Valuation I

Economic Value expresses the degree to which a good or service satisfies individual preferences. These preferences can be expressed in terms of utility, an unobservable ranking of preferences, or a less theoretically appealing, but more practical in money terms.

In neoclassical economics, the value of an object or service is often seen as nothing but the price it would bring in an open and competitive market. This is determined primarily by the demand for the object relative to supply.

In classical economics, the value of an object or condition is the amount of discomfort/labor saved through the consumption or use of an object or condition (Labor Theory of Value). Though exchange value is recognized, economic value is not dependent on the existence of a market and price and value are not seen as equal.Thus, economic value can be measured by the amount of money an individual is willing to pay for a good or service or the amount of money an individual is willing to accept as a compensation for forgoing the good or service.

Willingness to pay (WTP) and willingness to accept (WTA) are measures that can be revealed in exchange. Many goods and services are exchanged on a market, which automatically reveals their value.

The market, however, is capable of revealing only one component of the total economic value. This component, known as direct use value, refers to WTP or WTA for only an actual use of the good or service. The direct use component tends to dominate the total value of most ordinary (non environmental) goods such as books purchased to be read, food bought to be eaten, or cars acquired for transportation.


Values derived from Ecosystem
Source:www.ecosystemvalue.net

For some natural resources, their value is almost exclusively related to their direct use. The primary example of such a natural resource is crude oil. We are willing to pay for it only as much as the energy it creates is worth to us. Many other natural resources are also highly valued for their direct use, although, direct use may be only one of several components that contribute to their overall worth. For example, lakes, oceans and rivers can be used for swimming, fishing or enjoying water sports; forest are sources of timber, mushrooms, berries, herbs, as well as recreational opportunities; wetlands provide opportunities for bird watching.

Many goods and services, especially environmental ones, are valued for reasons not related to a direct use. However, no consensus exists as to what set of categories is truly exclusive and exhaustive in capturing the remaining elements of the total value. The discussion that follows presents these components of value and their relationship to each other (see the table) in a manner that represents the interpretation most commonly agreed upon by environmental economists.

Types of Values

Economists classify ecosystem values into several types. The two main categories are use values and non-use, or “passive use” values. Whereas use values are based on actual use of the environment, non-use values are values that are not associated with actual use, or even an option to use, an ecosystem or its services.

Total Economic Value

Types of Value
Source: FAO

Thus, use value is defined as the value derived from the actual use of a good or service, such as hunting, fishing, birdwatching, or hiking. Use values may also include indirect uses. For example, an Himalayan wilderness area provides direct use values to the people who visit the area. Other people might enjoy watching a television show about the area and its wildlife, thus receiving indirect use values. People may also receive indirect use values from an input that helps to produce something else that people use directly. For example, the lower organisms on the aquatic food chain provide indirect use values to recreational anglers who catch the fish that eat them.

Direct Use-Values

Consumption use value refers to “extractive” activities, whose object is a precise resource “consumable” in the primary manner (e.g. through hunting, picking and gathering wild fruits) or in the secondary manner entering other goods ( natural substances present in some medicines; the ivory of elephants’ tusks)as a productive factor.

Non-consumption use values refer to all those activities that exploit the resource for recreative and amusing purposes, without its material consumption. A walking tour in the mountains and the bird watching are some examples of these activities which do not cause any damage to the resource, obviously excluding episodes of congestion.

Option value

Option Value is the value that people place on having the option to enjoy something in the future, although they may not currently use it. Thus, it is a type of use value. For example, a person may hope to visit the Himalayan wilderness area sometime in the future, and thus would be willing to pay something to preserve the area in order to maintain that option.

In-direct Use Value

Incidental value means a value derived from passive utilization of a resource, nonconsumption, that an individual can experience in a very occasional way without the necessity to buy additional goods. You may think of an individual who lives in the area of a natural parks and sees a deep from the window of his house or going to work. (Freeman,1984).

The vicarious use value can be distinguished on the basis of the features of media used to create It. If an individuals enjoys the resource through pictures (or taped videocassettes) taken by himself, the use value can be analysed in the relationships between the resource and the input request of photos and videos production. On the contrary , if the resource is used through the vision of T.V. programs or the reading of magazines, the relationship between the resource and the information is complex: it can occur that the information request increases as a consequence of an environmental disaster so to stay in the increasing vicarious use value paradox corresponding to a damage caused to the resource.

Non-Use Values

Non-use values, also referred to as “passive use” values, are values that are not associated with actual use, or even the option to use a good or service.

Bequest value is the value that people place on knowing that future generations will have the option to enjoy something. Thus, bequest value is measured by peoples’ willingness to pay to preserve the natural environment for future generations. For example, a person may be willing to pay to protect the Himalayan wilderness area so that future generations will have the opportunity to enjoy it.

Existence value is the non-use value that people place on simply knowing that something exists, even if they will never see it or use it. For example, a person might be willing to pay to protect the Himalayan wilderness area, even though he or she never expects or even wants to go there, but simply because he or she values the fact that it exists.

Total Economic Value, Sustainable Development & Conservation

The Fine Balance

The Fine Balance

The total economic value of an environmental resource may assume two connotations: if sustainable use benefits are prevailing that would be a policy cue for sustainable development; if non-use benefits top, then the preference would be conservation.

Module Leader: Aditya Harit

References

Bateman I., 1993, Valuation of the environment, methods and techniques; the contingent valuation method, Sustainable Environmental Economics & Management. Principle and Practice, London, Belhaven Press, pp. 26-64.

Freeman A.M., Haveman R.H. and Kneese A.V., 1984, The Economics of Environmental Policy, Malabar, R.E. Krieger

Krutilla J.V. and Fisher A.C., 1985, The Economics of Natural Environments: Studies in the Valuation of Commodity and Amenity Resources, Washington, Resources for the Future.

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One response to this post.

  1. Posted by Mr Nusrt Gill on October 17, 2011 at 12:04 am

    I am extremely impressed with the content of this blog. Being a student of Environmental Economics, I would like to learn more on the research methodologies for valuation of environmental impacts. The basis of valuation is human preferences, which are not the same both at national, regional and international levels. A poor society may have different preferences as compare to a well off society. Therefore I am looking for some research methodologies which one can apply to value the services offered by environmental resources or assess any change in services in monetary terms.

    wish to know and learn from some Environmental Economist more about on this topic

    Reply

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