2. OUTLINE
• Economics
• Economic value
• Environmental valuation
• Why do we have to value the environment
• Methods for valuing the environment
1. Indirect method
(a) HP method
(b) TCM
2. Direct method
(a) CVM
• Applications of environmental valuation methods
• Conclusion
• References 2
3. ECONOMICS ??
• Economics studies how people use resources
to provide goods and services in the face of
variable supply and demand.
• Root “eco” give rise to both ecology and
economics.
• Most environmental and economic problems
are linked.
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4. ECONOMIC VALUE
It is a measure of the
benefit provided by a good
or service to an economic
agent.
Maximum amount a
consumer is willing to pay
for an item in a free market
economy or, amount of time
an individual will sacrifice
waiting to obtain a good in a
socialist economy. 4
5. ENVIRONMENTAL VALUATION
• It refers to assignment of money values to non-
marketed assets, goods and services, where the
money values have a particular and precise meaning.
• If a good or service contributes positively to human
wellbeing, it has economic value.
• Environmental values are measured in money terms
through the concept of individuals :
i. Willingness to pay (WTP)
ii. Willingness to accept (WTA)
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6. • Understanding value of Environmental Goods
requires understanding of the notion of
“values” of environmental goods.
• There are two types of values :
USE VALUE and NON-USE VALUE
Contd..
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7. Contd...
USE VALUE NON-USE VALUE
• Satisfaction/Utility that
consumers obtain by
directly consuming the
goods.
• Gain in person’s utility
without the person
actually using the good
directly.
• e.g : Hunting, Fishing • e.g: Increases in
productivity, well-being,
etc.
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9. Why do we have to value the environment ?
• No price data exists for non- marketed
environmental resources.
• Need information on benefits and costs of
protecting and restoring the environment to guide
budget allocations.
• Need information to guide compensation setting for
victims.
• Need information to guide efficient and fair
resource allocation.
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10. Methods of Measuring Environmental Values
Revealed Preference :
Real choices of people are observed in some
market and information are inferred on the trade-
offs between money and the environmental good.
Stated Preference :
It basically involves asking people how much an
environmental good is worth.
These information are collected through opinion
polls or surveys. 10
13. 1. Indirect methods
(A) HEDONIC PRICING METHOD
• Hedonic Pricing (HP) approach is derived from the
characteristic theory of value first proposed by
Lancaster (1966) and Rosen (1974).
• This seeks to explain the value of a commodity as a
bundle of valuable characteristics
(e.g. The price/rent of house depends on number of
rooms, availability of garden in the campus, proximity
to shops, noise level in the neighborhood, air quality
levels etc.)
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14. Contd..
• HP was first applied to environmental valuation by
Ridker and Henning (1967).
• “ Better environmental quality – higher the price of
the property”.
F IFIG : 1 14
15. Limitations :
• Does not cover all types of environmental services-
only housing.
• Multi- collinearity – Variables are not independent
of each other.
• Inequalities – Poor live in degraded environments,
but cannot opt for better surroundings.
• Future generations requirements not addressed.
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16. (B) TRAVEL COST METHOD
• It is a widely used surrogate market approach that
relies on information on time and travel costs to
derive a demand curve for a recreational site.
• This curve is in turn used to estimate the consumer’s
surplus or value of the site to all users.
• This approach is widely used to value the
recreational benefits of public parks and other
natural areas.
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18. Limitations :
• More visits to the site, more overcrowding.
• Sample not representative.
• Protected areas where no human access is
allowed, no travel costs, but have high
environmental values of conservation.
• Many other environmental issues not addresses
by this method.
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19. 2. Direct method
CONTINGENT VALUATION METHOD
• It is a direct approach using a hypothetical market.
• CVM is a survey method in which respondents are
asked how much they are willing to pay for the use
or conservation of natural goods.
• It is the only environmental valuation technique that
takes into account non-use values.
• It is said to be an appropriate economic valuation
method for environmental goods that have no
indirect effects on other goods.
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20. Contd..
• CVM exercise can be split into six stages:
1) Setting up the hypothetical market.
2) Obtaining bids.
3) Estimating mean WTP and/or WTAC.
4) Estimating bid curves.
5) Aggregating the data.
6) Evaluation.
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21. Limitations :
• Design of the survey, questionnaires.
• Choice of future generation is not considered, only
present generation.
• CV surveys are not based on real resource decisions.
• Finally, difficult to monetize environmental benefits.
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23. CONCLUSION
The economic value is therefore a vital concept
in natural resource management. This is
because it enables us value all of the elements
of an ecosystem or resource thus giving an
estimate of its value.
The many methods that have been developed,
tried and tested for us in total economic
valuation makes the concept very versatile.
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