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5.3.2 Methods for Quantifying Market and Non-Market Costs and Benefits Module

Valuation is required for decision making, even where markets do not directly capture social value. 5
King and Mazotta (2004) developed a typology that can serve that role, dividing value into three broad
categories. The first is referred to as market prices and revealed willingness to pay, which include prices

directly set in markets, as well as prices that can be inferred from market prices. Methods include:
? Direct estimation of producer and consumer surplus. This can be done for markets where there is
a reasonable amount of data, and where supply and demand curves can be calculated Abu Dhabi, UAE

? Productivity method. Here, ecosystem value calculated is one input to a marketed product, so it is
necessary to estimate the value of the input as a portion of the value of the product. For example,
an increase in river water quality will decrease treatment costs at a municipal treatment plant,
contributing to an overall cost savings for drinking water consumers.

? Hedonic pricing method. This approach can be used to estimate the value of changes in the
characteristics of a good. For example, the value that people derive from a nice view from their
house can be estimated from data on the cost of houses with and without a view. The same
methodology can be used to value (or derive costs for) such things as air pollution or noise.

? Travel cost method. This is best suited to valuing ecosystems or sites that are used for recreation.
Basically, the approach uses the costs that people incur in visiting a place as an indicator of its value.

A second category is circumstantial evidence and imputed willingness to pay (e.g., the amount people

are willing to pay to avoid floods can suggest the value of flood prevention wetlands). Specific methods
in this category include damage cost avoided, replacement cost, and substitute cost methods. These
methods estimate ecosystem costs by estimating the cost of damages due to lost services, the cost of
replacing services, and/or the cost of substituting for such services. For example, damage that might be
caused by flooding after removal of a wetland can be estimated by looking at the area or property that

might be flooded. The cost of replacing the flood control capacity of the wetland can be estimated from
engineering estimates of other sorts of control systems.

The third and final category of valuation methods is surveys, which capture people’s expressions of
their willingness to pay for services. The types of survey methods include:
? Contingent valuation methods, which involve direct surveys of individuals, asking them what they
would be willing to pay for certain specific environmental services. The word “contingent” refers
to the fact that people are asked how much they would pay for something like an environmental
service, contingent on a specific scenario and description of the service. The method is controversial,
because it is easy to argue that what people say and what they might actually do are different.
However, such studies are widely regarded as the only way to obtain estimates of many types of
non-use value.

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