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Cost Analysis

Costs of Restoration - Benefits of Restoration - Overview of Benefit-Cost Analysis

The Economic Value of Benefits Resulting from Environmental Restoration

Market-Based Estimates of Value | Alternative Measurement Tools

Goods and services have economic value because people want them. The economic value of forests, for example, is directly related to the various ways in which forests satisfy human desires, either by their use or their nonuse. Human desires are satisfied when forests are used as a source of timber–a direct or consumptive use–or as a site for hiking or birdwatching–an indirect or non-consumptive use. Human desires to maintain the option of personally using forests, directly or indirectly, at some time in the future is the basis of what some economists call option use value. Bequest value reflects human desires to keep that option open for future generations. Even the natural biodiversity and ecological outputs of the forest are valued (existence value) based on human desires to have and conserve those products of the forest.

Market-Based Estimates of Value
Economists do not directly measure human happiness. For goods and services that are routinely traded in free markets, the prices that are actually paid provide some indication of overall willingness to pay, which is taken as a measure of the value that humans place on the good or service being traded. People buy forests to cut timber, or to maintain the option of cutting timber in the future. People buy forests for recreational use as developed parks or undeveloped conservation areas. Public and private organizations purchase forested land for preservation. By studying these financial transactions, it is possible to estimate the amount of money that people are willing to pay forests, which reflects the economic value of forests–value that is grounded in the forests' satisfaction of human desires for timber, recreation, biodiversity, or other social, economic, or ecological outputs.

Goods and services that are not routinely traded in free markets, such as clean air and the care that parents provide for their children, also contribute to human happiness and therefore have economic value. But because people don't purchase clean air or pay their parents for services rendered, there are no financial transactions from which to estimate economic value.

Alternative Measurement Tools

Revealed Preference. The best way to determine the value that people place on a good or service is to study the transactions where it is bought or sold in free markets. The price that buyers are willing to pay for a good reveals the value that they place on it. When the good or service itself is not routinely bought or sold, there are other revealed preference tools that can be used to estimate its value.

  • The productivity method, also called the net factor income method, measures the contribution that non-market goods or services make to the production of marketed goods or services. When a non-market good or service results in increased revenues or decreased production costs for a marketed good or service, the revenue increase or cost decrease can be used to estimate the value of the non-market good or service. When the markets under consideration are well-established, revealed preference methods can provide good estimates of value.

  • The hedonic pricing method is used to estimate the value of environmental services by measuring their impact on market prices, such as residential property values.

  • The travel cost method is used to estimate the value of a non-market good or service, such the value of camping in a forest, by studying the costs that people are willing to incur in traveling to get there.

Stated Preference. Often, there are no market transactions that shed light, directly or indirectly, on the value that people place on a good or service. In such circumstances, other tools such as surveys can be used to help consumers consider and state the value that they attach to that good or service. Stated preference tools–the contingent value method is the best-known stated preference tool–can be developed to estimate the use or nonuse value of almost any good or service. However, they can be very expensive and time-consuming to apply and some economists doubt their reliability.

When a good or service is similar to another good or service whose value is already known, the values can also be assumed to be similar. This method, known as the benefit transfer method, can be applied quickly and inexpensively but is most commonly used as a tool for preliminary screening (King, undated).

There are significant practical and technical issues that govern the use of any of these approaches for estimating the value of non-market goods and services. Some approaches require an understanding of the relationship between the non-market goods or services under consideration and the marketed good or service that is being used to estimate its value, relationships that are often tenuous or poorly understood. Some approaches are not very broadly applicable, and those that are most broadly applicable are among the least reliable. Some approaches are very expensive to use, and those that are far less expensive, such as the benefit transfer method, often do little to advance the understanding of the benefits that are being evaluated. Furthermore, some critics question "the ethics of placing monetary values on the environment from what they see as a purely selfish, human centered motivation (Chartered Institution of Water and Environmental Management 2001)."

The usefulness of these approaches lies not in their ability to establish the true and total value of non-market goods and services. Instead, their usefulness lies in the ability, under limited circumstances, to estimate those values well-enough to make informed choices about resource use, choices that must consider not only the estimates of value that underlie them but also the qualifications of those estimates. Regarding the ethics of placing monetary values on the environment, one group of environmental scientists notes that "the controversy could be lessened by understanding that it is not the environment itself that is being valued, that individual preferences for the environment, being a measure of the well-being (or utility) that those affected attach to the goods or services provided by the environment. These preferences can be motivated by any number of factors, including altruism and concern for the rights of non-human species. Individuals may build into their valuation an element of intrinsic value, as they perceive an obligation on society to protect the environment for its own sake."

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Chartered Institution of Water and Environmental Management. 2001. "Environmental Economics" Web site (http://www.ciwem.org.uk/policy/policies/economics/index.asp). London, United Kingdom.

King, D.M., M. Mazzotta, and K.J. Markowitz. Undated. "Ecosystem Valuation" Web site (http://www.ecosystemvaluation.org).

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