valuing recreation/amenity benefits: travel costs, cvm, and hedonics

GEF

Session 15

Valuing Recreation/Amenity Benefits – travel costs, CVM, hedonics

John A. Dixon

[email protected]

The World Bank Institute

Ashgabad, November 2005

Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Recreation/Amenities

GEF

Questions

• What are the primary recreational/ amenity benefits associated with Caspian Sea resources?

• What are the main analytical techniques used to estimate these values? Differences between “revealed preference” and “stated preference” techniques.

• What are the main economic policies that can be used to regulate or manage these uses?


GEF

Selecting the appropriate valuation technique (again)

Environmental Impact

Measurable change in production

Change in environmental quality

Yes

Nondistorted market prices available?

Use change-in-productivity approach

Use surrogate market approaches, apply shadow prices to changes in production

Yes No

Habitat

Opportunity-cost approach

Replacement cost approach

Land value approaches

Contingent Valuation

Air and water quality

No

Cost-effectiveness of prevention

Preventive expenditure

Replacement/ relocation costs

Health effects

Sickness Death

Medical costs

Loss of earnings

Human capital

CEA of prevention

Recreation

Contingent valuation

Travel cost

Aesthetic, Biodiversity, Cultural, Historical assets

Contingen Valuation


Hedonic wage approach



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Principal Recreational/ Amenity Benefits

• Direct, consumptive uses: fishing, hunting, gathering of marine organisms, oil and gas?

• Direct, non-consumptive uses: swimming, sailing, viewing wildlife, transportation, others?

• Indirect uses: ecosystem services, vistas and views, amenity benefits


GEF

Matching Economic Valuation Technique to Uses and Users

• Direct, consumptive uses: changes in production, CVM, Travel Cost

• Direct non-consumptive uses: CVM, travel cost, RUM (random utility models), hedonics, others

• Indirect uses: changes in production of ecosystem services, replacement cost/ preventive expenditures, hedonics, others


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Valuing Recreational Uses

• Usually done by one of three means:– Observing net admission fees/ permit fees

paid (a minimum estimate of WTP)– Use of Travel Cost approach that relies on

“revealed preference” information on travelers time and costs of visiting a location

– Use of CVM that relies on “stated preferences” to determine WTP (willingness to pay) for use of a location


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“Revealed” vs “Stated” preferences

• Economists tend to prefer revealed preference approaches since they rely on real data on expenditures and markets– Can be collected from the market or via use

of surveys– Real dollars exchanged for various goods and

services

• Stated preferences (e.g. CVM), however, are sometimes the only valuation approach possible. When is this true???


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A Simple Travel Cost Example (revealed preference) – value of Lake Sevan in

Armenia

• Visitors to Lake Sevan in Armenia are surveyed to find their cost of travel and frequency of visits.– This information is used to estimate a

demand curve for Lake Sevan recreation– Different demand curves are estimated

for Armenians and foreign visitors (due to great differences in income levels)

– Travel Cost does NOT capture non-use values by both Armenians and foreigners


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The value of Lake Sevan can also be estimated by use of the CVM approach

(stated preferences)

• CVM can be used when a market is only partially developed (and sales data hard to obtain). Especially useful for non-use values.

• In theory CVM can capture the MAXIMUM willingness to pay for the use of a resource

• Advantage of CVM: you will always get an answer

• Disadvantage of CVM: you will always get an answer!!!


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Valuing Ecosystem Services: Cost-side Valuation Techniques

• Include the Replacement Cost approach and the Preventive Expenditures approach (both approaches are closely linked)

• Uses information on replacing a “lost” service or function, or preventing the damage from occurring– For example, the cost of replacing flood

protection benefits of a wetland, or– The cost of replacing natural water filtration/

treatment benefits by mechanical/engineering approaches


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Replacement-cost approach: New York City (NYC) watershed

• The question was whether it was better to protect NYC’s watershed and keep water clean, or allow the watershed to be developed and clean and treat the water when it reached NYC

• The economic analysis showed that it was CHEAPER (less costly) to protect the watershed by an investment of $1 billion plus in purchasing land in the watershed, than to build and operate a water-treatment plant closer to NYC


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Valuing Amenity Benefits: Hedonics (revealed preferences) and CVM (stated

preferences)

• Amenity benefits are usually valued by either Hedonic approaches or via CVM (surveys)

• Hedonic effects are commonly seen in pricing of hotel rooms, real estate, other tangible goods or services that have an amenity value component

• Hedonic approaches use information on actual market transactions to estimate the WTP for these amenity values


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Hedonic Valuation Approaches

• Use information on observed behavior to estimate WTP (willingness to pay) for an environmental amenity (an economic ‘good’) or disamenity (an economic ‘bad’)

• Requires information on transactions and differences in environmental quality

• Often applied to housing, hotel rooms or other locational decisions (e.g. wages and a ‘sunshine tax’)


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Example 1: Houses near the Zandvlei Wetland in Capetown, South Africa


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Capetown Case (cont’d)

Basic idea: Houses near the Zandvlei wetland sell for more, an “environmental premium.” How large is this premium?

The analysis was based on sales data on housing over the past 4 years; the results were then extrapolated to the entire housing stock in the areaPremium per house for water frontage was about R130,000 per house (about US$13,000) (see van Zyl/ Leiman paper Tables 2 and 3)The results were very similar to estimates made by estate agents (expert opinion approach) for the same area – Hedonic approach value of R77 million vs Expert opinion value of R88 million


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Discussion of Capetown Results

The waterfront (open space) premium was less than 10% (and in some cases was even negative due to security concerns)

The results are very site specific (and management specific) – and only capture one aspect of open space values (as embodied in property ownership)

Hedonic pricing may NOT value certain types of native vegetation (e.g. fynbos are seen as unkempt and a fire hazard even though they are a unique ecosystem)

The hedonic study ignores wider values of open spaces to recreational users and other parts of Capetown (as reflected in generally high property values in all of Capetown compared to other parts of South Africa – the San Francisco effect)


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Hedonic pricing (cont’d)

2. Hotel room pricing in resorts is a market that “clears” every day. For example, in hotels on the beach in Hawaii:– Room price varies with floor (higher floors

are more expensive)– Room price varies with view

• ocean view• ‘garden view’… usually the parking lot, maybe the

mountains!– Room price varies with season:

• High season/Low season• Or, as in Costa Rica, high season and the ‘green’

season (e.g. rain!)


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Hedonic pricing (cont’d)3.Pricing of faculty flats at a university in

ChinaIn this case a 6 storey building, no lift, one flat per floor, and the roof leaks.What is the monthly rental per flat? If ground floor rents for 100 units per month, what are the monthly rents for the following floors?

• Floor 2 ___• Floor 3 ___• Floor 4 ___• Floor 5 ___• Floor 6 (top) ___


GEF

Pricing of Professor’s Flats in Beijing (cont’d)

Suppose that the roof is fixed and does not leak, and that an elevator/ lift is installed. How does this change the pricing structure? What is the monthly rental per flat? If ground floor rents for 100 units per month, what are the monthly rents for the following floors?• Floor 2 ___• Floor 3 ___• Floor 4 ___• Floor 5 ___• Floor 6 (top) ___


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Pricing of Professor’s Flats in Beijing (cont’d)

• How could this hedonic pricing information be used to make better decisions??– To decide whether or not the repairs

and changes are justified? How?– To decide whether or not to build new

buildings? How?– To design a more efficient pricing

structure? How?

valuing recreation/amenity benefits: travel costs, cvm, and hedonics

Documents

cost of travel

caspian eve

cvm approach

preferences cvm

wbi jo gef questions

cost effectiveness

location use of cvm

simple travel cost example