Overview of Economic Valuation Methodologies Suzie Greenhalgh World Resources Institute.

Overview of Economic Overview of Economic ValuationValuation

MethodologiesMethodologiesSuzie Greenhalgh

World Resources Institute


Total Economic Value

Total Economic Value

Use Values Non-Use Values

Direct Use Values Indirect Use Values

Consumptive/Extractive Uses

Non-Consumptive/Non-Extractive Uses


Major Uses of Coral Reefs

• Direct Uses – Consumptive– Resource is consumed or extracted/destroyed– Mainly provisioning services

• Examples:– Reef Fishing– Catching other associated fish populations, crustaceans

and shell fish– Reef gleaning– Coral/vegetative matter collection



• Direct Uses – Non-Consumptive– Resource condition remains the same after use

– Mainly cultural services

• Examples:– Snorkeling

– Scuba diving

– Sailing/glass bottom boats

– Surfing

– Tourism/general recreation



• Indirect Uses– Resource provides a service that results in something else

we value

– Mainly regulating and supporting services

• Examples:– Fish nursery/forage grounds for pelagic fish

– Shoreline Protection

– Wave Energy dissipation/storm surge protection

– Protection of harbour/port infrastructure



• Non-use Values– Coral reef values that don’t involve direct or indirect uses

– Mainly cultural services

• Examples:– Option values—value attached to option of using/visiting

the reef later

– Bequest values—value placed on protecting the reef for future generations

– Existence values—value of knowing the reef exists


Some Useful Terms

Consumer Surplus• Amount people are willing to pay for a good or service

(e.g., diving on a reef) above what it actually cost to use that service (e.g., cost incurred to dive)

Producer Surplus• Amount people are willing to offer their services at

below what they actually charge for that service


Categories of Valuation Methods

• Market-Based, e.g.,– Change in Production/Effect on Production– Production Function/Market Price

• Revealed Preferences, e.g.,– Replacement Costs– Travel Cost– Hedonic Pricing

• Stated Preferences, e.g.,– Contingent Valuation


Production Function

• Also known as market prices or net benefits

• Values direct uses, e.g., fisheries, tourism/rec

• Uses market prices to determine value

• Should include both revenue and costs of providing the service

• Example:

– Used to estimate the economic value of the commercial reef fishery in Belize~US$1.9mill net return on investment in 1998


Production Function

• Advantages

– Easy to use

– Fewer assumptions

– Little modelling or statistical analysis

• Disadvantages

– Many goods/services do not have markets or have highly distorted markets


Change in Production

• Also known as Effect of Production

• Values direct uses, e.g., fisheries and tourism/rec

• Uses differences in output/prodn as basis for valuing reef services

• Used to estimate effect of an impact/management change

• Example:

– Sumilon Island (Philippines) had decline of US$54,000 in reef catch in 1990 after breakdown in protective management


Change in Production

• Advantages

– Applicable to a wide range of goods and services

• Disadvantages

– Difficult to collect data to accurately predict bio-physical response relationships

– May be other market impacts that need to be included, e.g., change production—prices change—people switch to different good


Replacement Cost

• Values indirect uses, e.g., shoreline protection

• Cost of infrastructure for coastal protection is a proxy for the protection provided by coral reefs

• Example:

– ~US$91,000 in coastal defenses had to be built on Tarawa Atoll, Kiribati to replace coral reef protection


Replacement Cost

• Advantages

– Simple to apply and analysis

– Useful when there is limited time/finances available

• Disadvantages

– Difficult to find perfect replacements that provide the same quality as the coral reef.

– It is questionable as whether (total) expenditure would be made if resource disappeared


Avoided Damages

• Also known as Stock at Risk

• Values indirect uses, e.g., shoreline protection

• Value based on the damage that is avoided by presence of the coral reef

– This is a proxy for the protection provided by coral reefs

• Example:

– Annual cost of erosion from coral mining in Sri Lanka ranged from ~US$160-172,000/km2 of reef, depending on land prices and landuses.


Avoided Damages

• Disadvantages

– Values are hypothetical

– Never sure whether the damages would ever occur


Hedonic Pricing

• Values non-consumptive direct uses and indirect uses, e.g., shoreline protection, enjoyment of a clean beach and healthy reef

• Uses price differences to determine the value of a good or service (e.g., presence of a reef or clean beach)

• Typically uses property values or wage rates

• Example:

– Used to value the benefit of coral reefs on Kihei Coast, Hawaii—65% of total annual reef economic benefit—based on property value


Hedonic Pricing

• Disadvantages

– Need large data sets and detailed information on all aspects that affect prices, e.g., distance from beach, housing characteristics, nearby amenities, crime rates, etc.

– Relies on assumption that prices are sensitive to reef quality


Travel Cost

• Values direct non-consumptive uses, e.g., tourism/recreation related benefits

• The travel time and cost spent to reach the destination is used to:

– construct a demand curve for the coral reef or its services

– estimate consumer surplus

• Examples:

– Total consumer surplus of visitors to Bonaire Marine Park was ~US$19.2 million

– Value of Vessigny Beach in Trinidad, ~US$202,000


Travel Cost

• Disadvantages

– Depends on large detailed data sets and relatively complex analytical techniques

– Surveys are expensive and time consuming

– Reason for traveling to a place may be difficult to isolate—may not be the reef


Contingent Valuation

• Estimates non-value uses

• Uses surveys to determine how much people are:

– willingness to pay for a benefit (e.g., improvement in reef condition) or

– willingness to accept to compensate for a loss (e.g., loss in income from reef-related activities)

• Examples:

– Estimate value of increased coral cover in Montego Bay and Curacao

– Estimate consumer surplus for existing reef and reef improvement in Negril Marine Park, Hol Chan & Grand Anse


Contingent Valuation

• Advantages

– Doesn’t rely on markets or observed behaviour

– Applied to any good or service

• Disadvantages

– Requires large and costly surveys

– Complex data sets and analytical techniques

– Relies on hypothetical scenarios that may not reflect reality

– Highly susceptible to bias as rely on people to state their preferences


Gross Value vs Net Benefit

• Gross Value—use revenue only

• Net benefits—use revenue less costs

• Net benefits is more correct form of analysis

• Use net benefits for estimating marginal gains/losses associated with different conditions of reef health


Economic vs Financial Analysis

• Economic analysis– uses distortion-free prices to estimate gross

revenue/net benefits (e.g., price without govt subsidy)• Better measure of social welfare

• Often difficult to get all the required info

• Financial analysis– uses observed prices for fuel, labour, etc. to estimate

gross revenue/net benefits• Helps explain how people react

• Often used as a first-best proxy for economic analysis


Avoiding Pitfalls

• Use net benefits rather than gross benefits

• Include opportunity cost, where necessary

• Only use replacement costs in right circumstances

• Only use benefits transfer in right circumstances

• Don’t use estimates of small changes for large changes


Avoiding Pitfalls

• Be careful of double counting

• Only use national benefits when interested in national perspective

• Adjust price distortions

• Do a reality check


Tobago Diving Value

• Assumptions– Number of tourists– Number of tourists that dive (10%)***– Number of dives/diver (80% 6+ dives, 20% 2 dives)– There is no renting of dive equipment– Average wage expenditure/operation– All divers pay by credit card– All divers are tourists (not residents)– Consumer surplus based on Hawaii study (not perfect)

• Sensitivity analysis– Level of consumer surplus– % of revenue going to operating costs


Estimated Dive Values--Tobago

Total Revenue

Total Costs

Value added

CS1*

9.5%

CS2*

19%

CS5*

28.5%

Assume 50% Operating Cost

5.2 3.7 0.8 0.5 1 1.5

Assume 75% Operating Cost

5.2 5 0.8 0.5 1 1.5

All values in US$ millions and Annual

Notes:Income tax/green levy not deductedDirect Impact multiplier not included

* Sensitivity analysis around consumer surplus


Estimated Net Benefits for Diving

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

CS 1 CS 2 CS 3 CS 4 CS 5

Consumer Surplus Sensitivity

Ann

ual N

et B

enef

its (U

S$ m

illio

n)

50% operating costs 75% operating costs



Known Omissions from Dive Value

• Income tax deductions

• Green levy deductions

• Direct economic multiplier for local suppliers of fuel, etc.

• Indirect economic multiplier for general expenditures by dive operator employees

• 2004 tourist numbers used with 2006 prices (need price adjustment)


Tobago Accommodation Value

• Assumptions– Occupancy rates: peak=85%, high=50%, low=50%, ave=65% – Only used advertised rates—no special room rates– Room rates based on double occupancy of predominant room

type– Assumed taxes/charges included if not stipulated on website– Assume 1.5 hotel employees/hotel room, 1 employee if < 2

rooms– Average wage rate used—TT$10/hr for 40 hour week

• Sensitivity analysis– Percent of accommodation values attributed to the reef– % of revenue going to operating costs


Data Issues: Accommodation Value

• Only 70% of hotels had accessible information

• Occupancy rates are expert opinion

• Possibility of double counting with villas

• Room rates, number of rooms, inclusion of taxes and charges for some hotels uncertain

• Local vs foreign room rates and proportion of rooms at local rates


Estimated Accommodation Values--Tobago

All Values in US$ Millions and Annual


Operating Costs

(50% of Revenue)

Operating Costs

(75% of Revenue)Revenue Value

Added

Costs Net

Benefits

Costs Net Benefits

Assume 30% of Values Attributed to the Reef

29.3 5.1 21.3 8 27.4 1.9

Assume 60% of Values Attributed to the Reef

58.7 10.1 42.7 16 54.8 3.9


Estimated Accommodation Net Benefits


0

2

4

6

8

10

12

14

16

18

50% Operating Costs 75% Operating Costs

Net

Ben

efit

s (U

S$

mil

l/y

r)

30% of Net Benefits Attributed to Reef 60% of Net Benefits Attibuted to Reef


Known Omissions: Accommodation Value

• Income tax deductions

• Green levy deductions

• Direct economic multiplier for local suppliers, e.g., laundry, etc.

• Indirect economic multiplier for general expenditures by hotel employees

Overview of Economic Valuation Methodologies Suzie Greenhalgh World Resources Institute.

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