Chapter 4: CHOOSING AND APPLYING MEASURES OF VALUE AND TECHNIQUES TO MEET THE INFORMATION NEEDS³⁰

In the previous chapter biophysical input and output were put together. They are associated with the changes that are under review in the decision context being studied. This chapter reviews a range of methods and techniques available for estimating values for the inputs and outputs. A "cookbook" approach will not do: situations are too site-specific within the decision context to allow this. There are some general guidelines that can be suggested, but they are not fixed rules. Box 5 highlights a few.

4.2.1 Main types of value measure

With the elements of box 5 in mind, and while recognizing that adaptations may be needed to suit each circumstance, the main value measures presented fall into three categories:

(a) direct market prices;

(b) indirect market prices (value inferred from other market prices), e.g. residual values, value of production increases, surrogate prices and replacement cost or cost avoided, opportunity cost, hedonic price and travel cost;

(c) non-market prices.

There has been remarkable growth in the academic literature on valuation methods for the different forest goods and services³¹. What follows is a quick overview of the main methods which are also summarized in table 8. A key point is that in any given analysis, a number of different techniques may be used. Indeed, this seems to be the trend according to evidence from the literature. Each category is discussed briefly below.

Figure 2 indicates the general categories of economic value measures commonly used. More specific examples of different techniques and their applications are summarized in table 8. Each measure presented in this table is discussed in more detail in the following sections³².

Figure 2. Valuation conditions and approaches.

Source: Adapted from Gregersen et. al (1987): fig. 6.1, p. 59.

Notes: WTP = willingness to pay.

4.3.1. On what conceptual foundation do direct market price methods depend?

Market prices are the result of interaction between consumers and producers through demand and supply of goods and services. The direct market price methods value the different forest goods and services that are exchanged in the marketplace with the implicit assumption that market prices correctly reflect economic scarcity and hence are economic-efficiency prices. Market prices can be used either in financial or economic analysis to compare the costs and benefits of alternative forest use options.

The first step is identify which goods and services are traded in the market. The second is to collect the empirical data, whether based on an original survey and/or secondary sources (e.g. published economic statistics). For forest goods and services that are freely traded in an open manner, market prices are available and reliable; the market prices exist and correspond to the intersection of supply and demand curves³³.

Box 5. Suggested guidelines in choosing forest valuation techniques.

The analyst should be open to all techniques and not develop such a strong preference for one that he/she forces its application to all situations (i.e., the analyst should avoid being like a person with a hammer to whom everything looks like a nail);

The analyst should, instead, carefully consider the task, evaluate the ability of existing tools to handle the job, select the appropriate one;

Where no existing tools suffice, the analyst may have to adapt one or several of them or even design new tools. Whether using established or new techniques, full transparency regarding assumptions and their basis should be ensured;

Since full forest valuation occurs in an environment of uncertainty, it is prudent to try deriving value estimates by more than one technique so as to have some kind of cross-check;

Irrespective of technique chosen, the manipulation of information at the ecological-economics frontier may influence the appointment of costs and benefits to various interest groups. This raises ethical questions. It is not an analyst’s job to make ethical judgements among existing groups or between present and future generations. It is the analyst’s obligation, however, to indicate how proposed interventions (such as investment projects) affect the costs and benefits;

Always include financial valuation since decision-makers find this a familiar point of reference;

For valuation aspects beyond financial valuation based on market prices, first carry out the easiest. If this gives large enough values on which to base the required decision, there is no point in spending much more time on valuing other functions;

Collecting and generating quantitative information can be a costly activity; to incur such costs is worthwhile only if the data are able to influence decisions. Therefore data collection should be in response to specific demands and guided by the type of decisions for which the results are to be used;

Extrapolation of results from one country to another, although it may be appealing, should be minimized or avoided. The value assigned to a forest resource by a person or a group depends, among other things, on the context of the valuation and varies in time and space (Brown, 1984; Brown and Slovic, 1988; Mäler, 1991). Risks are even greater in attempting to extrapolate value of forest resources from developed countries to tropical developing countries. For example, given that forest resources are currently the subject of massive public attention in developed countries and that people there have higher incomes, the results of such surveys give higher value estimates for conservation of tropical forests than if the people living in or near those forests were surveyed.

Table 8. Valuation approaches in relation to type of forest goods and services.

Source: Adapted from Gregersen (1996): pp. 9-14 (table 9.2).

Prices can be distorted because of market and/or policy failures³⁴, in which case the prices do not reflect true scarcity and shadow prices are required. Distortions are generally because of taxes, subsidies, administratively set exchange rates or mandated wage or interest rates. Examples include incentives given by the Brazilian government for settlement in the Amazon region and subsidies given to farmers in many OECD countries which encourage production of crops, meat and dairy products outside environmentally suitable areas. Another example, reported by McNeely and Dobias (1992), is of subsidies provided by the Government of Thailand to tapioca farmers to increase export earnings: these led to widespread loss of Thailand’s forests and were directly contrary to other policies favouring forest preservation. To correct such distortions, appropriately adjusted market prices, commonly called "shadow prices"³⁵, should be estimated.

Adjustments to use shadow prices or some other multiplier instead of market prices is a complex process that requires additional work and expertise. It is also the subject of some debate; for example, Gregersen et al. (1987) recommend caution in the use of shadow prices in place of market prices, arguing that market prices:

- are often more readily accepted by decision-makers than are artificial values derived by the analyst;

- are generally easy to observe, both at a single point and over time;

- reflect the decision of many buyers, whereas calculating shadow prices may often rely just on the judgement of the analyst.

Gregersen et al. (1987) also point out that the procedures for calculating shadow prices are rather complex for a field person and, if improperly followed, can introduce larger discrepancies than the simple use of even imperfect market prices.

A variety of sources can yield appropriate market prices, e.g. official statistics, socio-economic surveys, commercial market intelligence sources, or, in the case of rural products, consultation with extension officers. When determining market prices, it is important to take into account the seasonal variations that lead to price fluctuations due to changing supply/demand balance. Points to consider in the use of direct market price measures of value are summarized in box 6.

Box 6. - Considerations when using direct prices

- Direct prices are relatively easy to obtain. There have been many surveys of market prices from different goods and services provided by the forest. However, (i) not all forest goods and services are traded, including most environmental ones, (ii) there are markets where there is bargaining between traders and sellers, and hence no fixed publicly stated price exists, and (iii) observed prices may be of past transactions and outdated and may or may not reflect current or future conditions, whereas for most projects, prices are needed for future situations.

- They do not reflect willingness to pay (WTP), as it is usually understood; they reflect only what people actually do pay in exchanges (they do not tell what the WTP demand curve looks like; they give only one point on that curve);

- Market and/or policy failures may distort market prices, in which case they cannot reflect the true economic value. Allied to these failures there are seasonal variations and other effects on prices that can lead to a distortion of the market price as a good measure of value.

4.3.2 Example of application of market price

Peters et al. (1989) carried out a study on non-timber products and forest management in Peru and relied mainly on market and official prices, actual expenditure and the opportunity cost of labour (minimum wage). Initially, a physical inventory of one hectare of natural forest land was performed at Mishana, Rio Nanay, Peru. After this inventory, monthly surveys were carried out of local markets on the prices of fruit; timber prices were obtained by interviewing local mill operators. Interviews and observation of local forest users enabled the authors to obtain estimates of fruit yields for seven other tree species and of the labour inputs required to harvest fruit and latex. These primary data were supplemented with selected published information, e.g. minimum wage in Peru in 1987, logging and transport costs for timber (estimated at 30-50 percent of the total market value of delivered timber) and so on.

Then, based on the array of information referred to above, the following secondary data were generated:

- tree population, annual yield per tree, market price and total production value for 11 fruit tree species and one latex-producing species occurring in one hectare of forest;

- tree population, merchantable volume, unit price at the mill and stumpage value for 60 species of commercial timber (grouped under 23 commercial names) in the same hectare of forest;

- maximum sustainable timber yield (estimated at 30 cubic metres per hectare every 20 years).

These data were used to estimate gross and net revenues derived from fruit, latex and timber production on natural forest land. It was concluded that sust ainable multiple use of natural forest generates higher economic value than timber alone. This can be seen in table 9.

Table 9. - Financial returns to non-timber products and other forest uses in 1 hectare of natural forest at Mishana, Rio Nanay, Peru.

Source: Reproduced from IIED (1994).

Notes: a 1.0 ha plantation of Gmelina arborea in the Brazilian Amazon.

b Gross revenues per hectare of fully stocked cattle pastures in the Brazilian Amazon (costs of weeding and fencing and animal care not deducted).

4.4.1 General considerations

The indirect market price valuation approach uses information about surrogate markets to input or infer the value of a related, non-marketed good or service. In other words, it attempts to draw inferences from observed market-based information. There are different techniques and methods to do so. They are indirect because they do not depend on people’s direct responses to prices for the good or service being valued. To illustrate, some are discussed briefly below.

Among examples of surrogate price methods are (a) residual value, (b) value of production increases as minimum measure of value of some input, (c) surrogate prices and replacement cost or cost avoided, (d) opportunity cost, (e) hedonic pricing and (f) travel cost.

4.4.2 Residual value method

The residual value of particular goods or services is estimated from the prices of goods or services established later in the production-distribution process. It assumes that the value of the good or service at the forest roadside³⁶ is at least equal to the residual value left after subtracting from market prices the costs of further transport to mill, processing at mill, marketing and distribution. These conversion return methods have traditionally been used in appraisal of "stumpage value" (the value of standing timber). Although stumpage fees may account for a relatively small percentage of the total costs to forest products companies, methods to determine how much money may be charged for standing timber continue to be questioned by some authors. For example, Luckert and Bernard (1993) argue that such traditional residual value methods for assessing "stumpage", although consistent with economic theory, are not appropriate for forestry in Canada. They point out that such methods do not adequately represent stumpage values because of complications posed by imperfect competition, dynamic residual values and the forest tenure system.

Bettencourt (1992) suggested that the residual value of standing wood reflects the price that buyers are willing to pay for it whereas sellers consider this stumpage value as the minimum price they would be willing to accept, taking into account their production costs. Bettencourt states further that "while traditionally the residual stumpage value has been estimated from the buyers’ side, this procedure is only correct in cases where the production costs of the wood (prior to felling) are zero from the sellers’ perspective. This happens, for example, when wood is gathered from open-access forests." Such an assumption would not occur in the case of plantation wood where real production costs are incurred by the seller.

This method can be used also in cases where a market price for a non-wood forest product does not exist, but the product is used to manufacture other products for which market prices do exist. In this situation, the market price of the end product is the point of departure from which costs incurred in transformation of the product, costs of supplementary inputs and all other production, transportation and marketing costs are subtracted to arrive at the residual value. The residual value method can also be applied to economic valuation of fuelwood. Points to consider when using the residual value method are summarized in box 7.

Box 7. - Considerations when using residual value method

- Provides only a minimum value for the good or service in question;

- Does not take into account environmental and social impacts;

- Prevailing market prices used may be distorted.

Evidence suggests that many countries, particularly developing ones, are becoming increasingly concerned about their forest revenue systems. For many of these countries a primary objective in designing a forest revenue system is to maximize forest revenues collected. To do so, forest charges must closely reflect the stumpage values of the timber cut. The US Forest Service and the British Columbia Forest Service in Canada have developed sophisticated stumpage appraisal systems using residual value approaches. However, most developing countries are likely to rely on more basic and simpler appraisal methods. Tables 10 and 11 illustrate two examples of the derivation of stumpage values: the first is based on log prices and the second on prices of manufactured forest products.

Table 10. - Derivation of stumpage values based on log prices

Source: Gray (1983): table 4.1, p. 35.

Note: WTP = willingness to pay.

Caution should be taken in analysing such derived values. The analyst must have experience and knowledge of the context. These derived values can hide some important facts if the analyst lacks experience and local knowledge. For example, Bettencourt (1992) prepared a typical valuation of charcoal, a traded item, in Rwanda using the residual stumpage approach. The retail price of charcoal in Kigali (the main market) was used as the starting point of the analysis, and the stumpage value was derived by taking into consideration retailer profit margins, transportation and labour costs and transformation losses. The calculated residual value was less than RF100/stere which was far below actual plantation costs³⁸. This suggests that, among other reasons, most sellers collect the wood illegally from public forests, thus failing to internalize costs involved in growing the wood.

Table 11. - Derivation of stumpage values based on forest product prices

Source: Gray (1983): table 4.2, p. 37.

Note: WTP = willingness to pay.

4.4.3 Value of production increases as a measure of minimum value of some input

The increased market value of production of goods and services with and without the change or activity being valued can sometimes be used to value that activity or change. An example is the estimation of the value of a windbreak. A windbreak can increase crop production behind it; the value of this "extra" production can be taken as a proxy measure of the minimum value of the benefits from the windbreak. The same windbreak, according to the context, may also provide other benefits, such as fodder, shade for cattle, firewood and so on.

4.4.4 Surrogate prices, replac ement costs or costs avoided³⁹

This method estimates the value of a particular good or service from the known values or prices of substitute or comparable goods and services under comparable conditions. It assumes that the value of a particular good or service can be closely approximated by the prices of similar goods and services established under similar conditions.

To illustrate, the value of some forest products, such as fuelwood, can be valued also in terms of the value of a traded substitute. In the case of fuelwood, for example, substitutes can be (i) traded items, e.g. kerosene, and (ii) non-traded items, e.g. cow dung and crop residues. Hence, the value of fuelwood can be estimated as a proxy of the value of an alternative fuel, e.g. kerosene, in that market, after adjusting for calorific value of the two fuels. Table 12 provides an example of this estimation.

Table 12. - Estimated value of fuelwood on the basis of the value of a substitute product^a

Source: Gregersen and Contreras (1992): p. 90.

Note: a hypothetical example.

This method has been suggested as a way to estimate the value of a good, fuelwood for example, on the basis of the value of another product for which it can be substituted. In all cases of surrogate prices, caution needs to be applied. For example, Kanel (1990) points out that there are at least three problems with the method of valuing fuelwood through residual stumpage on the basis of the value of a traded substitute, namely:

- Though the technical relationship between fuelwood and kerosene in terms of calorific values may be the same as described in table 12, people are interested in the total useful energy from the substitute. The utilizable energy from the traditional fuelwood stove may be around 10 to 20 percent, whereas the utilizable energy from kerosene stove will be substantially higher, about 50 percent;

- Other benefits from alternative energy sources may be ignored; for example, kerosene is a cleaner energy than fuelwood;

- It ignores differences in purchase and maintenance costs for alternative energy sources. Kerosene stoves cost more than fuelwood stoves. Moreover, the rural people can repair fuelwood stoves themselves, whereas it needs more expertise and, thus more expense, to repair a kerosene stove.

Kanel also points out two problems associated with non-traded substitutes, as is the case where cow dung replaces fuelwood, namely:

- It is difficult to find information on the technical relationship between dung applied in agriculture and the incremental crop production;

- There are some cultural factors also involved in the use of dung as fuelwood substitute. Virtually no dung is used in the hills of Nepal, but it is used extensively in the southern part of Nepal adjoining India.

These methods are generally used where damage has occurred. They look at the cost of replacing or restoring a damaged asset to its original state and use this cost as a measure of the benefit of restoration⁴⁰. They have been used to estimate the value of environmental damage, such as that from soil erosion and siltation. The required data can be obtained from direct observation or from professional estimates. Westman (1977) calls attention to the fact that, in practice, people rarely repair all the damage. For example, the earthworm population decimated by erosion may not recuperate after restoration; similarly, the function of regulating the global climate cannot easily be restored, if at all. Westman also argues that "the interconnected nature of the complex systems of nature" makes valuation of individual lost services inevitably misleading.

"Cost avoided" relies on the assumption that damage estimates are a measure of value. According to Panayotou and Ashton (1992), the basic assumptions of this technique (not all fully justified) are: (a) the real value of damages can be accurately measured; (b) the irreversible loss of an environmental asset can be replaced by another asset of equal value to society (over space and time); and (c) there are no externalities associated with the necessary expenditures.

Pearce and Moran (1994) refer to its application to forestry valuation, for instance for estimating flood protection and water regulatory services of forests serving as natural barrages. Unfortunately, the methods have, according to Andersson and Bojö (1992), been used to demonstrate very high values for the services of forests, thus creating problems of credibility. Points to consider in the use of these methods are summarized in box 8.

Box 8. - Considerations when using the technique of replacement costs or costs avoided

- Useful in estimating indirect use benefits when ecological data are not available for estimating damage functions with better methods;

- Useful for estimating flood protection and water regulatory services supplied by forested watersheds which provide natural barrages;

- Difficult to ensure that net benefits of the replacement do not exceed those of the original environmental function. May overstate willingness to pay if only physical indicators of benefits are available;

- Some damage may not be fully perceived, or may arise only in the long term: benefits assessed now will therefore be an underestimate of what is really lost;

- It is assumed that the asset can be fully restored back to its original state; however, in practice, some aspects are not or cannot be fully restorable (i.e. are irreversible);

- Comparable goods or services may not be available.

4.4.5 Opportunity cost technique

This technique estimates the value of opportunities forgone in providing a particular good or service. It assumes that the value of the desired good or service is at least equal to the value of the best alternative forgone to obtain it. For example, the opportunity cost of using cow dung as fuel would be worth the increase in crop yields forgone by not using it as fertilizer. The technique has frequently been used to estimate the value of fuelwood and forest fodder in developing countries by assessing the opportunity cost of time spent gathering them. In other words, the value of time used in the collection of firewood and fodder is a proxy for the minimum value of the commodity in question. Points to consider are summarized in box 9.

Box 9. Considerations when using opportunity cost technique.

- Opportunity cost of time takes into account social impacts;

- Opportunity cost of resources and services used takes into account environmental impacts;

- It is often site-specific and, as such, requires local surveys; data requirements may be high and data collection costly and time-consuming;

- It requires assumptions about the value of alternative benefits forgone for which scientific information may be no better than for the value of the forest function itself.

The example below, adapted from Kanel (1990), utilizes opportunity cost technique to value fuelwood in Nepal.

a. An average hill family devotes about 75 person-days of labour per year to collect 4 tonnes of fuelwood;

b. Fuelwood collection takes place throughout the year, two-thirds being collected during the off-peak season and the remainder during the peak season;

c. One-third of fuelwood collection is done by children;

d. The wage rate is NR (Nepalese Rupees) 20 per person-day;

e. Child labour is valued the same as adult labour because children do other work, e.g. animal feeding and tending, so substituting for adult labour, and because other pursuits (including schooling) may present higher social costs;

f. The shadow wage rate during the off-peak and peak season is assumed to be 60 and 90 percent respectively of the going wage rate;

g. The economic value of 4 tonnes of fuelwood equates to:

(75 x 2/3 x 20 x 0.6) + (75 x 1/3 x 20 x 0.9) = NR1,050;

h. The economic value of one tonne of fuelwood equals NR262.

4.4.6 Hedonic pricing method

This is a method that uses surrogate markets to input values of a non-marketed good or service. Mendelsohn and Markstrom (1988) report that the hedonic price method was originally designed as a measure of the quality difference among goods; however, it gradually became a tool to measure the value of goods’ attributes. It assumes that people choose specific goods because of their objective characteristics. Therefore, the value of a good or service can be estimated from a technical relationship; for example, housing values may decline the closer houses are to a loud noise source such as an airport. There are two major variants in application of the method: property values and wage differentials.

In practice, property values are a prime example of the surrogate market approach. The value of a house, for example, is affected by many variables, such as size, construction and location. The basic assumption is that a property has a collection of attributes (some structural, some environmental, some aesthetic) that will influence the purchaser’s WTP. Some property value studies require a great many assumptions and considerable data, for example, the benefits from an urban project for flood control and the benefits to households of an improved water supply system. The method has been used to value, for example, aircraft noise nuisance and households’ WTP for water. In principle, it can be applied also to estimate the value of benefits to property from the proximity of forests. However, a review of the literature suggests no evidence for its use in forestry investment projects.

The second major application of the hedonic method is in wage differentials. It uses information on differences in wages for workers in different occupations under diverse degrees of risk. Its characteristics and aims suggest that is unlikely that this variant would be relevant to tropical forestry (Winpenny, 1992). Again, a review of the literature showed no evidence of using wage differential in tropical forest valuation. Points to consider are summarized in box 10.

Box 10. - Considerations when using hedonic pricing methods

- It may have potential for valuing certain forest functions (e.g. micro-climate regulation, ground water recharge) in terms of their impact on agricultural land values;

- Its application to the environmental functions of forests requires that these values are reflected in surrogate markets;

- Its uses may be limited where markets are distorted, choices are constrained by income, information about environmental conditions and changes are not widespread and data are scarce. This suggests difficulty in its utilization in a developing country context where all of these conditions are commonplace;

- Data requirements are substantial and, consequently, the method may be costly and time-consuming;

- It requires considerable expertise in economics and collection and analysis of data.

4.4.7 Travel cost method

According to Mendelsohn and Markstrom (1988), this method was originally conceived to value recreation sites; it has been used for almost three decades in the United States. It estimates the willingness to pay for using a particular resource on the basis of expenditures incurred in using it. It can be used to place a value on cultural and historical sites threatened by development projects. However, it has been most commonly used to estimate the benefits from recreation and ecotourism. As Munasinghe (1993c) explains, it uses the "amounts of time and money visitors spend travelling to a site as the price proxies, together with participation rates and visitor attributes, to estimate the recreational value of the site". It is most appropriate for estimating value for short distances. It is important to bear in mind that the amount of the travel cost⁴¹ per se is not equal to the value of the park. The travel cost data allow estimation of a demand curve for site visits (Dixon et al., 1988b).

Pearce and Moran (1994) report on attempts that have been made to value forests for fuelwood and for water supply (in each case using travel time as proxies for the value of fuelwood or water respectively). Points to consider are summarized in box 11.

An example of practical application of TCM in a developing country is the study carried out by Tobias and Mendelsohn (1991) to value the ecotourism at the Monteverde Cloud Forest Biological Reserve (MCFBR) in Costa Rica. The demand function was:

Q = f(P,X),

where,

Q is the quantity purchased, P is the price, and X represents a number of socio-economic variables which might shift the demand function, such as income or age.

The reserve management collected data at the reserve’s headquarters by offering those who gave their names and addresses the opportunity to win wildlife photographs. A total of 755 domestic visitors (out of approximately 3000) entered the draw in 1988. For the purpose of this study each of Costa Rica’s 81 cantons was treated as an observation. Visitation rates (number of visits per 100,000 residents) were calculated for each canton by dividing observed numbers of trips by census populations. The demand function for visits was assumed to be linear in this study:

V = a₀ + a₁P + a₂X₁ + a₃X₂ + e

where e is an error term assumed to be independent and normally distributed, and the two X variables are population density and the illiteracy rate. The above model was estimated using multiple regressions. The results are presented in table 13.

Box 11. - Considerations when using travel cost method

- It assumes that people will react equally to an increase in travel costs and admission fees. Thus, at a certain level of cost increase no one will use the park since there are other recreational options. This method therefore helps to calculate "optimal" recreational fees.

- May require local survey: data requirements are substantial. These are activities that can be both expensive and time-consuming;

- Estimated benefits reflect only the willingness to pay (WTP) of those who use the facility or the environmental resource (which may be a non-representative sample) and not the WTP of the society as a whole;

- Computationally difficult. It is susceptible to bias (e.g. double-visitation bias). Thus, it requires high expertise in economics and statistics to elaborate and apply the questionnaire and analyse and compute the answers.

Table 13. - Domestic demand for visits to Monteverde Cloud Forest Biological Reserve^a

Source: Tobias and Mendelsohn (1991): table 1, p. 93.

Notes: a The t-statistics are in parentheses. The number of observations (cantóns) is 81.

b. The low R² values are probably because of the lack of aggregate data. Unfortunately, information on socio-economic variables (which might explain differences in visitor travel behaviour) is unavailable.

This study concluded that Costa Rican citizens place a value of about US$35 per visit upon the MCFBR and that domestic recreation alone represents an annual value of between US$97,500 and US$116,200 (this estimate does not include foreign visitors). The authors concluded that the expansion of protected areas near the reserve was a well-justified investment "both from an economic and social perspective". If this conclusion is considered in terms of MCFBR being privately owned and that the value is being captured, its expansion can well be a justified investment. However, even if a good investment to the reserve’s owners, what are the implications of this expansion, for example, to people who sell their lands to the reserve? What would they do and where would they go for after selling their lands? It is possible that they would go to cities close to the reserve or to the capital, so perhaps leading to an increase in urban pressures and maybe even to promoting other environmental problems. It is very important to bear in mind that, although expanding the reserve’s area could contribute to preservation, there is also the possibility of new environmental and social problems being created.

With these methods, values are inferred from surveys of what people would be willing to pay to secure some environmental changes or what they would be willing to accept (WTA) to give it up. In the absence of real markets these surveys are carried out according to what is collectively termed "contingent valuation methods" (CVMs). The CVM allows the setting up of hypothetical situations.

4.5.1 Contingent valuation method (CVM)

CVM is used where prices are not available because markets do not exist, are not well developed or where there are no alternative markets. Under such conditions, market or surrogate market techniques are unable to value the effects of a particular project. According to Hutchinson et al. (1995), the CVM directly elicits people’s views to determine how much they might be willing to pay for a resource or service, or how much compensation they would be willing to accept if they were deprived of the same resource. Munasinghe (1993c) reports that "demand for nonmarket goods is established by first describing a simulated market to the respondents, and then asking them directly to reveal their preferences in terms of some common denominator". CVM has been successfully applied to the valuation of non-use values. An interesting problem discovered is that although theoretically WTP should be equal to WTA, empirical evidence suggests that they are not equal; WTA has tended to be significantly greater than the corresponding WTP. This disparity has been a matter of debate among economists⁴³ and should be kept in mind to avoid any confusion.

CVM has been subject to criticism for various biases⁴⁴. There are also some application problems in contingent valuation: where people are not used to purchasing a particular forest product or service, they find it difficult to attribute a monetary value to it. For example, a question on monetary value can be meaningless for many subsistence resource users. Thus, modifications are required in order to ask, for example, about relative preferences that can be easier to express than monetary valuations; such modifications require specific expertise. It is also important to bear in mind that "preference" is not synonymous with willingness to pay.

According to Brown et al. (1995), CVM is more effective when the respondents are familiar with the environmental good or service and have adequate information on which to base their preferences. It is likely to be far less reliable when the object of the valuation exercise is a more abstract aspect, e.g. existence value. Winpenny (1992) feels that the fact that CVM does not deal in the real market makes it "somewhat implausible for serious decision-making".

In order to overcome these criticisms, CVM has become diverse and sophisticated incorporating, for example, Delphi technique, take-it-or-leave-it experiments, bidding games, trade-off games and costless choice⁴⁵. Points to consider when using CVM are summarized in box 12.

Box 12. - Considerations when using contingent valuation method

- Estimates economic value directly;

- It is the only way to elicit non-use values directly;

- It can be helpful in economic decision-making, especially when other valuation methods are unavailable;

- Very susceptible to bias (e.g. strategic bias, scenario mis-specification bias, aggregation bias, starting-point bias). It requires expertise to detect and avoid, or at least minimize, these biases⁴⁶;

- Requires survey. Thus, it can be time-consuming and costly. Brown et al. (1995) reported, for example, that a well designed national CVM study intended for use as evidence in damage assessment litigation may cost several million dollars to design, implement, analyse and report.

Examples of the use of CVM, presented in annex 2, are focused on its application in a developing country context (examples 2, 3, 4 and 5).