Surrogate-Market Valuation

Techniques

Property Value approach

Wage Differential approach
Travel Cost Method
Introduction
• Surrogate-market valuation techniques recognise that the value of an
environmental impact can be embedded within the cost of a good or
service.

• The value of the environmental quality can then be separated from

the total value of the good or service
 Travel cost method
Estimates demand curves for recreational goods
Botanical gardens –Peradeniya, Hakgalle
National parks – Yala, Minneriya, Wasgomuwa, Horton Plains,
Hikkaduwa MS
Water falls
Species - elephants, leopards

Market prices of these recreational goods may not

justify their existence for policy purposes
Eg. conversion to other uses
Nature based tourism - Income earned
Income from Local and Foreign Visitors from 2009-2015 (millions)
1200

1046.1

1000

843

800

586.3 Local Revenue

600
Foreign Revenue
429.7
400
304.9
229.6
200
123.7

35.9 37.9 43.8 54.6

15.8 27.8 33.7
0
2009 2010 2011 2012 2013 2014 2015
Visitation to Recreational Sites in 2009
Site Foreigners Income Domestic Income from
Foreigners Visitors Domestic
(Rs) Visitors (Rs)
Cultural 109,404 402,826,506 490,058 18,422,280
Triangle
Zoological 149,833 201,659,125 2,072,653 154,649,970
Gardens
Botanic 123, 425 72,266,700 1,704,353 40,020,170
Gardens
Wildlife 70,688 103,992,971 364,114 15,426,776
Parks
 Recreational site Consumer surplus (Rs
million) 2017 prices - local
visitors
Horton Plains National Park 78
Udawalawa National Park 13
Wasgomuwa National Park 8
Yala National Park 203
Minneriya National park 13
Total of 5 parks 315
Peradeniya Botanic garden 824
Hakgalle Botanic Gardens 724
Seethawaka BG 175
Total of 3 gardens 61723
Market value for all 784
gardens
Theory of the method
• Users of our door recreation pay
nothing or only a nominal fee
• The revenue collected from these sites
is not a good indicator of the value of
the site
• The real value is equal to the user
charges and the consumer surplus
• Although no entrance fee is
charged, the demand is not infinite
because there is a cost involved in
getting to and from the site
USERS
far away nearby

Travel cost high low

Consumer low high

surplus
Admission
Fee

Rs 60

total visitation
(visits per year)
 METHOD
1. Identify the recreation area
2. Surrounding area is divided into
concentric zones of increasing distance
which represent increasing travel costs
3. Survey of users to get
zone of origin
travel costs – trip cost (transport, lodging
etc), time cost
socio economic characteristics
The data is used to derive the following
relationship:
Qi = f (TC, X1, X2 ………. Xn)

 Qi – visitation rate (number of visitors from zone

i per 1000 population
 Derived from data or from site records
 TC – travel cost
 X1……Xn – income, education level and other
socio economic variables
 This equation will find the impact of travel cost
on visitation rates
 This equation will give one point in the demand
curve
 Hypothetical example

ZONE POPULATI TRAVEL VISITS VISITS PER

ON COST MADE 1000 Pop.

1 1000 1 400 400

2 2000 3 400 200
3 4000 4 400 100
1200
 Relationship between travel cost and visitation rate (from survey data using multiple
regression) is given by
VR = 500 – 100 TC
VR – visits per 1000 population

 At present the admission fee is zero and total number of visits is 1200
 This gives one point in the demand curve

Rs

Visitation rate 1200

• In order to construct other points in the
demand curve…
• We assume that people’s reaction to
entrance fee is the same as their reaction to
higher travel cost
• Admission fee is increased hypothetically to
get new visitation rate using the previous
equation
New cost = TC + 1
Visits made - using VR = 500 – 100 TC

ZONE POPULATI NEW VISITS VISITS

ON COST MADE PER 1000
Pop.

1 1000 2 300 300

2 2000 4 200 100
3 4000 5 0 0
TOTAL 500
• This will make another point in the demand curve
• The process is repeated till the total number of visits are
zero.

Added cost Total no. of visits

0 1200
1 500
2 200
3 100
4 0
Rs Total consumer surplus is calculated from the
area under the demand curve

2
1

0 100 200 500 1200

 Shortcomings of the method
1. Method assumes that visitors are indifferent
between travel cost and entrance fee
2. Involves separate treatment of different types of
visitors - Pure visitors, meanders, transit visitors
Transit visitors - Multiple visits need adjustments
Meanders - to be removed from sample
Pure visitors – only category to be used in calculations
3. Traveling may not be a cost in certain cultures
It may be a way of showing the ‘status’
4. The method assumes
People in all distance zones would make the same
number of visits at a given monetary costs
Which implies ….
People have similar tastes
People have similar incomes

5. This method need lot of data and results are

sensitive to the functional form used
6. This gives only a minimal estimate of the total
benefit – only non consumptive use values
• Valuation of travel time
There are many arguments in the literature on
the correct method of valuing time
1/3 of wage rate for employed person

• Advantages
This method observes actual behaviour
Recreational values Sites
Consumer surplus
estimates
Hortain Plains NP, Udawalawa NP
Wasgomuwa NP, Yala NP
Nine National Parks
Minneriya NP, Kaudulla NP
Udawathekele RNP
Wilpattu NP, Kumana NP

Two Botanical gardens Peradeniya , Hakgalle BG

Two Waterfalls Dunhinda, Bopath Ella

Mountain trekking Sri Pada trekking

Cave recreation Belilena

Wetland recreation Muthurajewela Wetland

Elephant viewing Pinnawela EO
Leopard viewing Yala National Park
Property value approach/ Land value
approach / hedonic price method

The value of a land = discounted present value of the

future net benefit stream
Changes in the ambient environmental quality affect
the future benefit stream of a property and will
change the sale price

Therefore, value of property is less in polluted areas

 Theory of the method
• The price of a house is a function of its
• Structural
• Neighbourhood and
• Environmental quality characteristics

P = f (Si, Ni, Qi)

S – number of rooms, size, age, type of
construction
N – quality of schools, accessibility, crime
rates
Q – level of air quality
• This is the hedonic function
• This could be estimated by multivariate analysis
• Then the marginal willingness to pay for an
extra unit improvement of air quality Q is
derived
Basic assumptions
1. The area is treated as a single market for
housing (information of all alternatives are
available and there is freedom to choose and
move)
2. Housing market is in or near equilibrium (all
buyers have made their utility maximizing
choices on houses)
Shortcomings
1. Assumes community is homogeneous in
making their choices
2. People are able to know the environmental
quality
3. People are willing to pay for environmental
quality
4. Perfect information exist on prices
5. People continuously evaluate their placeof living
6. People do not cluster due to other reasons ethnic
and social etc.
Applications
Water pollution
Air pollution
Aesthetic values
Forest functions
 Meethotamulla surrounding community
- house price changes with the distance
from the dump site
Structural Neighborhood Environmental other
Land area Education Distance to dump Rent charges
site
House area Per capita Odour Housing tax
income
Year of built Visibility of the Per perch value
dumpsite
No of floors Compensation
expect to move
No: of rooms -(tiled)
No: of bathrooms-
(tiled)
USA examples
Impact of traffic noise upon house prices

Area of USA % fall in house price due to a one

unit increase in traffic noise
North Virginia 0.15
Tidewater 0.14
North Springfield 0.18-0.50
Towson 0.54
Washington DC 0.88
Kingsgate 0.48
North King County 0.40
Spokane 0.08
Chicago 0.65
(Nelson, 1982)
 Wage differential approach
Similar to property value approach
Theory of the method
In a perfectly competitive equilibrium, the demand for labour
equals the value of the marginal product of the labourers
The supply of the labour varies with living and working
conditions in the area.
A higher wage is needed to induce workers to live in polluted
areas.
Workers are able to move freely among jobs and are able to
choose a job that maximise their utility
• Wage levels of the same job = function of different job
attributes related to working and living conditions
• Eg risk to life and health
• Urban disamenities

Shortcomings
• Are similar to the property value approach
• People are able to make free choices with perfect info,
there is no discrimination, unemployment etc
• If wages are centrally set, this method cannot be used
• Poor people do not usually have choice about their
living and working conditions
• Certain occupations are relatively dangerous and are
likely to attract risk lovers
Limitations of valuation
• Income distribution
• Intergenerational equity
• Risk and uncertainty (unknown thresholds)
• Irreversibility (unknown future uses)
• Large margin of error
 Market price method
Pearce equation for
valuing land containing
medicinal plants
Benefit transfer approach
 Use of direct market prices
 For products that are commercially traded
 Adjustments are needed to account for market or
policy failures
 Prices reflect interaction between consumers and
producers over the demand and supply of goods and
services.
 Efficient market prices are the best estimates
 In an “efficient” market goods and services will be
priced at their marginal value product and reflect the
full opportunity costs of resource use.
 Methods to obtain market prices

• Existing economic and social studies,

• Published or privately held statistics,
• Socio-economic surveys and
• Consultation with
• Agricultural extension officers,
• Forestry service personnel,
• Government market specialists
• Statisticians.
 Different types of prices
• Prevailing market value of the goods and services
• Farmgate price, or stumpage price, is what the
farmer/forester receives when they sell products or
buy inputs from the boundary of their farm/timber
stand - price without any transport or marketing
costs
• Export parity price - value at country boundary
Substitute Goods Approach
 value may be approximated by the market price
of similar goods
 e.g. fuelwood sold in other areas
 value of the next best alternative
 substitute good (e.g. charcoal).
 If the two goods are perfect substitutes then their
economic values should be very close.
 As the level of substitution decreases so does the
extent to which the value of the marketed good
can be taken as an indication of the value of the
non-marketed forest good.
Calculation of net value of forest products
collected
 The net value of the forest products extracted could be expressed as
 ∑(i to n) Qi (Pi-Ci)
 where
 Qi - the quantity of good i extracted
 Pi - the forest gate price or value of good i
 Ci - the marginal cost of extracting good i at the forest gate
 n - the total set of non timber forest products
NTFP valuation using market prices
Consumptive Description
use values
Wet zone forests Six major categories of Non timber forest
products for own consumption / selling
Wet zone Eight major categories of home garden products
homegardens for own consumption / selling
Dry zone forests 28 items of Non timber forest products for
own consumption / selling
Dry zone home 33 items of Non timber forest products for own
gardens consumption / selling
Value of fodder Value of grazing for Sri Lanka
provided by
vegetations
Agricultural crop Damage from elephant
attacks - MP
Region Damage cost
Rs million per year
North western region 404.84
Mahaweli region 370.83
Southern region 345.74
Market prices to value Cost of lost recreational activities
water sports in Broadland power project

• Proposed bridge at powerhouse site is situated on the river

stretch used for whitewater rafting adventure sport activity.

Company Visitation Rates (Rs)

(per month) Local foreign Total
value

1 150 1300 1800 3,150,000

2 100 1200 1500 2, 340,000

Total 5,490,000
Applications of market prices of carbon
Cost of lost scrubland/ forest

• Powerhouse site and a part of the access road located

within the boundary of the forest reserve - clearance of
25ha of forested area; 10 ha restored.

Global damage cost approach

• A ha of closed secondary forest contain 152-237 tons of
carbon
• Average Global damage cost of a ton of carbon released
to the atmosphere - $10

• Total cost - Rs 136,800 per year per ha when the lower

bound carbon value is used.
• Total cost (Rs) 2,052,000
Uma Oya Multipurpose Development Project
Benefits of power and energy
• Avoided Cost Method

• What is the alternative way of generating the same level of energy?

• What is the cost of that option?

Estimation
• Alternative to hydropower - Diesel generation
• Alternative to provide peak demand - Gas turbines
• Installed capacity -120 MW
• Mean annual energy production - 231 GWh
• A 30MW diesel plant & 90MW Gas turbine can
provide annual energy equivalent and the peaking
capacity requirement to that produced by Uma Oya
hydro project
Cost of Diesel and gas turbines
• Capital cost of diesel plant is 950 US$/kW installed and the fuel cost is
US Cents 16.95 per kWh.

• Corresponding figures for a gas turbine plant are US$ 550/kW

installed and US Cents 26.57 per kWh.
Comparison of financial and economic benefits
• Financial value of power and energy
(Sale value of energy) is higher than Economic value (Avoided thermal
power generation)
• Avoided cost of kWh of electricity is Rs 17.90. This value is higher
than the current average selling price of electricity. At the exchange
rate of 1 US$= Rs 112.00
 Value of Carbon fixation by forests

• Estimated using Green House Gas Inventory data

• Carbon gain and losses in different forest categories
• Annual increments of different vegetations
• Value of carbon (MP)
Value of carbon sequestration (Rs mn)
2002 2010
Carbon gain in different 12,071 14,335
Forest categories
Carbon loss due to Tree 3,860 4,584
felling and Fuel wood use
Carbon gain and loss from 6,588 7,824
Plantation; Tea, Rubber and
Coconut
Carbon gain and loss from 254 302
other Perennial Plantation
Total Carbon Gain from all 14,545 17,273
categories
MP egs - NPV of two cover crops in rubber
plantations

Cover crop NPV, Rs.

Mucuna bracteata ground cover with paddy straw 16,153,414.40

Crotolaria anagyroides tree legume cover 25,586,119.98

• NPV of Crotolaria anagyroides tree legume cover is higher

than Mucuna bracteata ground cover with paddy straw
mulch

• High cost involved with Mucuna cover due to cost of

paddy straw and its transportation reduce its NPV
Value of pollination
CROP Dependence on
pollination by insects and other
animals

Avocado 0.7
Durian 1
Mango 0.9
Papaw 1
Passion-fruit 1
Rambutan 1
Coconut 0.75
Value of pollination Rs mn
2002 2010
Total Value Added 336 1363
Estimates of
selected Fruit
crops due to
Pollination
Total Value Added 19,416 45,329
Estimate of
Coconut crop due
to Pollination
 Valuation of medicinal plants

• Plants used for Medicine

• (a) Major commercial use, whether by prescription or
over-the-counter sales, and
• (b) As traditional medicines with or without a market
price.
• In the rich world, 25% of all medical drugs are based on
plants and plant derivatives.
• In the poor world the proportion is 75%.
Use of medicinal plants in the pharmaceutical
industry
• Three types of compounds
• which cannot be reproduced
synthetically eg. – digitoxin
• which are reproduced but are less
efficient than the original material
(synthetic vincristine from
Catharanthus),
• synthetic substitutes are easily
produced
Assigning an economic value to medicinal
plants
• use values - for commercial drugs and for traditional medicine.
• option value - the extent to which conservation is required to protect
future use values.
• Option values, are dependent upon the future of research in the
medicinal drugs sector with respect to the base materials that are
likely to be used.
Several ways to approach valuation
(a) actual market value of the plants when traded;
(b) market value of the drugs of which they are the
source material;
(c) value of the drugs in terms of their life-saving
properties, and using a value of a `statistical life'.
A Model of Economic Valuation of
Medicinal Plants containing land
• Vmp(L) = p.r.a.Vi(D)
• p – probability of success
• r – rent capture
• a - coefficient of rent capture
• Vi (D) – value of drug
• (a), (b) or (c)
 p - Probability of Success
• probability of any given plant species giving rise to a
successful drug is between 1 in 10,000 and 1 in 1000.
(drug company experts.)
• Number of plant species likely to be extinct in the
next 50 years - 60,000.
• Between 6 and 60 of these species could have
significant drug values.
 Rent Capture
• Rent appropriation is low in tropical low income economies.
CPV = a.EPV
• CPV is capturable production value,
• EPV is expected production value, i.e. the patent value of one
discovery.
• a - coefficient of rent capture.
• Low value for a explains why developing nations feel that
the benefits of their efforts to conserve biodiversity is
captured more by others.
• One purpose of the Rio Biodiversity Convention is to raise
the value of a.
• If host countries could capture rents perfectly a = 1.
• Rent capture is likely to be as low as 10% in low income
countries.
• Range for a is a = 0.1 to1.0.
 The Value of Drugs
• valuation based on life-saving properties gives the
highest values, using the value of a 'statistical life' of
$4 million.
• Market values of plant-based drugs give lower values
• Actual traded price of the plant material give the
lowest value of all.
• In USA in 1980s only about 40 plant species accounted for the plant-
based prescribed drug sales.
• On the basis of prescription values only each species was responsible
for $11.7 billion/40 = $290 million
• Since all life-saving drugs would be on prescription, use of the value
of avoided deaths suggests a value per plant of $240 billion/40 = $6
billion per annum.
The value of potential future drugs
Pearce and Moran (1994)
• Option value of pharmaceutical prospecting US$
0.01 to US$ 21.00 /ha/yr
• Vmp (L) = {NR×p×r×a×Vi/n}/ A
• Potential revenue from a hectare of land in
pharmaceutical prospecting depends on
• NR - number of plant species at risk of extinction,
• A - extent of land having plants
• V - value per drug produced marketed plant based
chemicals (or value of life saved by use of plant based
drugs),
• p - probability of success of pharmaceutical research,
• r - royalty rate
• a - appropriation rates
• NR = 60,000
• p = 1/10,000 to 1/1000
• r = 0.05
• a = 0.1 to 1
• V/n = 0.39 to 7.00 billion US$
• H = 1 billion hectares, the approximate area of tropical forest left in
the world.
• The resulting range of values is from $0.01 to $21 ha.
• If a = 1 at all times, then the range is $0.1 to $21 ha.
• the lower end of the range is negligible, but the upper end of the
range would, for a discount rate of 5% and a long time horizon
amount to a present value of $420 ha.
 Option values from pharmaceutical prospecting
in tropical forests in SL
Forest Option value Reference Extrapolation
area
Sinharaja US$ 77.00 /ha/yr Thushantha and For Sinharaja forest and
forest (Rs. 5,900 /ha/yr) Kotagama (1995);
forests with similar
Kotagama (1996)
(Pearce Equation) biodiversity indices

Knuckles US$ 19.67 /ha/yr Karaluvinne (2001) For Knuckels forest and
forest Rs. 1,495 /ha/yr forests with similar
(Pearce Equation) biodiversity indices

Knuckles US$ 49 – 98 (Pearce Pushpakumara et

al (2002)
forest Equation)
US$ 785 - based on
patents on medicinal
plants of Sri Lanka
forest in US$ 7,463 /ha Rausser and Small
southwest (Rs. 567,188 /ha) (2000)
ern SL
Valuing medicinal plants
• Withanage K W M L, Gunawardena U A D P, Contribution of
commonly used medicinal plants to the natural products
market in Sri Lanka, 2005

• Values of MPs used in Ayurvedic

preparations

• Value of MPs sold as raw materials in

retails shops
National annual demand of Ayurvedic drugs

• Arista - 15 015 280 bottles

• Asawa - 2 309 720 bottles
• Kwatha - 4 299 094 bottles
• Tablets - 126 695 kg
• Kalka - 176 326 kg
• Churna - 273 712 kg
• Lepa - 26 722 kg
• Grutha - 91948 kg
• Modaka - 247 892 kg
• Oil - 2 600 650 bottles
• Rasa beheth - 21481 kg

• Total value - Rs 53,334,906

Value of Drugs sold as raw materials in retails
shops
MP Annual Economic value
Agil 415,715
Amukkara 1,361,696

TOTAL of 209 plants - 49,358,725

 Benefit Transfer Method
The idea behind BT is to ‘borrow’ an estimate of WTP from site A
(the ‘study site’) and applying it to site B (the policy site’), without
the need to do a new valuation exercise in site B

Attractive because of cost and time advantages over

the separate conduct of non-market valuation
experiments
Can be complex because source and target sites may
not be identical
Benefit transfer may involve some adjustment of
values
BT may be associated with increased uncertainty
about values
• Benefit transfer is often used when it is too expensive and/or there is
too little time available to conduct an original valuation study, yet
some measure of benefits is needed.

• BT is unreliable !

• If it was reliable, researchers wouldn’t do any new study that applies

the Contingent Valuation Method, the Travel Cost Method, the
Conjoint Analysis, or the Hedonic Pricing Method.
• Benefit transfer can be applied to extrapolate values of different non-
market valuation techniques, including those involving:
• Hedonic pricing,
• Travel cost method,
• Contingent valuation,
• Choice modelling.
Single point value transfer

• A single value is transferred without adjustment from source study to

target site
• A forest protection value of $50/person is transferred from Case
Study A to Site B
Marginal point value transfer

• A single value that allows for site differences is transferred

• A forest protection value of $2/hectare/person is transferred from
Case Study A to Site B. The values are adjusted for the size of the
area.
Simple (naïve) unit value transfer
- use value: Consumer surplus/activity day
- non-use value: WTP/houshold/year

Unit value transfer with income adjustments

- International transfer: PPP-adjusted exchange rates
Benefit function transfer

• A valuation function is transferred, allowing adjustment for variety of

site differences
• A forest valuation function that involves several attributes is
transferred Case Study A to Site B
How a benefit transfer function works
• An indirect conditional utility function:
• Utility = Constant + attributes + individual factors
• Vih =  + 1Z1 + 2Z2 + .... nZn + aS1 + bS2 + .... zSn
• Vih = -0.828 - 0.023*cost + 0.031*Vegetation + 0.002*waterways - 0.015* people
leaving + 0.149* reserve + 0.265*education + 0.0001*income
• In this example, it would be possible to adjust this benefit transfer function to:
• Different site characteristics (e.g. vegetation, waterways)
• Different respondent characteristics (e.g. education, income)
Meta value analysis

• Results of several studies are combined to generate a pooled model

• Results from studies A, X, Y and Z are pooled to estimate a value for
Site B
• Often difficult to do in practice because of methodological and
framing differences between studies
Summary
• Historical context
• Economics of sustainability
• Value definitions
• Valuation methods
• Practical applications