Cultural Heritage and Sustainable Development An Educator’s Handbook MODULE 4 Investment appraisal and economic planning of cultural heritage projects SESSION 2 Economic value of cultural heritage goods and services This presentation is part of the InHeriT project: This project has been funded with support from the European Commission. This publication reflects the views only of the authors, and the Commission cannot be held responsible for any use, which may be made of the information contained therein. ERASMUS+ KA2 STRATEGIC PARTNERSHIP ADULT EDUCATION PROJECT NO. 2015-1-EL01-KA204-014085 Prepared by: Georgios Mergos, Professor Emeritus, Division of Development and International Economics, Department of Economics, National and Kapodistrian University of Athens
The Concept of Economic Value T.1 THE CONCEPT OF ECONOMIC VALUE OF HERITAGE ASSETS
The Concept of Economic Value T.1 Value and price: Why are economic value and price different ? • Economic value and price are different concepts • The paradox of value (also known as the diamond–water paradox) is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market. • The philosopher Adam Smith is often considered to be the classic presenter of this paradox, although it had already appeared as early as a paradox and many philosophers tried to explain the paradox
The Concept of Economic Value T.1 We need to measure the economic value that an individual (or the community) receives from cultural heritage assets • Evaluation is the necessary point of departure for public policy analysis, either for selecting public investment projects or for selecting public policy measures. • Value reflects the “willingness to pay” of the potential consumer and the importance that the individual puts on the asset. • Sources of value lie both in the desire to use a good or a service or to hold it for other reasons (“non-use values”). • Public policy, either investment projects or policy measures, increase the stream of benefits, market and non-market, to a city, region or a country.
The Concept of Economic Value T.1 Cultural heritage provides goods and services to society that are non-marketed, hence they have no price, but have value • Cultural heritage, like the environment, consists of public capital assets that provide to society a stream of services, that are non-marketed but which can be quantified and valued. • For selecting heritage projects and public policy measures we need to understand how the concepts and methods for valuing cultural heritage goods and services are defined and used. • Need to understand the economic characteristics of goods and services provided by cultural heritage assets, thus to know how to estimate benefits and costs of projects in the sector of cultural heritage.
The Concept of Economic Value T.1 Categories of value of cultural heritage goods • Total economic value of cultural heritage goods is usually decomposed into a number of categories of value. The breakdown and terminology vary slightly from analyst to analyst, but generally include • (i) extractive, or consumptive, use value; • (ii) non-extractive use value; and • (iii) non-use value. • The former two are generally referred to together as “use value”. Each is often further subdivided into additional categories. • By disaggregating the value of a cultural heritage site into various components, the problem generally becomes far more intelligible and tractable.
The Concept of Economic Value T.1 Use value of cultural heritage goods • Use value derives from goods which can be extracted or non-extracted use from the site, • Extractive use, for example forest goods, this value is generally the easiest to measure, since it involves observable quantities of products whose prices can usually also be observed. Even when prices cannot be observed, there are generally-accepted and reliable ways to estimate the value of the products (for example, using the value of close substitutes or extraction cost). • Non-extractive use derives from the services which the site provides. For example, a national park provides opportunities for recreation. These services have value but do not require any good to be extracted. • Measuring non-extractive use value is often considerably more difficult than measuring extractive use value. The ‘quantities’ of the service being provided are often hard to measure. Moreover, many of these services often do not enter markets at all, so that their ‘price’ is also extremely difficult to establish. • The aesthetic benefits provided by a landscape, for example, are non-rival in consumption, meaning that they can be enjoyed by many people without detracting from the enjoyment of others.
The Concept of Economic Value T.1 Non-use value of cultural heritage goods • Non-use value derives from the benefits that a site may provide which do not involve using the site in any way. • In many cases, the most important such benefit is existence value: the value that people derive from the knowledge that the site exists, even if they never plan to visit it. • Thus, people place a value on the existence of blue whales even if they have never seen one and probably never will; if blue whales became extinct, many people would feel a definite sense of loss. • Other aspects of non-use value include option value, which is the value obtained from maintaining the option of taking advantage of a site’s use value at a later date (akin to an insurance policy), and quasi-option value, which derives from the possibility that even though a site appears un-important now, information received later might lead us to re-evaluate it. • Non-use value is the most difficult type of value to estimate, since in most cases it is not, by definition, reflected in people’s behavior and is thus wholly unobservable. This category of value also has obvious relevance for the assessment of cultural heritage sites.
The Concept of Economic Value T.1 Methods to estimate the economic value of cultural heritage goods Stated preference methods. These methods rely on respondents making choices over hypothetical scenarios. Respondents are asked to choose the ‘best’ alternative from among a set of hypothetical scenarios, which are completely described by a set of attributes generated from an experimental design. • The Contingent Valuation method Revealed preference methods. These methods use observations on actual choices made by people to measure preferences. The primary advantage of the this technique is the reliance on actual choices, but this is also a disadvantage. • The Hedonic Pricing method • The Travel Cost method • The Productivity method • Market and surrogate market methods (market price of similar goods or of substitute goods or services)
The Concept of Economic Value T.1 Participation activity 1. Estimate the economic value of British Royal Family for the United Kingdom
The Concept of Economic Value T.1 What is the value of the British Royal Family?It is worth $88 Billion (Report of Brand Finance) The value of the British monarchy stands at $88 billion, give or take, according to a report released this week, as Queen Elizabeth and her husband, Prince Philip, celebrated their 70th wedding anniversary. • Tangible properties including Buckingham Palace, Royal Collection of art, the famous Crown Jewels and the Duchies of Lancaster and Cornwall account for only $33 billion • The family's added value on the economy is $55 billion • Annual economic impact is estimated, inter alia, at £550 and £150 million on tourism and trade respectively • The annual cost of the monarchy to British taxpayers? A considerable £292 million. Source: https://www.forbes.com/sites/ceciliarodriguez/2017/11/23/the-british-royal-family-is-worth-88-billion/#c42b6d4629c8
Brief Presentation of Methods T.2 BRIEF PRESENTATION OF METHODS USED TO ESTIMATE THE VALUE OF HERITAGE ASSETS
Brief Presentation of Methods T.2 The contingent valuation method (CVM) CVM has been used extensively to estimate economic values for all kinds of ecosystem and environmental services for both use and non-use values. It is the most widely used method for estimating non-use values and also the most controversial of the non-market valuation methods. CVM involves asking people directly, in a survey, how much they would be willing to pay for specific services. In some cases, people are asked for the amount of compensation they would be willing to accept to give up specific environmental services. It is called “contingent” valuation, because people state their WTP, contingent on a specific hypothetical scenario and description of the environmental service. The fact that CV is based on what people say they would do, as opposed to what people are observed to do, is the source of its greatest strengths and its greatest weaknesses.
Brief Presentation of Methods T.2 Steps in the application of the Contingent Valuation Method • Step 1. Define the valuation problem. Determine exactly the good or service to be valued. • Step 2. Design the survey. Determine the sample of the respondents, representative or not, the questionnaire, the means (mail, phone or in person interview). The survey design process usually starts with initial interviews and/or focus groups with the types of people who will be receiving the final survey, in this case the general public. • Step 3. Actual survey implementation. Asking respondents about their stated WTP or WTA. • Step 4. Compile and analyse the data. Data must be entered and analysed using appropriate statistical techniques. • Step 5. Derive WTP and report results. Estimate the average value for individual or household in the sample, and extrapolate to the relevant population in order to calculate the total benefits from the site.
Brief Presentation of Methods T.2 Method of calculation of the WTP and WTA Calculation of an average WTP orWTA An average price for the good may be obtained from stated preferences of respondents. It may be appropriate to exclude possible outliers from the sample. Derivation of a function ofWTP και WTA The WTP may be considered to be a function of several socio-economic variables, such as income(Υ), education(Ε), age(Α) και of course of the quantity of the good (Q) The functional form of the WTP may be defined as an inverse demand function The demand function is obtained by inverting this function, as
Brief Presentation of Methods T.2 Survey methodology for estimating WTP/WTA • Open method • Respondents are asked to state directly the max price they are willing to pay for the good in question. • Closed method • Respondents are initially guided with an initial price and according to their answer (yes/no) are asked a second question either doubling the price(if yes) or halving the price (if no). Then a range of price estimates (WTP or WTA) is obtained.
Brief Presentation of Methods T.2 Hedonic pricing method • The method uses surrogate markets for placing a value on environmental quality. The real estate market is the most commonly used surrogate in hedonic pricing of environmental values because the word “hedonic” comes from a Greek origin, which means, “pleasure”. • Hence, the hedonic pricing method relies on information provided by households when they make their location decisions. People prefer and pay more for a house or an apartment in a nice area, with a better view or with cleaner air without pollution.
Brief Presentation of Methods T.2 Application of the hedonic pricing method • Assume that the good to be valued is the sea view ad the objective is to estimate the WTP for sea view per square meter of apartment space • The price of an apartment depends on its size (S), floor (Κ), type of construction (L), area (R), level of pollution and noise (Q), sea view (yes/no) (P), etc.We can obtaining market prices for a sample of houses (observations) and we can calculate • Taking the partial derivative of the function with respect to the particular characteristic we obtain the demand function as:
Brief Presentation of Methods T.2 The Travel Cost Method • The total cost of a consumer’s visit to a cultural or natural site consists of • the cost of travel and accommodation • the entrance fee • the value of time • any other cost involved • Using a survey of visitors appropriately designed, an estimate of the price paid (WTP) for the visit is obtained. • By inverting this function, a demand curve is obtained and the consumer surplus can be estimated
Brief Presentation of Methods T.2 Demand function for visiting a cultural site
Brief Presentation of Methods T.2 Contingent valuation case studies National Museum of Sculpture Tate Modern Mogoşoaia Palace € 8,50m Economic value € 42,00m € 190,00m Sites
Brief Presentation of Methods T.2 Hedonic pricing and travel cost case studies Culemborgerwaard and Tieler VaraKonserthus Nordic Watercolour Economic value € 33,80m € 1,60m € 5,05m Sites