Valuing Recreation/Amenity Benefits: Travel Costs, CVM, and Hedonics

GEF
Session 15
Valuing Recreation/Amenity Benefits –
travel costs, CVM, hedonics
John A. Dixon
johnkailua@aol.com
The World Bank Institute
Ashgabad, November 2005

Caspian EVE 2005/UNDP and WBI Jo
GEF
Questions
• What are the primary recreational/ amenity
benefits associated with Caspian Sea
resources?
• What are the main analytical techniques used
to estimate these values? Differences
between “revealed preference” and “stated
preference” techniques.
• What are the main economic policies that can
be used to regulate or manage these uses?

GEF
Selecting the appropriate valuation
technique (again)
Environmental Impact
Measurable change
in production
Change in environmental
quality
Yes
Nondistorted market
prices available?
Use change-
in-
productivity
approach
Use surrogate
market
approaches,
apply shadow
prices to
changes in
production
Yes No
Habitat
Opportunity-
cost approach
Replacement
cost approach
Land value
approaches
Contingent
Valuation
Air and water
quality
No
Cost-
effectiveness
of prevention
Preventive
expenditure
Replacement/
relocation
costs
Health effects
Sickness Death
Medical
costs
Loss of
earnings
Human
capital
CEA of
prevention
Recreation
Contingent
valuation
Travel cost
Aesthetic,
Biodiversity,
Cultural,
Historical
assets
Contingen
Valuation
Contingent
Valuation
Hedonic
wage
approach
Contingent
Valuation

GEF
Principal Recreational/ Amenity Benefits
• Direct, consumptive uses: fishing,
hunting, gathering of marine organisms,
oil and gas?
• Direct, non-consumptive uses:
swimming, sailing, viewing wildlife,
transportation, others?
• Indirect uses: ecosystem services,
vistas and views, amenity benefits

GEF
Matching Economic Valuation Technique
to Uses and Users
• Direct, consumptive uses: changes in
production, CVM, Travel Cost
• Direct non-consumptive uses: CVM,
travel cost, RUM (random utility
models), hedonics, others
• Indirect uses: changes in production of
ecosystem services, replacement cost/
preventive expenditures, hedonics,
others

GEF
Valuing Recreational Uses
• Usually done by one of three means:
– Observing net admission fees/ permit fees
paid (a minimum estimate of WTP)
– Use of Travel Cost approach that relies on
“revealed preference” information on
travelers time and costs of visiting a
location
– Use of CVM that relies on “stated
preferences” to determine WTP
(willingness to pay) for use of a location

GEF
“Revealed” vs “Stated” preferences
• Economists tend to prefer revealed
preference approaches since they rely on real
data on expenditures and markets
– Can be collected from the market or via use of
surveys
– Real dollars exchanged for various goods and
services
• Stated preferences (e.g. CVM), however, are
sometimes the only valuation approach
possible. When is this true???

GEF
A Simple Travel Cost Example (revealed
preference) – value of Lake Sevan in Armenia
• Visitors to Lake Sevan in Armenia are
surveyed to find their cost of travel and
frequency of visits.
– This information is used to estimate a
demand curve for Lake Sevan recreation
– Different demand curves are estimated for
Armenians and foreign visitors (due to
great differences in income levels)
– Travel Cost does NOT capture non-use
values by both Armenians and foreigners

GEF
The value of Lake Sevan can also be estimated
by use of the CVM approach (stated
preferences)
• CVM can be used when a market is only
partially developed (and sales data hard to
obtain). Especially useful for non-use values.
• In theory CVM can capture the MAXIMUM
willingness to pay for the use of a resource
• Advantage of CVM: you will always get an
answer
• Disadvantage of CVM: you will always get an
answer!!!

GEF
Valuing Ecosystem Services: Cost-side
Valuation Techniques
• Include the Replacement Cost approach and
the Preventive Expenditures approach (both
approaches are closely linked)
• Uses information on replacing a “lost” service
or function, or preventing the damage from
occurring
– For example, the cost of replacing flood protection
benefits of a wetland, or
– The cost of replacing natural water filtration/
treatment benefits by mechanical/engineering
approaches

GEF
Replacement-cost approach: New York City
(NYC) watershed
• The question was whether it was better to
protect NYC’s watershed and keep water
clean, or allow the watershed to be developed
and clean and treat the water when it reached
NYC
• The economic analysis showed that it was
CHEAPER (less costly) to protect the
watershed by an investment of $1 billion plus
in purchasing land in the watershed, than to
build and operate a water-treatment plant
closer to NYC

GEF
Valuing Amenity Benefits: Hedonics (revealed
preferences) and CVM (stated preferences)
• Amenity benefits are usually valued by either
Hedonic approaches or via CVM (surveys)
• Hedonic effects are commonly seen in pricing
of hotel rooms, real estate, other tangible
goods or services that have an amenity value
component
• Hedonic approaches use information on
actual market transactions to estimate the
WTP for these amenity values

GEF
Hedonic Valuation Approaches
• Use information on observed behavior to estimate
WTP (willingness to pay) for an environmental
amenity (an economic ‘good’) or disamenity (an
economic ‘bad’)
• Requires information on transactions and differences
in environmental quality
• Often applied to housing, hotel rooms or other
locational decisions (e.g. wages and a ‘sunshine tax’)

GEF
Example 1: Houses near the Zandvlei Wetland
in Capetown, South Africa

GEF
Capetown Case (cont’d)
Basic idea: Houses near the Zandvlei wetland sell for
more, an “environmental premium.” How large is
this premium?
The analysis was based on sales data on housing over the
past 4 years; the results were then extrapolated to the entire
housing stock in the area
Premium per house for water frontage was about R130,000
per house (about US$13,000) (see van Zyl/ Leiman paper
Tables 2 and 3)
The results were very similar to estimates made by estate
agents (expert opinion approach) for the same area –
Hedonic approach value of R77 million vs Expert opinion
value of R88 million

GEF
Discussion of Capetown Results
The waterfront (open space) premium was less than 10% (and
in some cases was even negative due to security concerns)
The results are very site specific (and management specific) –
and only capture one aspect of open space values (as
embodied in property ownership)
Hedonic pricing may NOT value certain types of native
vegetation (e.g. fynbos are seen as unkempt and a fire hazard
even though they are a unique ecosystem)
The hedonic study ignores wider values of open spaces to
recreational users and other parts of Capetown (as reflected in
generally high property values in all of Capetown compared to
other parts of South Africa – the San Francisco effect)

GEF
Hedonic pricing (cont’d)
2. Hotel room pricing in resorts is a market that
“clears” every day. For example, in hotels on
the beach in Hawaii:
– Room price varies with floor (higher floors are
more expensive)
– Room price varies with view
• ocean view
• ‘garden view’… usually the parking lot, maybe the
mountains!
– Room price varies with season:
• High season/Low season
• Or, as in Costa Rica, high season and the ‘green’ season
(e.g. rain!)

GEF
Hedonic pricing (cont’d)
3.Pricing of faculty flats at a university in China
In this case a 6 storey building, no lift, one
flat per floor, and the roof leaks.
What is the monthly rental per flat? If
ground floor rents for 100 units per month,
what are the monthly rents for the following
floors?
• Floor 2 ___
• Floor 3 ___
• Floor 4 ___
• Floor 5 ___
• Floor 6 (top) ___

GEF
Pricing of Professor’s Flats in Beijing (cont’d)
Suppose that the roof is fixed and does not leak, and
that an elevator/ lift is installed. How does this
change the pricing structure? What is the
monthly rental per flat? If ground floor rents for
100 units per month, what are the monthly rents
for the following floors?
• Floor 2 ___
• Floor 3 ___
• Floor 4 ___
• Floor 5 ___
• Floor 6 (top) ___

GEF
Pricing of Professor’s Flats in Beijing (cont’d)
• How could this hedonic pricing information be
used to make better decisions??
– To decide whether or not the repairs and
changes are justified? How?
– To decide whether or not to build new
buildings? How?
– To design a more efficient pricing
structure? How?

Valuing Recreation/Amenity Benefits: Travel Costs, CVM, and Hedonics

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