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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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Major Uses of Coral Reefs
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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Major Uses of Coral Reefs
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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Major Uses of Coral Reefs
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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Contingent Valuation
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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Contingent Valuation
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:
Income tax/green levy not deducted
Direct Impact multiplier not included
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:
Income tax/green levy not deducted
Direct Impact multiplier not included
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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