Publications

Techniques to Value Environmental Resources:
an Introductory Handbook

Published as a joint exercise by the
Commonwealth Department of the Environment, Sport and Territories,
the Commonwealth Department of Finance,
and the Resource Assessment Commission
Australian Government Publishing Service, 1995

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Chapter 4: INTRODUCTION

In Chapter 3, techniques for determining the value of environmental resources used the costs or revenues gained from the effects themselves. In Chapter 4, techniques derive values from the costs or revenues of surrogates, effects closely related to the environmental resource of interest. The techniques can provide useful values.

This chapter describes each technique in terms of the problems it can help resolve, the values it can estimate, its underlying concept, its practical applications and its strengths and weaknesses.

Table 4.1: The range of surrogate market approaches

Surrogate    Description             Technique           Australian 
                                                            applications

Travel cost     Cost travel is a        Travel cost         Recreation
                proxy for price to 
                paid use the 
                environmental resource


Market price of Change in price of      Property value      Air pollution, soil
good with an    good is value of                            conservation, noise
environmental   change in the
characteristic  characteristic 


Wages to labour Change in wage is       Wage differential    Urban decline
                value of change in
                environment


Value of a close Value of a close       Proxy good          Research, native
substitute       substitute is value                        forests
                 of effect of interest

The travel-cost technique

The concept

A rational individual will weigh up the costs of a recreational visit against the benefits of the visit and then display the answer in actual behaviour. In this way, the willingness to pay for use of an environment is inferred from travel expenditures of those who visit it. Data on actual travel costs (including food costs, accommodation costs and any forgone income) can be collected by a survey and willingness to pay to visit the site can be derived from them. The benefits to a given individual are the cost savings relative to the other individuals who visit the same recreational environment.

When to use it

To resolve these questions, the monetary values need to be estimated for the benefits of recreation and environmental quality and the costs of deterioration in environmental quality and recreational amenity.

The technique was applied to help planning in the Colo Shire, located on the northwest outskirts of Sydney. In the early 1970s, recreational conflicts had arisen due to the combination of the attractive natural environment and the large adjacent population. The conflicts included:

To address these conflicts, a study was conducted by Planning Workshop Ltd (Sydney) to provide a profile of the main recreation uses and users, to provide information on factors shifting demand and to evaluate the benefits from each of the main activities (Sinden 1978). Benefits were estimated by the travel-cost technique for each of the major recreation activities (water-skiing, water picnicking, picnicking on land, driving for pleasure, visiting the Australiana village and visiting the butterfly farm). The most beneficial activities were driving for pleasure and picnicking, while water-skiers derived the least net benefit per day.

Box 4.1: Applications of the travel-cost technique

The technique has been applied to value the benefits of recreation in:

Strengths and weaknesses

The travel-cost method has been applied in many studies in Australia and has provided plausible estimates of monetary values for recreation in natural environments. The strengths of the technique are its use of:

The method relies on a number of assumptions which, if violated, complicate its use. For example:

If these assumptions hold, travel-cost values are comparable with those obtained in actual markets. If they do not hold, the technique must be applied differently. For example, the cost data from multi-purpose trips may have to be arbitrarily apportioned to each destination and this can affect the accuracy of the results.

The property-value technique

The concept

The price paid for a property directly reflects the benefits of the characteristics of the property. In this way, environmental characteristics such as clean air, peace, quiet and beauty are traded in the property market. The property-value technique derives the value for a particular characteristic from the price paid for the property. Data are collected on prices paid and characteristics of the property. The amount of the price attributable to the characteristics is then identified through statistical analysis. In essence, if two houses differ in only one characteristic, the difference in price is the value of that characteristic.

When to use it

To resolve the last question, monetary values need to be estimated for the benefits of soil conservation and the costs of land degradation.

Changes in noise level can lead to changes in enjoyment of an environment. When the noise levels are sufficiently high, they will impose costs on individuals and these costs may decrease house and land values. Abelson (1979) related the land value associated with houses in the Marrickville and Rockdale suburbs of Sydney to noise level and other characteristics such as house size. The average unimproved land value of a house block at the time was $10 000 in Marrickville and $14 000 in Rockdale. Abelson's findings included the following:

Box 4.2: Applications of the property-value technique

Increase in soil conservation were found to be associated with increase in the value of farms in Manilla Shire, New South Wales (King and Sinden 1988). The increase in value were attributed to conservation's role in improving aesthetics, maintaining farm access and improving long-term sustainability of output.

Retention of woodland on farms may enhance the naturalness of the environment, aesthetic quality and biodiversity but it may also lower farm land value. Reynolds (1978) estimated the loss in property value for increase in area retained and for increments in naturalness, aesthetic and biodiversity for a region of northern New South Wales. These losses are one measure of the cost of preservation of woodland.

Extension of a water supply pipeline to farms in Western Australia would benefit farm households as well as farm production activities. Coelli et al.(1991) valued these benefits as the increase in property value.

Strengths and weaknesses

The strengths of the technique include:

The weaknesses concern the need for a competitive property market in which to collect data. In the market:

The use of this technique is also restricted to cases where the environmental effect of interest can be shown to affect price.

The wage-differential technique

The concept

Wages for similar jobs in different geographical regions may vary with differences in environmental qualities between the regions. If so, higher wages may be paid to attract workers to areas with more pollution, less amenities or greater health risks. Or lower wages may be paid in areas with less pollution, more amenities and lower risks. If wages for similar jobs can be related to such environmental characteristics, differences in environmental quality can be valued as differences in wages.

Similarly, wages for different jobs in the same region may vary with differences in the environment and other characteristics of the jobs themselves. If so, higher wages may be paid to attract workers to those jobs with more pollution, less amenities or greater health risks. The cost of deterioration in the characteristics and the benefits for improvements in them can be derived from the differences in wages.

When to use it

To resolve the last question, the monetary values would need to be estimated for the benefits of improvements in environmental qualities and lower health risks and the costs of urban decline and decreases in safety.

Workers who move to the city for higher pay are trading off the increase in congestion, noise and pollution, for the increase in wages. Gillen (1974) argued that the extra cost of lack of environmental quality will be less than the increase in pay for some movers. For other movers, the extra costs of the disamenities will just equal the extra wage. In an early attempt at natural resource accounting for Australia, he identified people in this latter group and identified the change in wage and so valued the lack of environmental amenity.

The major overseas applications of this technique have been to workplace safety, to life and health, to the quality of urban living, in particular, air pollution (Hufschmidt et al. 1983, p.214). For example, Thaler and Rosen (1976) estimate individual willingness to trade off wages for safety. With data on occupational risks and wage differentials, they concluded that workers were willing to accept an additional $390 per year to work in jobs that increased their risk of death by one in one thousand.

Strengths and weaknesses

The strengths of the technique include its use of:

The technique suffers from a number of shortcomings:

Because of these weaknesses, markets and wages may not behave as expected and so the technique could provide under-estimates of the value of environmental resources.

The proxy-good technique

The concept

A good, service or resource with a market price may be a substitute for the unpriced environmental effect of interest. The market price could then be taken as an approximation for the value of the effect. There are three different ways to apply this concept and each takes the value of the substitute or proxy good as the required value.

When to use it

To resolve this question, the monetary values would need to be estimated for the benefits of research and the preservation of environments.

1. The proxy might be a different market good or service which already has a price. For example, a swimming pool might be a good substitute for rivers and lakes for some groups in the community.

The benefits of research are often hard to value. Johnston (1982) explored the possibility of valuing the benefits of research to reduce bush flies from the price of cans of fly repellent. The research concerned the introduction of beetles which eat dung and so reduce nutrient for the bush flies. Fly spray and dung beetles can both reduce the harmful effects of bush flies. Accordingly, Johnston asked households about their purchases of fly spray. Half the survey population felt their current purchases of repellent sufficient, while 20 per cent felt they needed to purchase more. If the research on introduction of dung beetles were successful, the average use of repellent would drop from three items a year to under one to give a saving of about $4 per person. If the repellent is a good proxy for a successful research program, the cost saving measures the benefits of the research.

2. The proxy might be a similar environmental good, service or asset that has been priced in a similar situation. For example, the Big Tree is a River Red Gum near Castlemaine in Victoria that had been classified by the National Trust. The State Electricity Commission recently spent $8 600 to shift power lines away from the tree to reduce fire risks to it. The benefit from preserving a similar tree in a similar situation might be a similar amount.

The Australian Bush Heritage Fund is a private organisation to collect funds to purchase and preserve native bushland. It recently purchased the Liffey blocks which comprise 241 hectares on the edge of the wilderness in northeast Tasmania. The market price of this particular forest type has been established and might be used in a new situation.

3. The proxy might be a good or service that is provided for a price by private enterprise in a market. The value of a similar good or service provided free by the government might be similar to this market price.

Strengths and weaknesses

The appeal of the technique is matched by the problems in its use. As long as the proxy provides the same kind of satisfaction in equal amounts to the same kinds of people, its price can be used to value the environmental effect of interest. Unfortunately, there is no guarantee of these similarities without intensive surveys of users. If the proxy is of lesser quality, the estimated value would be too low. If the proxy is of higher quality, the estimated value would be too high.

In order to use the technique, it is important to carefully establish the comparability of the proxy and the environmental effect of interest.

Chapter 4: DISCUSSION

The four techniques of this chapter all use data from surrogate markets. They use different kinds of data from different kinds of surrogate and use it in different ways. Hence they differ in their theoretical and market validity.

Theoretical validity

The travel-cost, property-value and wage-differential techniques all apply the notions of willingness to pay/accept and opportunity cost. Over the years, users of these techniques have refined the procedures and interpretations. For this reason, these techniques require careful and skilled management but are theoretically valid.

In contrast, the theoretical validity of the proxy-good technique is more open to question. The technique relies on finding a close proxy for the effect in question and the results achieved are only as reliable as the goods are close substitutes.

Market validity

All four techniques use actual prices and costs from actual exchanges in market places. Apart from the proxy-good technique, the surrogate is directly and causally related to the environmental effect of interest. The travel-cost, property-value and wage-differential techniques are all supported by market tests.

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