Valuing the Environment: Exploring Valuation Techniques and Methods

This report delves into the critical concept of environmental valuation, which involves assigning monetary values to environmental goods, services, and natural resources to inform decision-making regarding their wise use and conservation. It begins by explaining the rationale behind environmental valuation, emphasizing its role in cost-benefit analysis, particularly in scenarios like dam construction, where economic and environmental considerations intersect. The report then categorizes the types of value, differentiating between use values (consumptive and non-consumptive) and non-use values (existence, option, quasi-option, bequest, and vicarious values). Furthermore, it explores various environmental valuation techniques, including market-based methods (direct market prices, market prices of alternatives or substitutes) and non-market valuation methods (indirect methods like the travel cost method and hedonic pricing, and direct methods like contingent valuation). The report provides detailed explanations of each method, their applications, advantages, and limitations, with examples and case studies to illustrate the concepts. Finally, the report discusses the hedonic pricing method, explaining its application in valuing environmental attributes like clean air, and its use in statistical analysis to determine the implicit price of such attributes.

Valuing the Environment

Why Value the Environment
• Valuation can simply be defined “as an attempt to put monetary values or to
environmental goods and services or natural resources”.
• It is a key exercise in economic analysis and its results provide important
information about values of environmental goods and services.
• This information can be used to influence decisions about wise use and
conservation of forests and other ecosystems.
• The basic aim of valuation is to determine people’s preferences by gauging how
much they are willing to pay (WTP) for given benefits or certain environmental
attributes e.g. keep a forest ecosystem intact.
• In other words, valuation also tries to gauge how much worse off they would
consider themselves to be as a result of changes in the state of the environment
such as degradation of a forest.

Why Value the Environment (Cont……)
• The policy relevance of valuation information is extensive, but might include:
– • demonstrating the value of biodiversity: awareness raising;
– • land use decisions: for conservation or other uses;
– • setting priorities for biodiversity conservation (within a limited budget);
– • limiting biodiversity attacks;
– • assessing biodiversity impacts of non-biodiversity investments;
– • determining damages for loss of biodiversity: liability regimes;
– • limiting or banning trade in endangered species;
– • choosing economic instruments for saving biodiversity (e.g. taxes, subsidies).

Why Value the Environment (Cont……)
• Why Cost-Benefit Analysis?
In some cases, however, governments must make specific decisions that have both
economic and environmental implications.
In such cases, decision makers use Cost-Benefit Analysis (CBA) to balance the
positive and the negative consequences of a proposed action
(Ex. construction of large Dam).

Why Value the Environment (Cont……)
CostBenefit
Farmland and wildlife habitat will be
flooded
Hydro.electric Power
Communities will have to relocateA Stable water supply for irrigation
Certain fish species may become
extinct
Flood control
Reduce scenic whitewater rafting and
hiking
Create new recreational opportunities
for lake boating and fishing
Othersothers
CBA for An Dam Construction

Why Value the Environment (Cont……)
How can we evaluate whether or not to
build the dam?
How can we put a dollar value on the
social and ecological losses that will
result?

Estimating Value
For Dam Construction Case
Economists use various techniques to estimate
different kinds of values.

Types of value

Types of Value (Cont…..)
The term value is used in many ways in studies
on the economic valuation of goods and
services, including use values and non-use
values.
It is important to clarify the meanings of the
different types of values, as the term can have
distinct meanings. The working definitions and
discussions of non-market values.

Use values
Use value refers to the benefit a user obtains, either
directly or indirectly, from participating in an activity.
Consumptive use can be described as participation in
activities that utilize and possibly deplete the forest
resources (e.g. hunting, fishing and tree cutting); while
non-consumptive uses are those uses or activities that
do not affect the resource (e.g. bird-watching in a
national park, appreciating a view at a look-out).