Valuing the Environment:

Methods
• Introduction
• Why Value the Environment?
• Valuation
• Summary: Nonmarket Valuation
Today
Introduction

THIS CHAPTER EXAMINES VALUATION THIS CHAPTER WILL ALSO DISCUSS THE
METHODS OF ENVIRONMENTAL VARIOUS VALUATION TECHNIQUES.
RESOURCES.
Objectives

• Define types of values: use value, option value, existence value.

• Classify the available nonmarket valuation methods by whether they are based on
observed behavior or a hypothetical market and whether they are direct or
indirect.

• Present the potential biases associated with the contingent valuation method.
Economic Valuation Method

A market is defined as a place where goods and services

are transacted using monetary instruments and
monetary information is available to users.

However, there are other goods and services, such

those in the environmental sector, which lack a market,
hence these are known as non-market goods (or
services).
5
Basic Concept of Value

Many people
Economic value is
are actually
Theory of measured by the Market price
Economic willing to pay
economic most someone is does not
values are more than the
valuation is willing to give up correctly
based on what market price
based on in other goods measure the
people want – for a good, and
individual and services in economic
their thus their
preferences order to obtain a value of goods
preferences values exceed
and choices good, service, or or services
the market
state of the world
price
 Examples of Ecosystem Services
Provisioning services Regulating services Habitat /Supporting Services Cultural and amenity
service
•Timber •Air quality regulation •Maintenance of life cycles of • Education and
migratory birds Research
•Non-Timber • Watershed services •Nursery services • Opportunities for
recreation and
tourism
• Fish •Moderation of extreme •Genetic diversity • Inspiration for
events (storm protection) culture arts and
design
•Coral reefs • Coastal protection •Soil formation • Indigenous cultural
commoditization

• Support to downstream •Hydrological cycle • Spiritual and

and upstream religious
fisheries
•Erosion prevention

•Maintenance of soil
fertility
•Biological control (seed
dispersal)

(Source: Groot et al., 2012; Kumar, 2010)

More tangible and more likely to be Less tangible and less likely to be
dealt with by the market dealt with by the market
Figure 2.1: Total Economic Value
(Source: Barton, 1994; Kumar, 2010; Mohd Rusli, Alias, & Khairil, 2008; Plottu & Plottu, 2007)
TYPES OF ECONOMIC VALUES

Direct consumptive use values - consumption of wood products,

Direct Use Values medicinal plants, animal products and fisheries from wetlands
(DUV) - Benefits
derived from the
actual use of
resources Direct non-consumptive use values - personal uses of services that
can be observed such as recreation and scientific information
Indirect Use Values
(IUV) - Essentially
the ecological
services/functions
of wetlands, such
as flood protection,
coastal
stabilization, and
biodiversity
•Option Value (OV) - Values derived by an individual for
having the option of using the wetland resources sometime in
the future

•Non-Use Value: Existence or Passive Value (EV) -

Values placed by individuals regardless of use. It consists of
knowledge that a particular resource is in existence naturally.
It includes the notion of bequesting an environmental resource
for the use of future generations.
Importance of valuing ecosystem services

•To estimate the full range of benefits provided by an ecosystem -

importance of an ecosystem to a society (O’Garra, 2007).

•Can make explicit to society that biodiversity and ecosystem

services are scarce

•Their degradation has associated prices to society (O’Garra,

2007).

•The policy would be misguided and society would be worse off

as a result of the misallocation of resources (O’Garra, 2007).
 Importance of valuing ecosystem services

•To determine an appropriate (entrance fee) for the use of

recreational facilities

•To justify investment worthiness of public funds for tourism

development in a destination.

•To highlight the role and benefits of natural resources at

particular site instead of introducing some other forms of
alternative developments.

•To justify the need to protect the wildlife and marine life.

•To convey a strong economic justification for the designation

of Marine Protected Areas (MPAs)
Valuation
• Classifying Valuation methods
• Revealed preference
• Methods which are based on actual observable choices
and from which actual resource values can be directly
inferred
• Stated preference
• Methods to elicit respondents’ willingness to pay when
the value is not directly observable
 Non-Market Valuation
WTP

Revealed Preference Stated Preference

Methods Methods

Travel Hedonic Contingent Choice Modelling

Cost Pricing Valuation Techniques

Open-ended Contingent Ranking

Dichotomous Contingent Rating

Choice
Pair Comparisons
Iterative Bidding
Discrete Choice (Stated
Payment Card
Choice) Experiment
Figure 2. Willingness-to-pay (WTP) Method
Source: Bateman et al. (2002); Kjaer (2005)
 Table1: Types of Environmental Valuation Techniques

Revealed Preferences (RP) Stated Preferences (SP)

•Travel Cost Method (TCM) Contingent Valuation Method

(CVM)

•Hedonic Pricing Method (HPM) Choice Modeling (CM)

•Market Prices

Source: Adapted from Nijkamp, Vindigni, and Nunes (2008

Figure 2: Stated preference techniques
(Source: Merino-Castello, 2003)
CONTINGENT VALUATION METHOD
CVM - STEPS
1) Creating a survey instrument for the elicitation of individuals'
WTP/WTA.
(a) designing the hypothetical scenario;
(b) deciding whether to ask about WTP or WTA,
(c) creating a scenario about the means of payment or
compensation.

2) Using the survey instrument with a sample of the population of

interest.
STEP 1 Define the valuation problem
• Identify the resource and any particular changes in it.
• Provide detailed information about the resource and possible changes
in it
• Need to develop market scenario:
• Describe a payment vehicle e.g. sales tax, entrance fee, user fees which will be
used to fund any management policy for the resource or alternatively a public
fund to which contributions will be made to compensate for resource
degradation.
STEP 2 - Preliminary decisions about the survey

Choose a contact method – mail, Choose sample size, geographic

phone, in-person interviews region
STEP 4 - Survey implementation

• Choose a sample to survey.

• This could be a sample of the general public if it is something likely to
be of value to a broad segment of the community. The sample could be
of some special interest group whose members most frequently used the
resource and could offer well informed ideas on the sites value.
STEP 5
Compile, analyze and report the results
• Analyze results using statistical procedures, e.g. regression.
 The Contingent Valuation Method

The CVM questionnaire must contain:

• a clear description of the change to the environment,
• the method of paying for the changes and the frequency of
payment.

Question on
• how much individuals would be willing to pay (WTP) for an
environmental benefit, or
• how much money they would be willing to accept (WTA) for a
loss of environmental good and service.
 The Contingent Valuation Method Con’t

WTP Elicitation method

• open-ended
• payment card
• bidding game
• dichotomous choice

When to use
• The CVM has been used to value a range of environmental values
including areas of natural beauty, clean air and endangered species.

• This method is particularly useful in ascertaining non-use values.

 Advantages and disadvantages of the (open-ended)

What is the maximum amount that you would be prepared to pay on top of your annual
water bill to improve the quality of drinking water that comes to your home?
Advantages Disadvantages
 Straightforward  It leads to large non-response rates, a high
proportion of zero answers, and outliers (ie
 Very informative as maximum WTP
unrealistically large bids)
can be identified for each respondent
 In some cases, respondents may find it
 Requires relatively
difficult to come up with their true maximum
straightforward statistical
WTP
techniques

Source: (Pearce and Ozdemiroglu, 2002)

 Advantages and disadvantages of the iterative bidding elicitation
Iterative bidding

Would you pay an additional £5 every year through your annual water bill to
improve the quality of drinking water that comes to your home?

If Yes: Interviewer keeps increasing the bid until the respondent

answers "No". The maximum WTP is elicited.
If No: Interviewer keeps decreasing the bid until respondent answers
"Yes". The maximum WTP is elicited.
Advantages Disadvantages
 May encourage respondents to  Risk of anchoring bias (ie respondent may
consider their preferences be influenced by the starting values and
carefully succeeding bids used)

 Leads to large numbers of "yea-saying"

bids and outliers

Source: (Pearce and Ozdemiroglu, 2002)

 Advantages and disadvantages of the payment card elicitation

Payment card
Which of the amounts listed below best describes your maximum
willingness to pay
on top of your annual water bill to improve the quality of drinking water that comes
to your home?

£0
£0.50
£1
£2
£3
£4
£5
Advantages Disadvantages

 Avoids starting point bias at the same time  Vulnerable to biases relating to the range of the
numbers used in the card

Source: (Pearce and Ozdemiroglu, 2002)

 Advantages and disadvantages of the single-bounded dichotomous choice

Would you pay £5 every year on top of your annual water bill to improve the
drinking water quality that comes to your home? Yes / No

Advantages Disadvantages

 This task provides less cognitive

 Some degree of “yea-saying” is
burden for the respondents who only possible
have to state "Yes" or "No" to a given
price.
 There may also be starting point bias
 Minimises non-response and
avoids outliers

Source: (Pearce and Ozdemiroglu, 2002)

Advantages and disadvantages of the (double-bounded
dichotomous choice )

Would you pay £5 every year on top of your annual water bill to
improve the drinking water quality that comes to your home?
If Yes: And would you pay £10? If
No: And would you pay £1?
Advantages Disadvantages

 More efficient is elicited about  All the limitations of the

each respondent's WTP. single-bounded procedure still
apply.

 Added possibility of anchoring

Source: (Pearce and Ozdemiroglu, 2002) and “yea-saying” biases.
WTP = f {income, age, nationality, gender,
marital status, education}
• x1 = monthly income
•x2 = age
•x3 = nationality
•x4 = gender
•x5 = marital status
•x6 = education level

Source: Zaiton, Yuhanis, Alias, Mohd Rusli, 2010

BAHAGIAN 4: Willingness to Pay

Scenario

The Mossy Forest is a natural environment that grows only at the highest elevation of Cameron
Highlands. This moist tropical evergreen forest is also a rich repository for a varied set of
mountain creatures encompassing insects, snakes, frog, birds, and mammals unique to this
chilly atmosphere. Its role to the visitors is evident through its various ecosystem services like,
education and research, as well as recreation. The failure to conserve the forest would increase
the likelihood of devastation of the ecosystem and habitats of the forest.
The problem arises since at present there is lack of funding from the management of the forest
reserve. Hence, the visitors to Mossy Forest are charged with entrance fee. However, the
purpose of entrance fee is to cover the maintenance of the facilities, enforcement and
management of the park, while not for the purpose of conservation per se. The park has not
imposed the Conservation fee to the visitors. A conservation fee is important to carry out
biodiversity conservation efforts, tree planting, forest restoration and environmental education
programs to the public. Thus, this study aims to find the willingness to donate for the
conservation natural resource (purpose ONLY) by visitors.
1. Berdasarkan senario di atas, di masa akan datang adakah anda sanggup menderma untuk
tujuan pemuliharaan? (Tiada caj bayaran pemuliharaan pada masa ini).
Based on the scenario above, in the future are you willing to donate for conservation
purpose? (There is no conservation fee charges at this time)
□ Ya / Yes
□Tidak (Jika tidak, jawab soalan 3) / No (If no, answer question 3)

Before answering this question, think about that :

 The money received is only used for management and administration
 If the amount of money paid by the community is insufficient, the area cannot be managed
sustainably and perfectly
 Your ability to pay once a year
 Table : Drawbacks of CVM

Bias and error Description

types
1. Design bias The failure to make simple, clear, and realistic questions would result
in a design bias.

2.Hypothetical The bias results because those who have not used a non-market good
market bias are allowed to be the respondents.

3. Information The effect results in relation to the way the information is conveyed
effects to the respondents for example the starting bid for the WTP.

4. Interviewer bias The bias occurs in relation to the interviewer’s image and the way an
interview is conducted with the respondents..

Source: Adapted from Mohd Rusli, Alias, and Kharil (2008)

 Table 4: Drawbacks of CVM Continued…

Bias and error types Description

6. Non - response bias It happens because respondent is unable to understand

the questionnaire designed by the researcher.

8. Starting point bias The bias occurs in CVM when the first amount of bid
affects the bid distribution which has been set by the
interviewer
 Contingent Valuation Method

https://www.youtube.com/watch?v=__xzmIG4L8s
 CHOICE MODELLING

-Contingent Rating

-Contingent Ranking

-Pairwise comparison

-Choice Experiment
Choice Experiment
• The theoretical foundations:
1. Theory of value by Lancaster (1966)
2. Random utility theory by Manski (1977).
• Lancaster’s theory specifies the value of a good as a function of the attributes
that characterize the good rather that the good per se.
• The random utility theory (RUT) helps to derive the best estimator of the
unknown true utility function.
• RUT relates utility directly to the probability of choosing an alternative from a
set of alternatives.
CM approaches are based around the idea that any good
can be described in terms of

I) attributes, or characteristics
II) The levels
Choice Experiment
• A CE study involves five important stages:
1. selecting attributes
2. determining levels,
3. choosing experimental design,
4. constructing choice sets
5. measuring preferences
STEP 1 Define the valuation problem
• Identify the resource and any particular changes in it.
• Provide detailed information about the resource and possible changes
in it
• Need to develop market scenario:
• Describe a payment vehicle e.g. sales tax, entrance fee, user fees
which will be used to fund any management policy for the resource
or alternatively a public fund to which contributions will be made
to compensate for resource degradation.
 Problem
Step 1 definition

Qualitative study
•Identification of alternatives
Step 2 •Identification of attributes
•Identification of attribute levels

Experimental design
Step 3

Step 4 Generate choice sets

Step 5 Construct survey instrument

Figure 1: Design process in choice modelling experiments (source: Hensher et al. (2005))
Management Current condition Future condition
practice

1. Entrance Local: RM5 (adult), RM 3 No increase,

permit (others); Additional increment of RM5,
Foreigners:RM20 (adult), RM Additional increment of RM10,
10 (others) Additional increment of RM15

2. Number of 6,500 visitors/year 6,500 visitors/year;

visitors Additional increment of 10% in visitors arrival/ year
(7, 250 visitors);
Additional increment of 20% in visitors arrival /year
(8,000 visitors)
Survey Questionnaire
 I) Basic Multinomial Logit Model

U = β0 + β1NOV + β2BIO + β3EAM + β4ENV + β5Price + ε……………………(1)

Where:
U = Utility
NOV = Number of visitors
BIO = Biodiversity
EAM = Enforcement and monitoring
ENV = Environmental and nature education
Price = Entrance permit fee
β0- β5 = Coefficients to be estimated
ε = Random error
ECONOMIC VALUES OF CONSERVATION AND MANAGEMENT ATTRIBUTES IN
BAKO NATIONAL PARK, SARAWAK, MALAYSIA

i) Conservation attributes
 Choice Experiments

• The probability;
Pin = f ( Xin, Xjn ; j ≠ i, β)

Where;
Pin = probability of respondent n choosing alternative i
Xin = a vector of observable characteristics of alternative i accessible to
respondent n
Xjn = a vector of observable characteristics of alternatives j accessible to
respondent n
Choice experiment
Welfare measure:
• The ratio of an attribute’s coefficient and the price coefficient
represents the marginal implicit price of the attributes.
• This ratio represents the implied change in the implicit price of the
attributes relative to a current situation or status quo as in the formula
below:

ρi,k = ∂V / ∂Xi, k = -1 βi,k ∂V / ∂P i, k

βi,k=p
Choice Experiment
Factorial Design
• All choice modellng studies require an experimental design.

• The design is formulated from number of attributes (or factors) or the number of levels for each
attribute.

• Attributes must have at least two levels.

• The attributes included in an experimental design should be the attributes that influence a visitor’s
or respondent’s choices.

• A complete factorial design (CFD) or full factorial design is simply all possible combinations of
levels from all attributes.

• Example, CFD was 3341= 108,impossible to implement.

Choice Experiment
Fractional Factorial Design

 Fractional FD, only a subset of all possible combinations of attributes levels is selected.

 This design reduces the number of alternatives the respondent evaluates and still allows the
estimation of the unknown parameters the researcher seeks.
 Examples
 4 attributes; 2 attributes with 2 levels and 2 attributes with 3 levels
 FFD is:
 2^2 X3^2 = 36 Cards/Alternatives
 36 cards – Implausible and dominated alternatives
 30 Alternatives/3 (multiple choices)
 10 Questions
Approach of CE tasks Welfare Estimates (WTP)

CE Choose between two alternatives versus status Yes

quo

CR Rank a series of alternatives Depends

CRt Score alternative scenarios on a scale of 1 - 10 Doubtful

PC Score pairs of scenarios on similar Source:

scale Bateman et al., 2002 Doubtful
 2.Contingent Rating

Characteristics of route Route A Route B

Length of climb 150 metres 5o metres

Approach of time 3 hours 2 hours

Quality of climb 3 stars 1 stars

Crowding at route Not crowded Not crowded

Scenic quality of route Not at all scenic Very scenic

Distance of route from house 200 miles 110 miles

1
2 3 4 5 6 7 8 9 10

Strongly prefer route A Strongly prefer route B

Retrieved from (Hanley, 2001)

 Contingent ranking
Redang Island Perhentian Island Kapas Island

1. Accommodation type 3 stars 3 stars 3 stars

2. Accommodation Restaurant and Restaurant Restaurant and

facilities entertainment Entertainment

3. Proximity to the On the beach On the beach On the beach

beach

4. Accessibility from the 60 minutes 120 minutes 20 minutes

mainland (boat ride)

5. Package price RM 400 RM 600 RM 400

RANK 1 3 2

Note: Choose (√) if you prefer none of the above in the box.
Retrieved from Rawi (2012)
 Paired Comparisons

Service A Service B
Provider Consultation at GP Specialised nurse visits in
own home

Number of 2 consultations per year 2 visits per year

consultations

Payment per O DKK per year 500 DKK per year

year
Tick one box A is much A is slightly A and B are B is slightly B is much
better than B better than B equally good better than A better than A

Retrieved from Bech et al. (2007)

 Strength of Choice Modelling

 Needs respondents to select only one resource use option from each of
some sets (Hanley et al., 2001).

CM method has the capacity to estimate values for alternative multi-
attribute resource use options and marginal changes in each individual
attribute (Othman et al., 2004).

Alpizar (2001) pointed out the CM is capable to mitigate some of the

potential biases of CVM besides eliciting more information from the
respondents followed by its multi-attribute requirements.

Also, statistically it has more potential to test for internal consistency.

 Weakness of Choice Modelling

Additional (cognitive burden) placed on respondents, and its

(complexity in design) and (econometric estimation) (Othman
et al., 2004).

A biased sampling or results may result as a consequence of the

(failure to design) a good questionnaire design in CE.

The application of CE is also (more complex) than other stated

preference techniques such as CVM
 Strength and Weakness of Stated Preferences Techniques
Method Strength Weakness
Contingent Able to take into account the non Subjected to various biases, which constitutes of
Valuation use value strategic bias (e.g., non- response bias, starting point
bias, payment vehicle bias, Interviewing bias,
Can be used for both ex post and ex embedding bias and hypothetical bias)
ante valuation
Expensive

Choice The technique is complex

Modelling It can determine the non-use values
and discard some of the biases in Expensive, as it requires thorough survey
CVM development and pretesting

Can be used for both ex post and ex

ante valuation

Source: Birol, Karaousaki and Koundouri (2006)

Revealed Preferences Methods

• Travel Cost Models infer values of recreational resources by

determining how much visitors spent getting to a site and then using
this information to estimate a demand curve for that site.

• Hedonic property value and hedonic wage approaches use regression

analysis to infer environmental values from spending on goods which
include those values.

- Market Price:
Data Requirements: Market prices, production costs and the profitability of
the enterprise collected from a market and/or household survey.
Travel cost method
Travel Cost Method (TCM)

• The basic model of the traveling cost (Travel cost

method)
• TCM was introduced by Hoteling (1949)
• First used to estimate the recreational benefits by Trice
and Wood (1958)
• Modified and estimated the recreational benefits and
resources by Clawson (1959)
• Currently, TCM is widely used to:
• Measure the benefits of recreation activity
• Measure the benefits of TOR resources
Travel Cost Method (TCM)
• Estimation of the value of TOR
• TCM is based on observed market behaviour ‘direct out of pocket’ and
‘time cost of travel’
• The basic approach of TCM is:
The number of trips to a recreation site will decrease with an
increase in distance traveled; other things remain equal
Definition
• The basic idea of the travel cost method is that the time and travel cost
expenses that people incur to visit a site represent the “price” of access
to the site. 
• Thus, peoples’ willingness to pay to visit the site can be estimated
based on the number of trips that they make at different travel costs. 
• This is analogous to estimate peoples’ willingness to pay for a
marketed good based on the quantity demanded at different prices.

62
TRAVEL COST METHODS
• Implemented the concept of the whole recreational experience (WRE)
• Clawson (1959) suggest that the experience of the recreational trips to the
recreation site can be obtained from the five phases;
1. Planning
2. Travel to the site
3. On site
4. Travel back from the site
5. Recall the experience
Limitations of the TCM
• It is restricted to sites where people (in the zones) have different
travel costs. Without variation in total cost, it’s hard to estimate a
demand curve.

• There may be analytical problems in measuring the price of a visit.

How does one measure opportunity cost of travel time? Does one
include the marginal cost of capital goods used at the site? Should
multiple purpose trips be included in the data (desirable if costs can
be accurately apportioned to the site)? Also, the journey may have
value (and hence the trip has multiple purposes).
 Travel Cost Method (TCM)

1. Individual Travel Cost Model

2. Zonal Travel Cost Model

• Travel costs such as petrol and wear and tear, entrance fees, expenditure at
the site, and opportunity cost of time of travel are used as a proxy to prices.

• For ITCM: Visit rates (dependent variable);

• For ZTCM: Visits percapita (dependent variable);

• The area under the curve represents consumer surplus and is therefore an
estimation of the value of the site.
Travel Cost Method (TCM) con’t

Data requirements

Number of visits to the site, transport costs, time spent travelling to the site, the socio-economic
characteristics of the visitors and the population size, and opportunity cost of time.
Data obtained through visitor surveys at the site

When to use the method

To assess the value of a nature site used as a guide to the maximum entrance fee to charge.
 Model specification for ITCM
TCM V = β0 + β1RITCij + β2TTimeCij + β3OSTime + β4Age + β5Edu + β6GM + ε
Where:

I = Origin (Main cities of respondents)

J = Langkawi island
V = Number of visits to the Kilim Karst Geoforest Park
RITCij = Total round trip travel cost of individual from i to site j
TTimeCij = Cost of travelling time of individual i to site j
OSTime = Number of hours spent in the park
Age = Age of individuals
Edu = Education level of individuals
GM = Gross monthly income of individuals
β0 – β10 = Coefficients to be estimated
ε = Random error

Source: Matthew, N.K., Ahmad, S., Ramachandran, S., & Syamsul, H. M. A. (2013
Published in the Journal of Applied Economics and Business,.
 Table 3: Weakness of TCM
Problems Description

1. Determines the use value •TCM cannot be used to determine the non-use value
of specific sites only

2. Multiple destinations •Despite there being many suggestions about the allotment of cost
concerning multipurpose trips there is no standardized way

3. Seasonal visitation pattern •This would result in bias in survey findings except for those
conducted for long durations.

4. The finding of recreational •This is because a person who lives near to the study site would
value is questionable incur lower travel cost however; they may have high value for the
site.

5. Travel time •There is no standardized measure for the proportion of

opportunity cost of time measured in terms of the loss in wages

Source: Adapted from (John Asafu Adjaye, 2005)

 Travel cost method video

https://www.youtube.com/watch?v=AjcQpzIBu1I
Zonal Travel Cost Method

This method allows one

to estimate the market The consumer surplus
demand curve for access may be obtained from the
to a non-unique site, market demand curve in
which is shown in the the usual way.
next slide.
Zonal Travel Cost Method
• One can also use TCM to estimate demand for a unique site. To use this method:

1. survey actual visitors rather than potential ones

2. allocate visitors to a particular zone, depending on their “travel costs”
(usually distance).
3. For each zone, compute the average number of visits per year and the average
total travel cost.
4. Estimate the relationship between cost/trip and the number of trips per person.

• The consumer surplus for a visitor from a particular zone is given by the area
below this curve and above the cost of a visit from that zone
Zonal Travel Cost Model
Estimating Consumer Surplus:
Benefits of a recreation area

DISTANCE VISITS AS COST PER

ZONE POPULATION FROM AREA % OF POP VISIT
A 10,000 100 Miles 50 10
B 20,000 300 Miles 15 80
C 100,000 500 Miles 5 100

ZONE A: .5 (10K) * (60-10) or .5 (10K) * [(110-10)/2] =$250K

ZONE B: .15 (20K) * (95-80) or .15 (20K) * [(110-80)/2] =$45K

ZONE C: .05 (100K) * (105-100) or .05 (100K) * [(110-100)/2] =$25K

SUM = $320K
Group activity
1) Identify the attributes and the levels (current condition and future
condition)
2) Please draft a choice card based on the topic given for your
assignment topic
3) Travel Cost Method : List out all potential costs involved as well estimate the
cost
1. Planning
2. Travel to the site
3. On site
4. Travel back from the site
 Hedonic pricing (HP)

• Property value depends on a number of factors: house

size, accessibility to workplace as well as the
environmental characteristics of the neighborhood.

• HP seeks to value the contribution of environmental

attributes towards raising real estate value.
 Hedonic pricing (HP) con’t

Information requirements
• The property (e.g. prices, condition, age, size)
• The neighborhood (e.g. crime rate)
• Access to amenities (e.g. public transport, shops) and
• The environment (e.g. air and water quality, noise, amenity) and
• Individuals’ socio-economic status.

When to use
• The technique is best employed to estimate the environmental effects of air
and water pollution and noise nuisance on the residential environment.
 Hedonic Pricing Analysis of green spaces

Source: Saphores and Li (2012)

Published in Landscape and Urban Planning.
Valuation of Ecosystem Services: Hedonic Pricing Method - YouT
ube
Individual
activity
Apply the Hedonic Pricing method to
your area/hometown currently you
residing?
Market Price-Based Valuation Methods

When adopted?
• When the environmental goods and services are transacted in
formal markets.

Where commonly used?

• To estimate the economic rent of extractable resources such as
timber, non-timber and water
 Strength and Weakness of Revealed Preferences Techniques
Method Strength Weakness
Travel Cost Data obtained from •Limited to the assessment of current use only and in situ
actual behaviour and resources using situations including travel
choices
•Ex-post valuation and does not take into account the non
use values

Hedonic Based on secondary and •Difficult to detect the small effects of environmental quality
Pricing observable data factors

•Ex-post valuation which means the (e.g., after a change in

the environmental quality)

Market prices Based on actual choices •Does not take into account the non use values and market
in market distortions which may bias the values

Source: Birol, Karaousaki and Koundouri (2006)

Glossary of Evaluation
Choice Modeling A valuation technique ofmethods
eliciting WTP involving a hypothetical
market with designed combinations of multi-attributes of the
environmental resource. This technique can decompose the values
of the individual attribute of the resource.

Contingent Valuation A technique involving the construction of a hypothetical market in

Method order to elicit the WTP or WTA a compensation involving the gain or
loss of environmental services respectively.

Hedonic Pricing A technique that uses the differential value of properties and wages
to impute the value of a change in environmental amenities.

Travel Cost Method A technique of estimating the recreational services of a site using
information on the amount of money and time people spends
getting to the site.

Market Prices Prices derived from buying and selling of goods and services in the
market.
 Table 1: Revealed and stated preference methods

Valuation method

Revealed preference Stated preference

Approach Consumers' preferences are revealed through their actions Consumers are asked to state their preferences for
in real markets hypothetical scenarios

Direct
methods Indirect Contingent valuation
(directly asking individuals their WTP)
Indirect
methods  Travel cost method Discrete choice experiment (estimation of the WTP
 Hedonic pricing method by use of price variable)
Disadvantages
 Limited to supply of information regarding values  Overall costly evaluation (more complicated to
that have been experienced design and analyse, and also more costly to
undertake survey as show material often
required for more complex choice task)

Advantages  External validity is maximised because the choices

observed are real market choices  Provides preferences and information that are
otherwise impossible to reveal
 Low-cost evaluation

Sources: adapted from Kjaer (2005)

Summary
• Total economic value
• Contingent valuation
• Contingent choice experiment
• Travel cost
• Hedonic property and wage