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

Contents Page > Previous > Next

Chapter 5: Introduction

The techniques of Chapters 3 and 4 depend on data from actual markets for the relevant environmental effect or for a surrogate effect. In the absence of these data, market exchanges can be simulated using survey questionnaires. Other methods ask questions to elicit monetary values directly (the contingent valuation and trade-off techniques) or to elicit values indirectly (contingent ranking and rating, and the priority evaluator). The success of these techniques is contingent on successful simulation of the market.

This chapter describes each technique in terms of the problems it can help resolve, the values it can help estimate, its concept, its practical applications and an overview of strengths and weaknesses. Table 5.1 summarises the range of the techniques.

Table 5.1: The range of simulated market approaches

Nature of questions          Nature of simulation            Technique

Direct questions about          Purchase of environmental       Contingent valuation
willingness to pay/accept       good, service or asset  


                                Choice between                  Trade-off game
                                alternatives each with a 
                                different level of the 
                                environmental effect  


Direct questions about          Rank or rate environmental      Contingent ranking and 
preferences                     and other goods and services    contingent rating


  


Direct questions about          Choice of quantities to         Priority evaluator
quantities to purchase          purchase in market setting

Contingent Valuation

The concept

There is great appeal in asking the following question:

When the respondent understands the question and answers truthfully the benefit of the environmental effect is valued directly. The simplicity of the technique has led to widespread application, widespread testing of its forms and assumptions and widespread comment on its perceived adequacy.

When to use it

To resolve these questions, monetary values need to be estimated for the benefits of recreation, preservation of habitats, preservation of the soil and other non-use benefits.

There are many practical applications of direct survey questions and Wilks (1990) summarises 16 of the Australian studies. These value the benefits of eucalypt woodland, environmental quality, clean air, preservation of natural habitats, prevention of bushfires, cultural facilities, recreation, control of weeds, clean water supplies and research.

The value of visits to coral sites on the Great Barrier Reef was estimated, validated and applied by Hundloe (1990). Visitors were asked how much they were willing to pay for a visit to the sites themselves, having already paid to holiday in the area. The mean value was $8 per adult visitor or some $6 million per year for all visitors. This is the value over and above fares and other costs to reach the area. Hundloe notes that this is less than a value obtained in a comparable survey on Heron Island, and only slightly more than the value for visits to a substitute, namely an underwater observatory. On this basis he suggests that the value of $8 underestimates the true value.

A further check on the validity of contingent values is to assess their consistency with related, actual expenditures. Actual visitor costs to the reef region were $653.7 million and the costs to visit the coral sites themselves were $44.4 million. A sum of $6 million would only be a 14 per cent addition to the actual costs of visits to the sites, a percentage which would be likely to be within the financial capacity of most visitors.

Box 5.1: Applications of contingent valuation

Clean air, cars and lead pollution. In an effort to gain some knowledge of the magnitude of the benefits of pollution control on automobiles, the Australian Environment Council (1982) asked vehicle owners the following question: How much are you prepared to increase your annual car cost to help reduce air pollution?

Non-use benefits. The non-use benefits of existence value, vicarious value, option value, quasi-option value and bequest value can often only be assessed with contingent valuation and the survey of the non-use benefits of the Kakadu Conservation Zone is an attempt to do so (Imber, Stevenson and Wilks 1991).

Quality of recreational environments. Walpole (1991) assessed the recreational benefits of 25 sites along the Ovens and King Valleys in northeastern Victoria with contingent valuation. The value of a recreation visit per group ranged from $7 to $30 across the sites and higher values consistently occurred at sites with higher environmental quality ratings. A one unit increase in the environmental rating, on 1 to 10 scale, was associated with an $8 per visit increase in recreation benefit.

Strengths and weaknesses

The questions can readily be phrased to capture willingness to pay/accept, so the technique is theoretically valid. However, contingent valuation is difficult to use because questions can be misinterpreted, responses can be biased by the questions and respondents can behave strategically or dishonestly. As a consequence, it is no simple matter to obtain values that would apply in a real market.

Sometimes contingent valuation will provide estimates of willingness to pay/accept that pass this test and so are proven to be useful for policy (Bohm 1972; Bishop and Heberlein 1979; Sinden 1988; Duffield and Paterson 1992). At other times, the values do not pass this test or prove of only marginal relevance for decision-making. For these reasons, some people argue that the technique is successful and relevant while others argue otherwise.

If sufficient funds were available for the surveys, the decision on whether to apply the technique depends on three judgements:

The Trade-off game

The concept

The idea of a trade-off is fundamental to human behaviour and so to the making of choices. In any decision there are benefits to be gained and costs to be incurred and a trade-off is the act of weighing benefits and costs. In the trade-off game, respondents are offered two alternatives and are asked to choose between them. The alternatives are defined in terms of their outcomes, they differ in the level of one or more outcomes and one of the outcomes will be monetary.

When to use it

The technique can be used to measure in monetary terms the benefits or costs of a given change in:

Table 5.2: A simple trade-off game: two alternatives with two outcomes

                                             Alternatives
Outcomes                     Existing Situation      New situation
                                 A                           B

Money payments                     $0                           $X


Level of environmental            Level A                       Level B
service                           (low)                        (high)

The respondent is asked:

What is the value of the payment $X at which you are indifferent between A and B?

The sum $X is the willingness to pay for the given improvement in the level of environmental amenity.

The trade-off can often be expressed as a simple question instead of a formal table. Questions can be posed to decision makers just as easily as to individuals in the community. Read and Sturgess (1992) recognise that the decision maker may ultimately have to make an implicit valuation so the valuation might as well be posed as a trade-off. They call this application of the technique the last resort.

Bennett (1991) summarised the findings of the commission of inquiry into land use on Fraser Island in this way. For example, the conflict between commercial and recreational fishing was framed as follows:

Are the increased recreational fishing benefits that would result from a ban on commercial fishing worth the $6 million loss the ban would cause?

Sand mining competes with recreation and preservation. Bennett posed the following question:

Are the $200 million benefits of sand mining worth the reduction in recreation and preservation benefits that would result?

As Bennett argued, economic values are not designed to provide recommendations on the use of environmental resources. They set out the information which is relevant to decisions on resource allocation. A trade-off doesn't value anything, it presents information about environmental effects in a way that brings out the implicit valuation that the decision maker will have to make.

Strengths and weaknesses

The technique is a development of contingent valuation and so possesses similar strengths and weaknesses. It is superior to contingent valuation in the sense that the willingness to pay/accept question is more tightly posed and the alternative resource uses are more obviously defined. It is somewhat more cumbersome than contingent valuation in that the trade-off game requires more explanation to players.

Contingent ranking and contingent rating

The concept

Instead of being asked to express a willingness to pay for or accept an environmental effect, respondents are asked to rank several alternatives in their order of preference. The alternatives include the environmental effect to be valued. The alternatives also include substitutes for the effect and some good with a money price ($P) to act as a threshold. The results from the ranking are interpreted as follows.

In a simple extension to contingent rating, respondents are asked to rate the alternatives on a scale of say 1 to 100 according to their preferences. The rating of the environmental effect (RE), the rating of the threshold (RT) and $P are then used to value the effect.

Value = f(RE, RT, $P)

The costless choice technique (see Romm 1969) is a version of contingent ranking.

When to use it

This technique can be used to determine whether a particular environmental effect is valued more or less than a given threshold by ranking it against a substitute with a money value.

Strengths and weaknesses

The applicability of this technique has not yet been fully established. However, it could be extensive and appears theoretically valid (HMSO 1991).

The priority-evaluator technique

The concept

The priority evaluator simulates choices in a market place. Respondents are offered a set of items they could purchase including the environmental effect of interest, substitutes for it and market goods. Each item in the set is given a price and a hypothetical budget is defined. Respondents are then asked to spend the budget to choose items that they prefer. Values are then derived from the preferences.

When to use it

To resolve the last question, monetary values would need to be estimated for the benefits of use compared to the value of knowledge of species existence, the naturalness of recreation sites and the sight of wildlife.

The method was pioneered by Hoinville and Berthoud (1970) to value travel time, road safety, vehicle pollution and vehicle congestion in London. O'Hanlon and Sinden (1978) applied the procedure to value existence value, naturalness of the environment and option value in northern New South Wales. Existence value was defined as the benefit derived from the knowledge of the presence of a given number of species. Option value was derived from the probability of seeing given species.

Strengths and weaknesses

There are, as yet, surprisingly few applications of this technique. As Hufschmidt et al. (1983, p.251) say, 'it is an intriguing attempt to meld the economic theory...with survey techniques to value an unpriced environmental good'. The difficulties, which include the need for statistical analysis of the results and several sets of choices to obtain the values, perhaps explain the lack of use to date.

Chapter 5: DISCUSSION

How can we decide whether a particular application of a technique or a particular value is credible? To answer we need to justify the theoretical and market validity of the techniques. The theoretical basis can be addressed in terms of the content of the questionnaire and the conduct of the survey, and the market validity in terms of ways to test the values obtained.

Content of the questionnaire

All the simulated market techniques require questionnaires to be written, tested and presented. All questionnaires have three components no matter what kind of technique is used or what type of environmental effect is to be valued.

A. Description of the hypothetical market.

In the first part, sufficient information is provided to simulate the market, describe the choices and allow respondents to pay/accept bids or make their hypothetical purchases. This section of the questionnaire must describe:

B. The valuation questions.

Questions to elicit willingness to pay/accept bids for the effect and to frame the rankings, ratings or trade-offs are posed using one of the techniques described in this chapter.

C. Socio-economic data.

Information on the characteristics or attitudes of the respondent and family are collected. The values from the valuation questions can then be related to these data to check for consistency in a test of market validity.

The specification of these three components should follow economic theory and economic principles of choice. The considerable economic literature in this area and its application to valuation techniques is reviewed by Mitchell and Carson (1989). In summary, the questionnaire must specify the following five kinds of information.

1. Reference level or baseline. Describe the ownership of the good in question (current level and whether the change is an increase or decrease). Describe the current disposable income of the person concerned or the household income if the household is the unit of analysis.

2. The nature of the environmental effect. The nature of the good, service or effect, and the change in it, must be specified closely. The discreteness of the change must be specified. For example, an improvement in air quality may provide aesthetic or health benefits.

3. Prices of other goods. The environmental change may alter the prices of other goods and services; the magnitude of such changes must be noted.

4. Conditions for provision of the good and payment for it. The length of time over which the good is provided, how and where, must be specified. The frequency of payments, the time period of payments and who else will pay must also be specified.

5. The nature of the required willingness to pay/accept. The results from the questionnaire must be able to provide values as net benefits.

Conduct of the survey

The report of the National Oceanic and Atmospheric Administration Panel (Arrow, Solow et al. 1993) offers guidelines to help in the survey.

Sample size. Advice should be sought from a statistician on sample size and survey design.

Tests of market validity

All these techniques and their questionnaires can provide a great deal of helpful information to decision makers in addition to the values themselves. But to be acceptable and then to be used in choices, the values should meet a test of market validity.

The test requires the analyst to demonstrate that the values obtained are consistent with the values that would have been obtained in a market, had one existed. In simple terms, the values must be consistent with prices that would actually be paid. Although this consistency can rarely be tested in practice, the following approximate tests will lend credence to the values.

Conclusions

All the techniques of this chapter can be applied widely but use of the values obtained requires the decision maker to:

Unlike the techniques of Chapters 3 and 4, all of these methods can value non-use benefits. If the content of the questionnaire, the conduct of the survey and the validity of the values pass the tests, the values should provide useful information to assist decisions. In any case, the importance of the values lies more in their order of magnitude than in their precision.

Contents Page > Previous > Next