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5: Economic Methods of Valuation
Pages 87-117

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From page 87...
... Economic valuation is an attempt to provide an empirical account of the value of services and amenities or of the benefits and costs of proposed actions (projects or policies) that would modify the flow of services and amenities.
From page 88...
... Skepticism about any of those claims, in general or in the specific application to biodiversity, suggests that caveats should be applied to the interpretation of benefit-cost information or its use in policy decisions. The conceptually valid measures of welfare change are willingness to pay (WTP)
From page 89...
... suggest that targeted conservation policies provide the appropriate remedy to the extent that particular natural resources are both necessary for human welfare and threatened with exhaustion. Cost-effectiveness analysis can be useful in guiding decisions toward the
From page 90...
... Both kinds of use generate economic value, but it is likely to be expressed in different ways and via different institutions for commodities, in terms of quantities taken and prices paid and for habitat quality, perhaps via voluntary contributions to conservation organizations. Total economic values include all the several kinds of economic values that nave been identified by economists.
From page 91...
... In addition, market distortions of various kinds might distort prices, markets might be incomplete or otherwise imperfect, and the environmental service involved might be nonmarketed. Data generated by contingent valuation or contingent policy referendums often can (because a researcher controls the valuation context)
From page 92...
... Market Demands and Prices For commodities that can be sold in quantities that are small relative to the total market, the economic value that can be assigned to a decision to sell or preserve is simply the product of the market price of the commodity and the quantity. For example, if 20 acres of old-growth timber is reserved from the market to protect a pair of spotted owls, one estimate of the cost of this decision is the product of the volume of the timber and the market price per unit volume.
From page 93...
... First, "net value" requires that any costs associated with using the resources, such as, timber-harvesting costs, be subtracted from gross value. Second, "present value" requires prediction of future demands for environmental services.
From page 94...
... However, direct validation of the value estimates obtained with travel-cost models is impossible; the best one can do is test for convergence of the results of travel-cost methods and the results of alternative approaches, such as contingent valuation, and such tests have provided some empirical evidence of convergent validity. Hedonic Price Analysis Hedonic-price analysis separates the factors that contribute to prices to identify the contribution of those based on environmental amenities.
From page 95...
... The literature suggests that hedonic-price analysis has succeeded, in a fairly wide range of circumstances, in generating plausible estimates of marginal hedonic prices for various housing characteristics, including environmental amenities. To value nonmarginal changes in amenity levels, however, it is necessary to estimate hedonic demands, that is, demands for amenities.
From page 96...
... , the institutional environment, the valuation question, and the policy-decision rule: How does the answer to the valuation question affect whether the proposal passes or fails? (See the Grand Canyon flush case study below.)
From page 97...
... A large-scale test of the potential for reestablishing stream-bottom and beach characteristics in the Grand Canyon of the Colorado River was conducted in the spring of 1996. A week-long surge of water through the canyon was provided by opening the gates on the Glen Canyon Dam just upstream of the Grand Canyon.
From page 98...
... This storage is used to even out the year-to-year and seasonal supply of water to various users, divided between the upper and lower basin states by interstate compact and court decrees. In view of the history of large variations in runoff and of periodic droughts, the Glen Canyon Dam was built upriver of Grand Canyon National Park in part to provide water to the upper basin states and in part to regulate flows into Lake Mead, which supplies much of the water to users in California.
From page 99...
... But as a result of pressure from new constituencies, such as trout fishers and river rafters, and the mandates of the National Environmental Policy Act and the Endangered Species Act (ESA) , BOR initiated the Grand Canyon Environmental Studies (GCES)
From page 100...
... The economics of the electric-power industry are changing, and prices in a regulated industry are not always a good measure of real economic values. On the other side were a variety of values that are even more difficult to measure: recreation, including trout fishing and rafting; maintaining biological communities, including endangered species; maintaining riparian communities, including geomorphic formations; providing nonuse values, such as scenic and aesthetic resources; and preserving sites of cultural or archeological importance, including those related to Indian cultures.
From page 101...
... Commentary The experimental release of a surge of water from the Glen Canyon Dam had the expected beneficial environmental effects throughout the Grand Canyon. The costs in lost power generation appear to have been within reasonable bounds.
From page 102...
... · Theoretical requirements for valuation of complex policies are systematically violated by schemes that value components of Biodiversity separately, each by whatever method is feasible and appropriate, and then calculate total economic value by adding the component values. Valid approaches are limited to holistic total value (for example, one-shot WTP for the proposed change in the state of the world, with respect to the particular habitat)
From page 103...
... Case Study: Pacific Northwest Forests This case involves a conflict between protection of species that depend on old-growth forests and long-standing use of the Pacific Northwest's forests as a major source of timber and wood products for national and international markets. Although the conflict started over protection of a single endangered species, the northern spotted owl, it grew into an issue involving protection of a suite of species, including various strains of salmon.
From page 104...
... who were, in effect, required to agree on the estimates of the likelihoods for the four categories of habitat outcomes. Other groups of specialists provided estimates of other outcomes for each policy option, including some probable annual volumes of federal timber harvests, direct timber-industry employment, and annual federal receipts from the sale of federal timber, all within the defined range of the northern spotted owl.
From page 105...
... · Environmental option would have put the largest area of federal land in protected reserves. A comparison of the three options, their effects on three economics-related measures, and their effects on the availability of "well-distributed" habitat for the northern spotted owl, the marbled murrelet and coho salmon (three of the 426 species or groups of species for which estimates of the likelihood of habitat outcomes were made)
From page 106...
... 106 o A o s° .O o V ca ca o C)
From page 107...
... The size of the region was based largely on the range of the northern spotted owl, which was the subject of the original court case. That meant it was a very large area for focusing on some kinds of effects, such as human-community impacts, which vary considerably from one locale to another whose measurement can easily be lost when impacts on individual communities are melded into state or multistate regional estimates.
From page 108...
... · It is difficult to implement conceptually valid piecewise valuation procedures that would give these methods a role in eclectic valuation schemes that use different methods to value different components of the suite of biodiversity services and amenities. Contingent valuation, although controversial, is the obvious method for valuing biodiversity because it is, at least in principle, capable of valuing nonmarketuse values, passive-use values, and total economic value.
From page 109...
... EXAMPLES Various estimates have been made of the value of aspects of biodiversity. They include in this report the estimates for ecosystem services in chapter 3, the estimates in the Pacific Northwest forests and Grand Canyon flush case studies in this chapter.
From page 110...
... 110 PERSPECTIVES ONBIODIVERSI7Y Benefit-Cost Analysis in the Federal Government Benefit-cost analysis (B CA) is a generic term that can refer to nearly any comparison of benefits and costs as long as they are measured or estimated in comparable units.
From page 111...
... ECONOMIC METHODS OF VALUATION 111 meet", a model that achieved great influence in the first half of this century (Nelson 1987~. Guidance for analyses of federal water-resources projects grew in a series of documents (the "Green Book" of 1947, Senate Resolution 148 of 1957, Senate Document 97 of 1962, and so on)
From page 112...
... . A BCA is an account not a perfect account but a fairly good accountof the prospective contribution of some proposed action to the satisfaction of human preferences.
From page 113...
... · In the case of biodiversity, the appropriate constraints can well include safe minimum standards of conservation for critical species and habitats (see box 5-3) (Farmer and Randall 1998~.
From page 114...
... is the most that could be paid as a bribe to save the world's ecosystem services without reducing the accumulated value of the the world's capital. The value estimates of Costanza and others (1997)
From page 115...
... As long as the value of most ecosystem services is not subjected to a market test, such debates will continue, and in the end they will advance understanding not only of the issues, but also of the values that are involved. SUMMARY Economists have developed an array of tools for estimating values when the lack of ordinary markets precludes use of their favored measure, market-determined prices.
From page 116...
... 1996. The value of the world's ecosystem services and natural capital.
From page 117...
... 1996. Do contingent valuation estimates pass a Scope test?


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