Economic Valuation. Methodologies

8/9/2019 Economic Valuation. Methodologies

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Overview of Economic ValuationOverview of Economic Valuation

MethodologiesMethodologiesSuzie Greenhalgh

World Resources Institute


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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


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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


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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


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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


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Non-use Values

Coral reef values that dont involve direct or indirect uses

Mainly cultural services

Examples:

Option valuesvalue attached to option of using/visiting the

reef later

Bequest valuesvalue placed on protecting the reef forfuture generations

Existence valuesvalue of knowing the reef exists


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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 touse that service (e.g., cost incurred to dive)

Producer Surplus

Amount people are willing to offer their services atbelow what they actually charge for that service


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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


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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


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Production Function

Advantages

Easy to use

Fewer assumptions Little modelling or statistical analysis

Disadvantages

Many goods/services do not have markets or havehighly distorted markets


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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


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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


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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


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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.


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Avoided Damages

Disadvantages

Values are hypothetical

Never sure whether the damages would ever occur


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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 goodor 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,

Hawaii65% of total annual reef economic benefitbased

on property value


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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, crimerates, etc.

Relies on assumption that prices are sensitive to reef

quality


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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


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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

isolatemay not be the reef


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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 andCuracao

Estimate consumer surplus for existing reef and reef

improvement in Negril Marine Park, Hol Chan & Grand Anse


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Advantages Doesnt 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 reflectreality

Highly susceptible to bias as rely on people to statetheir preferences


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Gross Value vs Net Benefit

Gross Valueuse revenue only

Net benefitsuse revenue less costs

Net benefits is more correct form ofanalysis

Use net benefits for estimating marginal

gains/losses associated with differentconditions of reef health


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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 estimategross revenue/net benefits

Helps explain how people react

Often used as a first-best proxy for economic analysis


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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

Dont use estimates of small changes for large

changes


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Avoiding Pitfalls

Be careful of double counting

Only use national benefits when interested innational perspective

Adjust price distortions

Do a reality check


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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


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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 deducted

Direct Impact multiplier not included

* Sensitivity analysis around consumer surplus


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Estimated Net Benefits for Diving

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

3 4

onsumer ur lus ensitivit

nnualNetBenefits(

million)

0 o erating costs 7 o erating costs

Notes:

Income tax/green lev not deducted

Direct Im act multi lier not included


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Known Omissions from Dive Value

Income tax deductions

Green levy deductions

Direct economic multiplier for localsuppliers of fuel, etc.

Indirect economic multiplier for general

expenditures by dive operator employees

2004 tourist numbers used with 2006 prices

(need price adjustment)


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Tobago Accommodation Value

Assumptions Occupancy rates: peak=85%, high=50%, low=50%, ave=65%

Only used advertised ratesno 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 < 2rooms

Average wage rate usedTT$10/hr for 40 hour week Sensitivity analysis

Percent of accommodation values attributed to the reef

% of revenue going to operating costs


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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


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Estimated Accommodation Values--Tobago

All Values in US$ Millions and Annual

Notes:



Operating Costs

5 % of Revenue

Operating Costs

5% of Revenue

Revenue Value

Added

Costs Net

Benefits

Costs Net

Benefits

Assume % of Values Attributed to the Reef

29.3 5.1 21.3 8 27.4 1.9

Assume 6 % of Values Attributed to the Reef

58.7 10.1 42.7 16 54.8 3.9


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Estimated Accommodation Net Benefits

Notes:



perating osts perating osts

NetBenefits

mill/y

of Net B ene fi ts Attri uted to Reef o f Net B enefi ts Atti ute d to Re ef


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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

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Economic Valuation. Methodologies