Avoided Cost Method
The Avoided Cost Method calculates the economic value of benefits that an ecosystem provides that would not exist without the ecosystem in place, and therefore, would represent an added cost to society if this environmental service no longer existed. For example, a wetland that supplies flood protection provides the "avoided cost" of having to invest in additional flood protection measures such as additional levees.
The Benefit Transfer Method "estimates economic values by transferring existing benefit estimates from studies already completed for another location or issue." For example, if a study is conducted on the economic value of a beach in Florida it may be possible to transfer some of the study's findings to beaches along the Carolina Coast, given reasonable changes in the weightings based on the differences among the beaches. This method is popular because it does not require the expense of conducting new studies, but given that environmental values can change dramatically based on local conditions it lacks the robustness that comes from original research based at the site in question.
Calibrated and Conjoint Analysis
Calibrated and Conjoint Analysis is a statistical technique used to determine how people value different features that make up an individual good or service; it can be used to determine the values attributed to different dimensions of an environmental resource. For example, by examining the choices people make when faced with the possibility of visiting different beaches, some with good wildlife viewing and others without, the value of wildlife viewing can be inferred.
Choice Experiments test assumptions about human behavior and decision making against standard economic precepts. They estimate economic values for virtually any ecosystem or environmental service by asking people to make tradeoffs among sets of ecosystem or environmental services or characteristics. Choice experiments do not directly ask for willingness to pay; this is inferred from tradeoffs that include cost as an attribute.
The Contingent Valuation Method (CVM or CV) usually takes the form of a survey questionnaire, which elicits values for environmental goods and services based upon hypothetical situations. CVM may be the only means of estimating certain classes of Non-Market values (e.g. non-use or passive-use values-see Appendix below) for environmental goods and services. For example, after the Exxon Valdez oil spill the only way to estimate the harm to the public of the damage to Prince William Sound was to employ the CVM method and ask respondents how much they would be willing to pay to prevent future oil spills of a similar magnitude. Because the CVM relies on hypothetical situations it is more controversial than most other valuation methods. However, the U.S. Federal Courts have ruled that under certain conditions it is a reliable source of information on otherwise unknowable environmental values. See NOAA's recommendations on the CVM and a response by the environmental thinktank Resources for the Future.
Damage Assessment Model
The Damage Assessment Model is much like the Avoided Cost Method. The model uses a damage function to calculate the environmental and social costs of alterations to the natural environment.
The Discrete Choice Method uses models of consumer choice in which the good or alternative chosen by the consumer is available only in discrete (integer) units. For example, discrete choice can be useful in determining the relative preferences of beach runners for different route characteristics, e.g. separate path, compact sand, or hills. One advantage of discrete choice models over other methods is that the tradeoffs between attributes can be more easily quantified.
Expenditure Analysis is used within the Non-Market valuation literature primarily to examine indirect expenditures that are tied to environmental resources, which are often left out of many traditional analyses; it is commonly employed in the Travel Cost Method.
The Hedonic Pricing Method assesses the value of an environmental feature (clean air, clean water, serenity, view) by examining actual markets where the feature contributes to the price of a marketed good. For example, using the hedonic pricing method one can estimate the monetary contribution of ocean views to home prices. The monetary contribution of the environmental good is usually determined by a regression of the price of the marketed good against attributes of the good, including the environmental attribute in question.
Input-output Analysis illustrates a regional economy by describing flows to and from industries and institutions and shows how industries are linked together; it demonstrates how all of the parts of a system are affected by a change in one part. Where environmental services are involved, it can show how changes in the quantity or quality of these services can impact the entire regional economy, both in terms of input and output prices.
The Productivity Method, also referred to as the "Net Factor
Income" or "Derived Value Method," is used to estimate the economic value of
ecosystem products or services that contribute to the production of
commercially marketed goods. It is applied in cases where the products or
services of an ecosystem are used, along with other inputs, to produce a
If a natural resource is a factor of production, then changes in the quantity or quality of the resource will result in changes in production costs, and/or productivity of other inputs. This in turn may affect the price and/or quantity supplied of the final good. It may also affect the economic returns to other inputs.
For example, water quality affects the productivity of irrigated agricultural crops, or the costs of purifying municipal drinking water. Thus, the economic benefits of improved water quality can be measured by the increased revenues from greater agricultural productivity, or the decreased costs of providing clean drinking water.
The Random Utility Model (RUM) is a model of consumer choice in which the consumer is assumed to have perfect discrimination capability between goods or activities in order to maximize their 'utility' (relative attractiveness of competing alternatives). However, generally the analyst has incomplete and imperfect information about the variables that influence a person's decision-making. The RUM method uses statistical techniques that take into account the random nature of the data that is observed. RUM's are common in revealed-preference research (see Appendix below) such as studies employing the Travel Cost Method, in which the researcher is unaware of all of the factors that are taken into account when the final decisions are made of where to visit.
The Referendum Method is a survey method commonly used in contingent valuation surveys in which the respondent is asked to respond 'yes' or 'no' to a hypothetical tradeoff between some amount of environmental good or service and something else of value (typically money). The Referendum Method is the principle method employed in the Contingent Valuation Method; it closely mimics the real choices individuals faced when confronted with ballot initiatives that ask them to vote 'yes' or 'no' for a new program or law.
The Travel Cost Method (TCM) "estimates economic values associated with ecosystems or sites that are used for recreation. It assumes that the value of a site can be deduced from how much people are willing to pay to travel to visit the site." It is important to note that if the proximity to a site greatly influences property values and/or local economic activity the TCM may not be sufficient to capture the full Non-Market value of the resource in question. For example, the best surf spots in California greatly increase the value of adjacent property; yet most of the users of the sites do not travel very far to get to them, but they value the resources very much (which is reflected in the high costs of housing in these areas).
NOTE: Unless otherwise noted, much of the
information used for the above definitions was obtained from:
Grafton, R.Q., Pendleton L.H., and Nelson H.W. 2001. A Dictionary of Environmental Economics, Science, and Policy. Edward Elgar, Northhampton, MA.
Appendix to Methodology Section
Non-Use or Passive-Use Values
In contrast to the direct values people derive from using or experiencing environmental resources, non-use or passive-use values are indirect values that can be broken into three categories: existence value, bequest value, and option value. Existence value refers to the value that people get from simply knowing that an environmental resource is conserved; e.g. knowing that the Amazon Rainforest is protected even if you live in the U.S. and don't ever plan on visiting there. Bequest value refers to the value that individuals gain from being able to pass a resource on to future generations even if they may not ever directly use or experience the resource themselves. Option value refers to the value individuals receive from reserving the option of utilizing a resource in the future; e.g. there is a value gained from protecting whales if people want the option of being able to go whale watching sometime in the future.
Revealed Preference is an approach that is used to identify the underlying preferences, and thus demands of individuals, based upon the choices each reveals in their consumption. Thus, if bundle of goods A is bought when another bundle of goods B is available and affordable, then bundle A is revealed to be preferred to bundle B. Revealed Preference methods are preferred by most economists since they rely on real actions that people make and do not rely on hypothetical situations; i.e. the actions leave a "behavioral trace" that economists can directly observe. In essence, Reveal Preference Methods are based on activities in which individuals have to "put their money where their mouths are." The Travel Cost Method and the Hedonic Pricing Method are examples of Reveal Preference Methods.
Stated Preference methods are employed when the researcher does not have actual data on behavior with regards to a certain environmental good or service, or where it is impossible to obtain these values (e.g. when trying to estimate the "existence value" that individuals ascribe to resources that they will never visit). Individuals are typically provided with hypothetical scenarios, based on plausible outcomes and options, and their choices are used to determine the value of the environmental good or service in question. The Contingent Valuation Method is the primary example of the Stated Preference Method. Stated and revealed preference methods may be combined, often using a random utility framework (RUM)