Economic Valuation

of Natural Resources
Specialization Module for
Fisheries SocMon Workshop
Peter Schuhmann,
Schuhmann, Ph.D.
University of North Carolina Wilmington
James Casey , Ph.D.
Washington & Lee University

Economic Valuation of Natural Resources

Public policy should reflect an understanding
of the public's values. This is especially true
with respect to the environment. Because
public values about the environment are not
generally expressed in the marketplace, nonnonmarket valuation has become an important
source of information for environmental
decision making .
From: Champ, Boyle, and Brown, "A Primer on Nonmarket Valuation"

Outline

Introduction
What is value
value to an economist?
Market failures
Market vs. nonnon-market goods
Common misconceptions regarding value
Resource management & benefit cost
analysis
Categories of value

Outline

Value

Economic Value
Value refers not only to what
people actually pay (direct contribution to
the economy), but also includes what
people are willing to pay (or give up).

Example: you pay $25 for a snorkel trip with

turtles that is worth $100 to you.
The true economic value of this trip is $100.

Economic Valuation
Valuation simply means
estimating what something is worth.

Benefits of conducting a valuation

exercise
Natural resource valuation scenarios
Valuation methods & applications
Valuation in national legislation
Prerequisites for valuation studies
Obstacles & budget considerations
Conclusion
Exercise

Valuation & Resource Management

From an economic perspective, the

primary goal of resource management is
to find the stock
stock size that maximizes the
net benefits from the resource.
Maximizing net benefits is only one piece
of the policy puzzle. Other factors such as
moral and cultural norms, equity and
fairness, and political feasibility must be
considered.

Economic Value

Value is only meaningful relative to what people

are willing and able to give up for the good or
service.
If people are not willing to pay or trade
something to obtain a particular good,
economists say that good has zero value.
Hence, in economics, value is anthropocentric
(human(human-centered).
The process of valuation is utilitarian, because
its purpose is to aid policy in improving the
wellbeing of people.
people.

Economic Value and Willingness to Accept

Economic Value & Tradeoffs

People value natural resources and the

environment for many reasons.
People also value goods and services that
cannot be produced without exploiting or
damaging natural resources (most market
goods).
Unlike market goods, the value of
environmental goods goes largely
unmeasured because markets do not
provide these goods.

Markets fail to capture the value of

environmental and natural resources
due to two common market failures:
The

nonnon-rivalry and/or nonnon-excludability

of public goods causes traditional market
forces to break down.
External costs created by the production
or consumption of market goods are not
reflected in the market prices of those
goods.

Example: Coastal development infringes upon

society
societys windows to the sea
sea. Value of this
loss can be measured as society
societys willingness
to pay to avoid that loss, or the amount of
compensation they would be willing to accept
to be just as well off with the loss.

Benefit-Cost Analysis

Market failure

Oftentimes we lose something of value

So we can look at value as willingness to
pay to avoid loss, or willingness to accept
compensation for loss.

One method that helps inform us of the relative

tradetrade-offs of alternative resource management
strategies and outcomes is BenefitBenefit-Cost Analysis.
BenefitBenefit-Costs Analysis (BCA) provides for a
systematic enumeration of the gains (benefits)
and losses (costs) of particular decisions, in
common units, for comparison purposes.
Valuation can be an important component of BCA
as it informs decision makers about what
something is worth (in dollars) or what something
will cost (in dollars).

Economic Value

Market goods (with known value) and

environmental goods (unknown value) are
often mutually exclusive. Can
Cant have both.

Common Misconceptions

Common Misconceptions

1. Economic Value vs. Economic Activity:

2. Economic Value vs. Economic Cost

Economic activity (sales, jobs) is often

confused with economic value.

Measures of the amount of money that

changes hands may not reflect the benefits
or worth to society.

These measures do not account for

alternatives that are foregone, and do not
take into account goods and services that
are not traded in markets.

Common Misconceptions
3. Value is only revealed in markets.

Economic value is often thought of as only

pertaining to those goods that are traded
in the market place i.e., market goods
have value as observed by people willing
to buy and sell them. Yet, goods that are
not traded in the market (
(nonnon-market
goods
goods such as clean air, clean water, or a
view of the sea) have real economic value
as well (just more difficult to measure).

Summary of Value

Value is what something is worth to people.

What something costs and the value or
benefits it delivers are not necessarily equal.
Value need not be revealed in markets.
The value of foregone activities (
(opportunity
cost
cost) must be considered. Tradeoffs are a
fact of life when resources are scarce.
Understanding total economic value can help
inform decisions regarding those tradeoffs.

The cost of an item or price paid

paid is not
always a good reflection of value.
For example, it would cost a lot to take 12
tons of sand from the Caribbean to the
Sahara, but the value would be quite low.
Similarly, you may pay $20 for a pair of
shoes that yields considerably more than
$20 in value. They last long, comfortable.

Common Misconceptions
4. The

Broken Window Fallacy

Wars or natural disasters good

good for an economy?
After the war or disaster there is a an upswing in
economic activity!
This line of reasoning (
(The broken window
fallacy
fallacy) fails to recognize opportunity cost. Money
that is spent recovering from disaster (replacing the
broken window) could be spent on something else.
Jobs created in the wake of something bad are not
necessarily new jobs
jobs, as that labor could have
been used for something else.

Components of Economic Value

Example: Coral Reef Ecosystem

Valuation

Economic Valuation
Valuation simply means estimating
what something is worth to people.
Valuation involves measuring use values and
nonnon-use values, market values and nonnon-market
values.
Many situations call for valuation.
Economic valuation does not establish absolute
values for the environment.
Estimated values may constitute lower bounds,
capturing only the more obvious and readily
calculated values.

What are the benefits of conducting

a valuation exercise?

1.

Having a common unit of measure

Uses of natural resources create a range of

impacts, usually not in comparable units
(generated revenues, changes in fish stocks,
loss of tourists, water quality changes, reef
degradation). Many impacts are not recognized
by markets. So markets cannot always be relied
upon to allocate resources to their best use.
Production of goods can reduce the nonnon-market
values of natural resources by more than the
gain in benefits from them, leading to losses in
social welfare.

Should we bother with valuation?

According to Prato, there are three

ways to handle the nonnon-market
benefits and costs of environmental
resources:
(1) ignore them
(2) record them in physical, natural and
environmental accounts, or
(3) estimate them through the use of nonnonmarket valuation techniques.

What are the benefits of conducting

a valuation exercise?
Objective decisiondecision-making is fostered when
all these impacts expressed in the same units.
Economic valuation facilitates this comparison
by expressing all impacts in monetary units.

Coastal development project?

vs.

What are the benefits of conducting

a valuation exercise?

What are the benefits of conducting

a valuation exercise?

2. Valuation can be used in conjunction

with benefitbenefit-cost analysis and
provide information that
can be used to inform
Policy
complex management
Decision
decisions.

3. The services provided by the natural

environment directly affect human
welfare in myriad ways, but are often
overlooked by some policy makers who
only focus on jobs and revenues.
Valuation reminds everyone that although
that the environment is free
free, this in no way
implies that it is not valuable.

What are the benefits of

conducting a valuation ?

What are the benefits of conducting

a valuation exercise?
4. Estimating monetary benefits for natural
resources avoids several problems that
often plague policy debates.
For example, valuation avoids the frequent false
characterization of some polices as being a
choice between "the economy versus the
environment.
environment.

5. Understanding costs and benefits.

Who gains?
Who loses?
When are the gains to be realized?
When are the costs to be borne?

(Loomis, Choices, 2005)

Valuation Methods

Valuation Scenarios & Examples

Scenario

Example

Complete a benefit-cost
analysis of a conservation
project

Determine the net economic

benefit of increasing use of
reef balls or mooring buoys

Analyze potential economic

impacts of a proposed policy
or regulation change
Measure monetary damages
from natural resource
degradation

Determining the economic &

environmental implications
of a fishery regulation
What is the economic loss
as beach width diminishes?

Valuation Methods

Because of the complex nature of many

environmental goods and natural
resources, more than one type of method
may be necessary to better understand all
the components of value

Over the past 5 decades economists have

developed techniques to assess the value
of environmental goods.
These techniques, which can estimate
value for both users as nonnon-users, are
being employed intensively throughout the
world and are being constantly refined and
improved.

Revealed Preference Techniques

Rely on observations of people

peoples
behavior in related markets to
understand the value of associated
nonnon-market goods.
Travel

Cost Methods
Pricing

Hedonic

Revealed Preference Techniques

These methods require that a link be

established between changes in the
environmental resource and changes in
the observed behavior of people.

For instance, changes in beach width or reef quality

may result in people moving to another location or
taking fewer trips.

Valuation Methods

Travel Cost Method (TCM)

Uses information on travel to estimate a trip
demand function, based on the idea that costs
incurred in travel are a lower limit on willingness
to pay for access to the natural resource.
Typically applied to situations involving recreation
Survey data should include:

Individual visitation data

Travel costs & other expenditures
Environmental quality measures
Demographic information

Free disposal of rubbish

actually has a large economic cost
in terms of the impact of beach
quality on peoples enjoyment of
the resource and resulting
economic effects.

Travel Cost Method (TCM)

Values derived from a TCM study include:

Example: People pay more for housing

located closer to the sea. By comparing
prices and characteristics of similar
houses, we can derive the value of the
coastal amenity.
What are the economic benefits of
increased erosion protection to coastal
property owners?

Hedonic Pricing Method (HP)

Demand

for natural resources will be

reflected in the prices people pay for
associated goods such as housing.
The value of environmental amenities or
changes in them can be estimated.

Value of the visit to the visitor over and above

the price he already pays (consumer surplus).
The recreational value of the natural area
(deducted by aggregating the consumer surplus
per visit per visitor over all visitors). This is what
would be lost when the natural area disappears
or is closed for recreation.
The value of changes in the quality or
characteristics of the recreation site or area.

HP Applications

Valuation Methods

House

characteristics
environmental attributes

Associated

Stated Preference Techniques

Rely on people
peoples responses to survey
questions regarding willingness to
pay, willingness to accept or
hypothetical choices between
alternatives to understand value.
Contingent
Choice

Valuation Method
Modeling / Conjoint Analysis

Valuation Methods

Contingent Valuation Method (CVM)

Survey

method where people indicate

willingness to pay (or accept) for changes
described in a hypothetical market.
Survey data should include:
description of a program or change
for eliciting value or choice
Payment vehicle
Information on respondent attitudes and
characteristics

CVM Applications

Detailed

Mechanism

Valuation Methods

Choice Modeling (CM)

Survey method whereby preferences
are elicited through a series of paired
choice alternatives. Each alternative is
described in terms of different levels of
attributes that comprise the product.

Coral reef value what are people

willing to pay for reef improvement?
Beach value - What is the nonnon-use
value of beaches to residents?
Preservation value How much are
citizens willing to pay to preserve the
coastal environment?

Prerequisites

Before valuation techniques can be employed, a

sound understanding of the biophysical
relationships between resource use decisions
and the ecological system needs to be
established. (Bennett, 2003)

Description

of 2 options for a product

product
specified with levels of attributes that make
up the product.
Respondent attitudes and characteristics

Is it worth the time and expense?

Budget and Time Constraints

NonNon-market valuation studies can be

expensive to undertake, depending on the
size and scope of the problem at hand.
The method of benefits transfer
transfer is a lowlowcost alternative that may be applicable in
some situations where time and/or money
are limited.
Benefits transfer uses functions and
estimates from similar policy questions
and adapts them to the local issue.

Are the benefits of these studies (more efficient

use of natural resources) worth their costs?
Given that policy decisions are (and should be)
affected by many concerns besides economic
efficiency (e.g. equity, sustainability), it is rare to
be able to point to any one information source in
the policy process as the definitive factor.
Yet, it would appear foolish to make millionmilliondollar decisions without carefully considering the
full range of benefits and costs of the available
alternatives. (Loomis, 2005)

Conclusions

What can nonnon-market valuation contribute to

better resource management and policy making?
In some cases it can change the character of the
debate from being "the economy versus the
environment" to one of recognizing people care
about the environment in the same way they care
about market goods.
In other situations, nonnon-market valuation can
bring balance to questions of "how safe is safe
enough?" given scarce resources in society.
Valuation can also call attention to otherwise
undervalued resources. (Loomis, Choices, 2005)

Conclusions

Valuation studies have the potential to provide

an effective way to lessen the role of special
interests in the policy process. Although policy
makers and society will often have other
objectives in addition to economic efficiency,
more informed tradetrade-offs can be made between
objectives if the benefits and costs of each
alternative are known.
Although it is true that benefits and costs are not
all that matter, it is rare that benefits and costs
do not matter at all to public decision makers
and society. (Loomis, Choices, 2005)

Conclusions

The value of valuation lies in providing a

more complete accounting of the benefits
and costs to all of the people.
Without economic valuation, the following
predictions are frequently realized:
(a) those who would bear concentrated costs
can block resource reallocations that benefit
society as a whole, and
(b) those few that stand to gain concentrated
benefits can spread even larger costs out
over millions of taxpayers.