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Introduction

Benefit-Cost Analysis

Travel Cost Model

Random Utility Models

Hedonic Pricing Methods

Contingent Valuation Method

References

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value

Introduction

Valuation of natural resources began informally with individuals like Charles Darwin, James Audubon, and other naturalists who began to document the functional value of species and habitats in ecosystems. Economic environmental valuation in the United States was formally recognized in the Rivers and Harbors Act of 1902 which required an evaluation of the costs and benefits of major projects, such as dams, to commercial enterprises dependent on natural resources that would be impacted by the project. This Act was followed over the next 90 years with a series of Acts that began to require society to estimate the value of our natural resources not just from direct utilization of the particular resources, but from the multiple viewpoints of a sustainable and interlinked system of natural resources.

oyster harvestThe economic value of natural resources like those of the ACE Basin, can be estimated by the price individuals will pay in order to obtain the benefits of the resources. Some of these are easier to estimate than others. For example, the value of the shrimp crop exceeds the cost of harvesting the crop and is therefore considered a commercially valuable crop. Until the 1960s and 1970s, oyster canneries were a viable commercial endeavor but when the demand for canned oysters dropped and the value of canned oysters fell below the costs of producing them, the oyster canning industry in South Carolina collapsed.

Much more difficult to evaluate is the benefit of the ACE Basin to recreational anglers, to the people who live in the ACE Basin, or the economic value of the salt marsh as a nursery to commercially and recreationally important species. Therefore, how does one evaluate the value associated with the ecosystem functions of the ACE Basin? Refer to the Ecosystem Processes section for additional information about ecosystems. Using some of the techniques described below, economists and resource managers can estimate the value of these resources based on how much individuals are willing to pay to benefit from the resources. The study of economics, which is really the study of human behavior, analyzes how individuals use their limited resources to obtain the goods and services they want.

The economic value or benefits of natural resources can be broken into two major categories: (1) those that have a revealed market price such as commercial fisheries in which a price can be placed on number of pounds of landed fish, and (2) those that bring benefits such as recreational fishing experiences where the benefits are not normally traded in commerce.

Economists have developed a number of concepts or methods to evaluate the market and non-market value of natural resources. These include, among others, travel cost models, random utility models, hedonic pricing methods, contingent valuation, natural resource damage assessment, and sustainable development assessment. In addition, one of the most common decision-making methods is a benefit-cost analysis. A short summary of some of the primary methods used to place a value on natural resources follows.

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Benefit-Cost Analysis

Benefit-cost analysis is a systematic method that compares the accumulative social benefits with the opportunity costs (i.e., the economic advantages with the disadvantages). For example, a comparison of the cost of installing flood control structures to the cost of cleaning up after individual floods. If the flooding only occurs occasionally, then the cost of putting in dams and levees may be more than the future clean up costs associated with the occasional flooding. Other factors also need to be considered such as more expensive insurance or down time while individuals are making repairs when they should be continuing with their normal jobs. Benefit-cost analysis is easier to use when a market value (e.g. the cost of installing flood control structures verses the cost of cleaning up after a flood) can be attached to each component of the project. Benefit-cost analysis can be more difficult to apply when the benefits or cost do not have a market value.

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Travel Cost Model

The travel cost model estimates the implicit price of natural resources based on outlays of time and travel expenses. An evaluation of these costs incurred in using a natural resource (e.g. a state park) can be used to estimate the regional demand for the resource. The aggregate value of the resource can then be inferred from a combination of this demand and the number of visits to the site over time. This model can be applied to many recreational activities that utilize the more intangible natural resources such as canoeing and bird watching. This method cannot be used to estimate non-use values. Non-use values or existence values include commodities that an individual may be willing to pay for but will not benefit from directly. For example, monies paid by an individual to support a wildlife sanctuary that the individual will not visit.

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Random Utility Models

The random utility model is similar to the travel cost model except that rather than focusing on the number and overall costs of trips to different sites, it estimates the value individuals place on particular sites based on the attributes of the site. For example, it would allow comparison of three different river sites in the same area, based on differences in attributes between the sites. Given that each site has different attributes (e.g., ease of access, water speed, depth, number of animals seen, number of sites to camp, access to hiking trails, etc.), a comparison between the use of the three sites, plus travel costs incurred by individuals, would provide the economist with information on what attributes are preferred by the user and to infer the non-market value of the individual attributes. By understanding the value of individual attributes, the economist is better prepared to predict how alterations of a site might influence demand for the site and the associated aggregate value.

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Hedonic Pricing Methods

Hedonic pricing methods involve a comparison of specific sites that differ only by some environmental attribute such as proximity to a forested area or availability of a view. Comparison of the property value between two house sites provides an indication of the value to the individual paying a higher price for the site with the preferred attribute (compare the price of two identical houses that are close to the marsh, only one having a dock). This often becomes problematic because few sites are identical except for the attribute of interest. For example, a condo on the third floor, which has a better view, is also less accessible than a ground floor unit with a restricted view. The difference in value of the two units is related to the advantageous view balanced by the inconvenience of carrying the groceries up three flights of stairs. This method has only limited use because most environmental disamenities have only small effects on housing prices and it is technically complex to translate these implicit price differences.

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Contingent Valuation Method

The contingent valuation method is a survey- or questionnaire-based approach to estimating the value of non-market goods. This is the primary method used for placing value on resources that cannot be valued by the indirect methods above. The method usually involves presenting a particular problem (e.g., loss of a local public park) to a representative sample of individuals, and asking them what they would be willing to pay in taxes or use fees to keep the park operating. This is the only method that can be used to estimate "existence values". The existence value is the value that individuals place on natural resources that they want to remain unaltered or in a more pristine state, even though they may not use or visit the area.

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References

Lipton, D.W., K. Wellman, I.C. Sheifer, R.F. Weiher. 1995. Economic valuation of natural resources: a handbook for coastal resource policymakers. U.S. Dept. of Commerce, National Oceanic and Atmospheric Administration, Coastal Ocean Office, Silver Springs, MD.

Edwards, S.F. 1988. An introduction to coastal zone economics : concepts, methods, and case studies. Taylor & Francis, New York.

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