Session 15 Valuing Recreation/Amenity Benefits

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Session 15Valuing Recreation/Amenity Benefits
travel costs, CVM, hedonics

• John A. Dixon
• johnkailua_at_aol.com
• The World Bank Institute
• Ashgabad, November 2005

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Questions

• What are the primary recreational/ amenity
  benefits associated with Caspian Sea resources?
• What are the main analytical techniques used to
  estimate these values? Differences between
  revealed preference and stated preference
  techniques.
• What are the main economic policies that can be
  used to regulate or manage these uses?

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Selecting the appropriate valuation technique
(again)
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Principal Recreational/ Amenity Benefits

• Direct, consumptive uses fishing, hunting,
  gathering of marine organisms, oil and gas?
• Direct, non-consumptive uses swimming, sailing,
  viewing wildlife, transportation, others?
• Indirect uses ecosystem services, vistas and
  views, amenity benefits

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Matching Economic Valuation Technique to Uses and
Users

• Direct, consumptive uses changes in production,
  CVM, Travel Cost
• Direct non-consumptive uses CVM, travel cost,
  RUM (random utility models), hedonics, others
• Indirect uses changes in production of ecosystem
  services, replacement cost/ preventive
  expenditures, hedonics, others

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Valuing Recreational Uses

• Usually done by one of three means
• Observing net admission fees/ permit fees paid (a
  minimum estimate of WTP)
• Use of Travel Cost approach that relies on
  revealed preference information on travelers
  time and costs of visiting a location
• Use of CVM that relies on stated preferences to
  determine WTP (willingness to pay) for use of a
  location

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Revealed vs Stated preferences

• Economists tend to prefer revealed preference
  approaches since they rely on real data on
  expenditures and markets
• Can be collected from the market or via use of
  surveys
• Real dollars exchanged for various goods and
  services
• Stated preferences (e.g. CVM), however, are
  sometimes the only valuation approach possible.
  When is this true???

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A Simple Travel Cost Example (revealed
preference) value of Lake Sevan in Armenia

• Visitors to Lake Sevan in Armenia are surveyed to
  find their cost of travel and frequency of
  visits.
• This information is used to estimate a demand
  curve for Lake Sevan recreation
• Different demand curves are estimated for
  Armenians and foreign visitors (due to great
  differences in income levels)
• Travel Cost does NOT capture non-use values by
  both Armenians and foreigners

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The value of Lake Sevan can also be estimated by
use of the CVM approach (stated preferences)

• CVM can be used when a market is only partially
  developed (and sales data hard to obtain).
  Especially useful for non-use values.
• In theory CVM can capture the MAXIMUM willingness
  to pay for the use of a resource
• Advantage of CVM you will always get an answer
• Disadvantage of CVM you will always get an
  answer!!!

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Valuing Ecosystem Services Cost-side Valuation
Techniques

• Include the Replacement Cost approach and the
  Preventive Expenditures approach (both approaches
  are closely linked)
• Uses information on replacing a lost service or
  function, or preventing the damage from occurring
• For example, the cost of replacing flood
  protection benefits of a wetland, or
• The cost of replacing natural water filtration/
  treatment benefits by mechanical/engineering
  approaches

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Replacement-cost approach New York City (NYC)
watershed

• The question was whether it was better to protect
  NYCs watershed and keep water clean, or allow
  the watershed to be developed and clean and treat
  the water when it reached NYC
• The economic analysis showed that it was CHEAPER
  (less costly) to protect the watershed by an
  investment of 1 billion plus in purchasing land
  in the watershed, than to build and operate a
  water-treatment plant closer to NYC

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Valuing Amenity Benefits Hedonics (revealed
preferences) and CVM (stated preferences)

• Amenity benefits are usually valued by either
  Hedonic approaches or via CVM (surveys)
• Hedonic effects are commonly seen in pricing of
  hotel rooms, real estate, other tangible goods or
  services that have an amenity value component
• Hedonic approaches use information on actual
  market transactions to estimate the WTP for these
  amenity values

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Hedonic Valuation Approaches

• Use information on observed behavior to estimate
  WTP (willingness to pay) for an environmental
  amenity (an economic good) or disamenity (an
  economic bad)
• Requires information on transactions and
  differences in environmental quality
• Often applied to housing, hotel rooms or other
  locational decisions (e.g. wages and a sunshine
  tax)

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Example 1 Houses near the Zandvlei Wetland in
Capetown, South Africa
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Capetown Case (contd)

• Basic idea Houses near the Zandvlei wetland sell
  for more, an environmental premium. How large
  is this premium?
• The analysis was based on sales data on housing
  over the past 4 years the results were then
  extrapolated to the entire housing stock in the
  area
• Premium per house for water frontage was about
  R130,000 per house (about US13,000) (see van
  Zyl/ Leiman paper Tables 2 and 3)
• The results were very similar to estimates made
  by estate agents (expert opinion approach) for
  the same area Hedonic approach value of R77
  million vs Expert opinion value of R88 million

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Discussion of Capetown Results

• The waterfront (open space) premium was less than
  10 (and in some cases was even negative due to
  security concerns)
• The results are very site specific (and
  management specific) and only capture one
  aspect of open space values (as embodied in
  property ownership)
• Hedonic pricing may NOT value certain types of
  native vegetation (e.g. fynbos are seen as
  unkempt and a fire hazard even though they are a
  unique ecosystem)
• The hedonic study ignores wider values of open
  spaces to recreational users and other parts of
  Capetown (as reflected in generally high property
  values in all of Capetown compared to other parts
  of South Africa the San Francisco effect)

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Hedonic pricing (contd)

• 2. Hotel room pricing in resorts is a market that
  clears every day. For example, in hotels on the
  beach in Hawaii
• Room price varies with floor (higher floors are
  more expensive)
• Room price varies with view
• ocean view
• garden view usually the parking lot, maybe the
  mountains!
• Room price varies with season
• High season/Low season
• Or, as in Costa Rica, high season and the green
  season (e.g. rain!)

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Hedonic pricing (contd)

• 3.Pricing of faculty flats at a university in
  China
• In this case a 6 storey building, no lift, one
  flat per floor, and the roof leaks.
• What is the monthly rental per flat? If ground
  floor rents for 100 units per month, what are the
  monthly rents for the following floors?
• Floor 2 ___
• Floor 3 ___
• Floor 4 ___
• Floor 5 ___
• Floor 6 (top) ___

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Pricing of Professors Flats in Beijing (contd)

• Suppose that the roof is fixed and does not leak,
  and that an elevator/ lift is installed. How does
  this change the pricing structure? What is the
  monthly rental per flat? If ground floor rents
  for 100 units per month, what are the monthly
  rents for the following floors?
• Floor 2 ___
• Floor 3 ___
• Floor 4 ___
• Floor 5 ___
• Floor 6 (top) ___

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Pricing of Professors Flats in Beijing (contd)

• How could this hedonic pricing information be
  used to make better decisions??
• To decide whether or not the repairs and changes
  are justified? How?
• To decide whether or not to build new buildings?
  How?
• To design a more efficient pricing structure?
  How?