive willingness to
  pay because they feel good about the act of
  giving for a social good (referred to as the
  warm glow effect), although they believe that
  the good itself is unimportant.  Respondents may
  state a positive willingness to pay in order to
  signal that they place importance on improved
  environmental quality in general.  Alternatively,
  some respondents may value the good, but state
  that they are not willing to pay for it, because
  they are protesting some aspect of the scenario,
  such as increased taxes or the means of
  providing the good.

44
Issues and Limitations of the Contingent
Valuation Method

• Respondents may make associations among
  environmental goods that the researcher had not
  intended.  For example, if asked for willingness
  to pay for improved visibility (through reduced
  pollution), the respondent may actually answer
  based on the health risks that he or she
  associates with dirty air.
• 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.
• 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. 
• If people are first asked for their willingness
  to pay for one part of an environmental asset
  (e.g. one lake in an entire system of lakes) and
  then asked to value the whole asset (e.g. the
  whole lake system), the amounts stated may be
  similar.  This is referred to as the embedding
  effect.
• In some cases, peoples expressed willingness to
  pay for something has been found to depend on
  where it is placed on a list of things being
  valued.  This is referred to as the "ordering
  problem." 
• 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.
• Many early studies attempted to prompt
  respondents by suggesting a starting bid and then
  increasing or decreasing this bid based upon
  whether the respondent agreed or refused to pay a
  such sum.  However, it has been shown that the
  choice of starting bid affects respondents final
  willingness to pay response. 

45
Issues and Limitations of the Contingent
Valuation Method

• 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 answer 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.
• Estimates of nonuse values are difficult to
  validate externally.
• When conducted to the exacting standards of the
  profession, contingent valuation methods can be
  very expensive and time-consuming, because of the
  extensive pre-testing and survey work. 
• Many people, including jurists policy-makers,
  economists, and others, do not believe the
  results of CV.

46
Advantages of the Contingent Choice Method

•  
• The contingent choice method can be used to
  value the outcomes of an action as a whole, as
  well as the various attributes or effects of the
  action.
• The method allows respondents to think in terms
  of tradeoffs, which may be easier than directly
  expressing dollar values. The tradeoff process
  may encourage respondent introspection and make
  it easier to check for consistency of responses. 
  In addition, respondents may be able to give more
  meaningful answers to questions about their
  behavior (i.e. they prefer one alternative over
  another), than to questions that ask them
  directly about the dollar value of a good or
  service or the value of changes in environmental
  quality.  Thus, an advantage of this method over
  the contingent valuation method is that it does
  not ask the respondent to make a tradeoff
  directly between environmental quality and money.
• Respondents are generally more comfortable
  providing qualitative rankings or ratings of
  attribute bundles that include prices, rather
  than dollar valuation of the same bundles without
  prices, by de-emphasizing price as simply another
  attribute.
• Survey methods may be better at estimating
  relative values than absolute values.  Thus, even
  if the absolute dollar values estimated are not
  precise, the relative values or priorities
  elicited by a contingent choice survey are likely
  to be valid and useful for policy decisions.
• The method minimizes many of the biases that can
  arise in open-ended contingent valuation studies
  where respondents are presented with the
  unfamiliar and often unrealistic task of putting
  prices on non-market amenities.
• The method has the potential to reduce problems
  such as expressions of symbolic values, protest
  bids, and some of the other sources of potential
  bias associated with contingent valuation. 

47
Issues and Limitations of the Contingent Choice
Method

•  
• Respondents may find some tradeoffs difficult to
  evaluate, because they are unfamiliar.
• The respondents behavior underlying the results
  of a contingent choice study is not well
  understood.  Respondents may resort to simplified
  decision rules if the choices are too
  complicated, which can bias the results of the
  statistical analysis.
• If the number of attributes or levels of
  attributes is increased, the sample size and/or
  number of comparisons each respondent makes must
  be increased.
• When presented with a large number of tradeoff
  questions, respondents may lose interest or
  become frustrated.
• Contingent choice may extract preferences in the
  form of attitudes instead of behavior intentions.
• By only providing a limited number of options, it
  may force respondents to make choices that they
  would not voluntarily make.
• Contingent ranking requires more sophisticated
  statistical techniques to estimate willingness to
  pay.
• Translating the answers into dollar values, may
  lead to greater uncertainty in the actual value
  that is placed on the good or service of
  interest.
• Although contingent choice has been widely used
  in the field of market research, its validity and
  reliability for valuing non-market commodities is
  largely untested.

48
Advantages of the Damage Cost Avoided and
Replacement Cost Methods

•  
• Benefit transfer is typically less costly than
  conducting an original valuation study. 
• Economic benefits can be estimated more quickly
  than when undertaking an original valuation
  study.
• The method can be used as a screening technique
  to determine if a more detailed, original
  valuation study should be conducted. 
• The method can easily and quickly b