10. Economic valuation II - Valuation methods Flashcards
Name 4 of the 6 steps of doing a CV.
- Define problem
- Define population & sample
- Choose payment vehicle
- Choose elicitation method
- Survey implementation
- Data analysis
Give 3 reasons why people might overstate WTP.
- Warm glow, people who get a warm feeling from giving overstate more
- Social expectations, the more you think others will donate, the more you overstate the amount you donate
- Perceived legitimacy of the question
- Income
- Education
What is the distance decay effect?
The further away from something, the more it decreases.
Describe at least 3 of the 5 steps in doing a meta-analysis
- Find ‘all’ empirical studies on a certain topic, e.g.all wetland valuation studies
- Define the effect you want to analyse and put in common metric (effects size)
- Code outcomes and characteristics of studies in a database, and gather external data (income, population density)
- Estimate a meta-regression model explaining variation in outcomes
- Use findings for value transfer
What are the two indirect market valuation methods?
- Hedonic pricing method
- Travel cost method
What are the two non-market valuation methods?
- Contingent valuation method
- Choice experiment method
Describe the market price method and provide an example
Economic value is derived by looking at actual market transactions.
Examples: timber, fuel wood, fish.
Name 2 pros and 2 cons of the market price method.
Advantages:
- Relatively easy to apply
- Only requires simple modelling and few assumptions
- Uses actual consumer preferences, in contrast to stated consumer preferences
Disadvantages:
- Many environmental services are not traded directly in markets
- If markets do exist, they might be highly distorted and the price information will not reflect true social and economic values
- Method cannot measure value of larger scale changes that might affect supply and demand
Describe the production function method and provide an example
Values of inputs of production processes, obtained by measuring the contribution to the economic value of the final good.
Example: the revenue of providing diving trips to a coral reef can be considered a function of the quantity and quality of the coral reef; the production of fruits and nuts from a forest as a function of hours spent harvesting and the area of the quality of the forest
Name 1 advantage and 1 disadvantage of the production function method.
Advantages:
- In theory, it is well-suited to value ecosystem services since it is based on the notion that ecosystem services and economic benefits are strongly linked.
Disadvantages:
- In practice the method is technically difficult to apply
- It has substantial data requirements
- Market value of other inputs needs to be taken into account, so as not to overstate benefits from ecosystem inputs
- Only works if the final output is a marketed good
Describe the cost-based methods and provide 1 example.
Damage cost avoided, replacement cost and substitute cost methods estimate values of ESS on either the costs of avoiding damages due to lost services, the costs of replacing environmental assets, or the costs of providing substitute services.
Examples:
- Damage cost avoided: wetland as flood protection
- Replacement/substitute cost: substituting wetland reservoir with artificial reservoir
Provide 1 advantage and 1 disadvantage for cost-based methods.
Advantages:
- Simple to apply
- Inexpensive
- Methods integrate well with the types of economic analysis that are often used, such as cost-effectiveness analysis
Disadvantages:
- Measures are based on assumption that if people pay to replace an ES service or to avoid damages, then that service must be worth at least that cost
- The estimates produced by these methods might understate true values
- Replacement/substitution cost method: it is difficult to find exact replacements for ESS
- When an ESS is considered unimportant, the estimated value of the service will be low
- The methods are inconsistent estimators of value because the higher the level of ESS, the higher are the costs of additional improvements
Explain the hedonic pricing method and provide an example.
Uses implicit price of an ESS that is not traded on the market, as revealed through the observed price of a product such as real estate.
Examples: air pollution, water pollution, noise, aesthetic views, proximity to recreational sites.
Provide 1 advantage and 1 disadvantage of the hedonic pricing method.
Advantages:
- Uses revealed preferences
- When data is available, relatively inexpensive
Disadvantages:
- Only measures WTP for a non-marketed commodity at the location of investigation
- It may be difficult to control for all factors influencing house prices
- Difficult to apply for valuing ESS in poorly documented areas due to large data requirements
- Results depend heavily on model specification
Describe the travel cost method and provide an example.
Estimates economic benefits of a recreational site based on an observed travel pattern of people who visit the site.
Example: a recreational forest.
