FOR 414/595: World Forestry

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1 FOR 414/595: World Forestry Katrina Mullan Valuation of non monetary benefits Total Economic Value Use Values Option value Non Use Values Direct Use: Consumptive and Non consumptive Indirect use Existence Beques t Altruism

2 Why quantify benefits? 1) Cost benefit analysis: Do the benefits of a proposed policy exceed the costs? 2) Policy evaluation: Are particular conservation decisions justified? 3) Green Accounting: How much do natural ecosystems contribute to economic activity? And is natural capital increasing or decreasing over time? 4) Equity considerations: Who benefits from conservation and who bears the costs? 5) Conservation finance: Are there values of biodiversity that could be captured to provide funding for conservation? Overview of methods Revealed preferences: Travel cost Hedonic pricing Stated preferences: Contingent Valuation Choice Experiment Change in productivity

3 What are we trying to quantify? Price Market goods and services $10 Consumer surplus Demand Payments 8 DVDs What are we trying to quantify? $/ha Non market goods and services Change in consumer surplus resulting from change in area protected 100 WTP for increase in area protected 200 Marginal WTP Hectares of forest protected

4 Hedonic Pricing Key assumption: price of market good is a function of the characteristics of the good => if environmental amenities are one of the characteristics, variation in price provides information on value of those amenities Example: House price=f(rooms, distance to employment, woodland views) Travel cost Cost $20 WTP = Consumer surplus Travel cost Demand 5 Visits to forest

5 Example Maille and Mendelsohn (1993) Survey of visitors to Beza Reserve, Madagascar Data: total international airfare, country of origin, total trip length, time in Madagascar, time at Beza Estimated visitation rates and average airfares from each country Equation for demand curve: Number of visits/1000 population = α βprice Average consumer surplus of $276 $360/visitor Contingent Valuation Direct questions to survey respondents: How much would you be willing to pay? Key Design Issues: Sample selection who s values are you interested in? Survey method face to face, telephone, mail What is the policy change being valued? What are the key attributes What substitutes are available What are the baseline and target levels of the good Payment mechanism Voluntary or compulsory Who is payment made to Periodic or one off Elicitation method open ended, bidding game, payment card, dichotomous choice

6 Example Kramer and Mercer (1997) Experts say that we need to preserve at least 10% of all tropical rain forests in national parks and reserves. Currently only 5% of all rain forests is preserved. Assume that the United Nations creates a special Save the Rain Forests Fund to raise enough money to preserve 110 million more acres (about the size of California) of rain forests in national parks and nature reserves in 57 tropical countries. This would be enough to reach the goal of saving 10% of all tropical rain forests. Assume that all of the donations to the Fund will go directly toward saving tropical rain forests by creating and managing national parks and reserves. Would you be willing to make a one time donation of $x to this fund? If YES => Would you be willing to contribute $(twice original amount) If NO => Would you be willing to contribute $(half original amount) If you were asked to make a one time donation to this fund, how much would you contribute? (Please circle the amount which is the most you would pay.) Example Kontoleon and Swanson (2003) Survey of 305 foreign tourists to China WTP for increase in Giant Panda population of Wolong Reserve from 200 (current population) to 500 (minimum viable population) Three scenarios for preservation: Scenario Mean WTP 100 m 2 cages $ m 2 pens $ ha natural habitat $14.86

Choice Experiment Survey respondents choose

importance of different attributes Multiple

7 Choice Experiment Survey respondents choose between options with different combinations of attributes If cost is one of the attributes, you can observe how people trade off cost against other attributes Provides information about relative importance of different attributes Multiple choices given to each respondent Design issues some similar to CV: sample selection, survey method Some specific to CE: selection of attributes and levels

including non market good and output): Q=f(x 1, x 2, x 3, G) 2)Estimate how outputs

9 Change in Productivity Ecosystem goods or services are combined with other inputs to produce a marketed good 1)Estimate production function (relationship between inputs including non market good and output): Q=f(x 1, x 2, x 3, G) 2)Estimate how outputs change as non market good changes 3)Estimate the total economic benefits of protecting the ecosystem

10 Example Nunez et al (2006) Impact of deforestation on production of drinking water in Chile Drinking water = f (energy, streamflow) 10% change in streamflow => 1.5% change in drinking water production Value of higher streamflow: $15.4/household (Summer); $5.8/household (rest of year) Estimate that 1% loss of native forests => reduction of 27,127m 3 in streamflow Value of forest protection: $162.4/ha (Summer); $61.2/ha (rest of year Selection of Valuation Method Choice of method will depend on data availability and characteristics of goods or services Creating nature reserve for ecotourism in Ecuador Planting trees in urban areas of Raleigh Conserving mangrove areas used as fish spawning areas Protecting habitat for Ring tailed Lemur in Madagascar

The methods to estimate the monetary value of the environment

The methods to estimate the monetary value of the environment Dr. Alberto Longo Department of Economics and International Development University of Bath A.Longo@bath.ac.uk 1 Overview of the presentation