Total Economic Value

1. Total Economic Value • TEV is an attempt to put a quantitative value on environmental resources (Barbier et al., 1997). • TEV is a sum of use values (UV) and non-use values (NUV) (Munasinghe, 1994 in Fennell [1999]). • Use values are divided into direct use value (DUV) indirect use value (IUV) and option value (OV). • NUV are classified as bequest value (BV) and existence value (EV). • According to Munasinghe (1994) ‘use values are those associated with tangible users of environmental resources such as recreational or health benefits’ (in Fennell, 1999:170). • However, NUV are non-market and intangible values which people derive from the preservation of environmental assets (Stevens et al., 1995). • OV is associated with WTP for preserving environmental resources for future use (Munasinghe, 1994 in Fennell [1999]).

3. Field (1994) relates this OV to the amount that individuals or society are willing to pay for using these environmental resources in future. An example would be someone who is willing to pay for park conservation for their next generation, i.e. for his/her future children or grandchildren. • BV is ‘the value that people derive from knowing that other people will benefit from the resource in the future’ (Munasinghe, 1994 quoted in Fennell [1999: 170]). Turner (1988) identifies BV as associated with a value which somebody puts in to ensure the endowment of these environmental resources to successive generations. • EV refers to the fact that an individual’s utility may be increased by the knowledge of the existence of these resources, even though they may not be interested in consuming these resources (Khan, 1995).

4. There are various techniques available for estimating the value of non-market goods and services. • The TEV technique is divided into two groups: Stated Preference Techniques (SP) and Revealed Preference Techniques (RP). • The SP technique is one that tries to discover an individual’s preferences and it is based on a questionnaire (Bann, 2002). Bateman and Willis (1999) found that the Contingent Valuation is the most popular and frequently used valuation tool in environmental economics. Other techniques in SP include Contingent Rating, Contingent Ranking, Choice Modelling and Paired Comparisons (Mitchell and Carson, 1989). • The second group is the RP technique. It is called the ‘revealed preference’ technique, since consumer preferences are ‘revealed’ in this technique through their consumption of goods and services (Mathews et al., 2001). RP techniques include Hedonic Property Pricing, Travel Cost Method (TCM) Random Utility Modelling and Averting Behaviour. The most common is TCM, which is normally used to estimate values for recreational sites.

5. Contingent Valuation Method • The Contingent Valuation Method (CVM) was proposed by Ciriacy-Wantrup in 1947. He held the opinion that the prevention of soil erosion would generate some ‘extra market benefits’. He was thinking that one possible way of estimating benefits was to elicit the individual’s WTP for these benefits through a survey method (Portney, 1994). • However, Davis was the first person to implement this method during the 1960’s. He estimated the benefits of goose hunting through a survey among goose-hunters (Portney, 1994). • Subsequently, this method became popular and has been used around the world in many fields. It has been employed extensively in the valuation of environmental resources such as endangered species and landscapes (Bann, 2002). • It has also been the subject of methodological research and applied in estimating both use values and non-use values of environmental goods (Cummings et al., 1986; Mitchell and Carson, 1989).

6. The CVM, sometimes referred to as ‘the direct approach’, is called ‘contingent’ because in this approach respondents are asked how they would act if they were placed in certain situations (Mathews et al., 2001). In this application, users are asked how much they are willing to pay before they stop visiting the site altogether (Mitchell and Carson, 1989). • CVM is the only method that can elicit the benefits of use value and non-use value (Mitchell and Carson, 1989). The main objective of CVM is to measure the economic value of non-market goods such as recreational resources, wildlife, and environmental quality goods (Hanemann, Loomis and Kanninen, 1991; Hanemann, 1994). In addition, it is suitable for the valuation of public goods where no market exists (Bann, 2002).

7. Eagles et al. (2002: 115) state that: The main steps in CVM are: to create a hypothetical market for a ‘good’; communicate the market to the respondent so that he or she can establish a theoretical price in the form of ‘willingness to pay’; and use the responses to estimate the value of the goods. It is used to estimate consumer surplus, and also option, existence and bequest values.

8. Biases/Limitations • The first is strategic bias. This bias occurs when people are not telling the truth about what they are willing to pay for environmental changes, and is associated with strategic thinking where they prefer to use and enjoy environmental goods that have been paid for by other people (Oglethorpe and Miliadou, 2000). According to Pearce and Moran (1994) strategic bias will occur in the situation of a ‘free rider’.

9. Information bias is highly related to how the information is presented to the respondents. The bias could begin with information on the research objectives, socio-demographic characteristics of respondents and others sources (Samples et al., 1986). In addition, such bias is frequently associated with quality and quantity of information provided, how the questions were asked and the payment vehicle. It is important to ensure that the proper format of questions is used and applied simply, and clear and realistic questions are asked.

10. The next bias is hypothetical bias (mental bias). This bias is due to the nature of the hypothetical market that has been created in the CVM survey (Neill et al., 1994). In other words, the purchasing of an unfamiliar commodity represents a guess as to what the commodity might be worth, rather than an evaluation based on experience. This may lead to an overstatement of WTP on a hypothetical evaluation of the commodity.

11. Willingness to Pay • Concept in CVM • Defined as the amount of money that a person is willing and able to pay to enjoy recreational facilities (McConnel, 1985). • It measures whether an individual is willing to forego their income in order to obtain more goods and services, and is typically used for non-market goods. • Laarman and Gregersen (1996) state that the choice of whether or not to visit a nature-based tourist site will depend on the relation between an individual’s WTP and the competing uses for his/her income. It also measures the consumer experience values, including anticipation and perceptions of the trip, travel to the site, on-site experience, travel back from the site and recollection of the experience. • Kyle et al. (2002) explain that when a respondent indicates his/her WTP for a non-market good, it is presumed he/she would be willing to pay any price below the stated amount. • Studies show that WTP varies with the respondent’s profile. This includes income, education, occupation, demographic aspects and psychographic profile.

12. WTP Elicitation Method • Boyle et al. (1996) there are four major types of elicitation technique, namely: bidding game, payment card, open-ended (OE) and dichotomous choice (DC).

13. Bidding Game • Mitchell and Carson (1989)- the oldest type of elicitation method. • Introduced in 1963, when Davis used this approach to elicit the benefits of goose hunting. Subsequently, other researchers have used this technique in estimating the value of public goods (Randall et al., 1974). • In this method, the interviewer will state an initial WTP bid level that may be fixed. The respondents will then be asked if they are willing to pay this stated amount. The bid level will be increased if they reply positively, but if they reply negatively the bid level will be decreased. • The interviewer again starts to ask respondents about their WTP until the highest positive level of response is reached (Randall et al., 1974). • Advantages - similar to a market situation. • Familiar to the respondents, because it is just like an auction. • Simple because this method requires only a ‘yes/no’ response. • Disadvantage - starting point bias. If the starting bids are well above the true WTP, they tend to overstate the revealed WTP. If the bid is below WTP, it has the opposite effect. • Expensive to implement - need for interviewers (Cummings et al., 1986). • Not suitable for postal questionnaires.

14. Payment Card • Introduced by Mitchell and Carson (1989); it is the second oldest approach. • In this approach, a respondent has to choose the best value from a series of values. This value will represent his maximum WTP. • Researchers agree that this approach is able to reach the maximum value of WTP. • Advantage of this approach is also that respondents have only to bid once from the range provided. • However, it is possible that this approach encourages range bias and centring bias.

15. Open Ended • Considered as the easiest format because the question is direct. For example, respondents may be asked questions such as ‘How much are you willing to pay to enter this national park?’ • Advantage of this elicitation method is that respondents are free to state any amount which they are willing to pay for the public goods (Brookshire et al., 1983). • Walsh et al. (1984) add that OE can avoid the problem of starting point bias, a difficulty which appears in the bidding approach. In addition, it is easy to answer and does not need the presence of an interviewer. • The main disadvantage of this method is that it is difficult for respondents to place a value on some environmental goods spontaneously. This situation is completely different from the normal market scenario, where the consumers will react to the displayed prices.

16. Dichotomous Choice (DC) • Considered to be the best elicitation method (Lockwood and Tracy, 1995) and the recommended one for CVM questionnaires. • A respondent is asked whether he/she would be willing to pay a stated monetary value (Mitchell and Carson, 1989). For example, a person might be asked “Are you willing to pay £X to enter this national park?”, with the bid level X systematically varied across the sample (Bishop and Heberlein, 1979). • The respondent is required to answer either ‘yes’ or ‘no’ to that particular monetary value. A ‘yes’ answer will be given if the true WTP is in excess of the stated monetary value, and ‘no’ otherwise. • The main advantage of this method is that it adopts a ‘take it or leave it’ approach, because it simulates the situation consumers have to face in making purchases of ordinary goods and services. • The main disadvantage of this method is that it is not free from potential bias problems. The inherent characteristics of the DC approach will induce bias into responses. Boyle et al. (1996) found that this approach failed to derive an actual value of WTP. According to Bateman et al. (1995) respondents may accept the introduction of a specific bid given by the interviewer. This ‘framing’ or ‘anchor’ effect may arise because the true value of the resource is not clear in the respondent’s mind.

17. There are various techniques available for estimating the value of non-market goods and services. The next section will discuss each of these techniques. • The TEV technique is divided into two groups: Stated Preference Techniques (SP) and Revealed Preference Techniques (RP). • The SP technique is one that tries to discover an individual’s preferences and it is based on a questionnaire (Bann, 2002). Bateman and Willis (1999) found that the Contingent Valuation is the most popular and frequently used valuation tool in environmental economics. Other techniques in SP include Contingent Rating, Contingent Ranking, Choice Modelling and Paired Comparisons (Mitchell and Carson, 1989). • The second group is the RP technique. It is called the ‘revealed preference’ technique, since consumer preferences are ‘revealed’ in this technique through their consumption of goods and services (Mathews et al., 2001). RP techniques include Hedonic Property Pricing, Travel Cost Method (TCM) Random Utility Modelling and Averting Behaviour. The most common is TCM, which is normally used to estimate values for recreational sites.

18. Travel Cost Method • Initially suggested by Hotelling (1949) and was developed by Clawson in 1959. • Designed to assist in the valuation of outdoor recreation, and is widely used in deriving the demand curve for recreational goods (Duffield, 1984; Forster, 1989). • ‘The TCM seeks to estimate the benefit arising from a recreation experience by treating the cost of travel to recreation sites’ (Christie, 1999: 551). • As discussed earlier, TCM is a revealed preference model where consumer preferences are ‘revealed’ through their consumption of complementing goods or services. • In this approach, the consumer’s demand curve is derived, and actual expenditure is used to estimate the value of the recreation resources (Willis and Garrod, 1993). • Involves using the costs of travel (including expenditure to get to a site, entry fees, if relevant, and the value of time spent travelling to and at a site) as a proxy for the price of visiting a given site. • Assumed that users will react to a hypothetical increase in entry fees in the same manner as for his/her travel costs to a site (Eagles et al., 2002).

19. Comparison – TCM and CVM • The TCM and CVM approaches are widely used to estimate the economic value of recreational resources. • Fix and Loomis (1998:227) have explained the difference between these two methods. They assert that: The TCM is a revealed preference model, meaning it uses actual expenditures by the respondents to derive a demand curve from which to estimate benefits, whereas the CVM is a stated preference model, meaning no actual transaction will take place but rather intended behaviour is used to estimate benefits. Both methods measure forms of consumer welfare, with the TCM measuring Marshallian consumer surplus, which is defined as the difference between the price a consumer was willing to pay (WTP) for a good and the price actually paid, while the CVM can measure various forms of welfare. • According to Turner and Brooke (1988) TCM and hedonic pricing have been criticized due to a failure to capture the non-use value adequately. TCM only can measure consumer surplus, i.e. direct use value. It has limited use for measuring option, existence or bequest value (Eagles et al., 2002). • In contrast, the CVM approach can be applied in measuring total preservation value, i.e. both use and non-use components (Echeverria et al., 1995). It can also measure consumer surplus, option, existence and bequest values.

20. Choice Modelling • According to Adamowicz et al. (1997) Choice Modelling can be used to estimate the value of a variety of goods such as recreation services and scenic beauty. • The surveys used for CM analyses are similar to those for the CV questionnaires, with the exception of the designation of the WTP question. • In this approach, respondents are presented with a series of choices about a respondent’s preferred alternative as regards the amenity. There are four types of CM: Choice Experiments, Contingent Ranking, Contingent Rating and Paired Comparisons.

21. Hedonic Price • The Hedonic Price Method is another revealed value technique that relies on market prices (property and wages) to embody the value of the environmental attribute of interest. • This method can be used to estimate the value of living near an amenity such as a recreational park or national park. The main purpose of this method is to estimate an implicit price for environmental attributes by observing the actual markets in which those attributes are effectively traded.