of Restoration - Benefits of Restoration
of Benefit-Cost Analysis
The Economic Value of Benefits
Resulting from Environmental Restoration
Estimates of Value | Alternative Measurement
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
timbera direct or consumptive useor
as a site for hiking or birdwatchingan 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 forestsvalue
that is grounded in the forests' satisfaction of human desires for
timber, recreation, biodiversity, or other social, economic, or
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
toolsthe contingent value method is the best-known stated
preference toolcan 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
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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