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Environmental Valuation: Total Economic Value
178.242 Land Economics - Assignment One
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INTRODUCTION

The leading economic measurement tool of environmental value is contained in the concept of total
economic value (TEV). TEV acknowledges the presence of optional and non use values alongside
traditional use values within existing or proposed environmental contexts. This demonstrates that
environmental decision theory has progressed to include measurement of the majority of factors
present in both the natural and physical environment that together contribute to human well-being.
However, valuing the environment is a hotly contestable subject, “Some of the biggest
environmental policy questions focus on this valuation issue” (Kahn, 2005, p. 53). The challenge to
the integrity of such policy decisions is the robustness of analysis where environmental goods are at
stake. Can economics truly integrate the multidimensionality of the environment into a quantitative
measure that has credibility in social decision making? This essay critically reviews the concept of
(TEV) as well as the methods developed for establishing monetary integers used to value proposed
change to the physical and natural environment.

THE CONCEPT OF TOTAL ECONOMIC VALUE

When a change in the environment is proposed welfare economics attempts to answer the question
- “will allowing this change mean society is better off?” While there is incomplete agreement on the
TEV environmental valuation method, (Edward-Jones, Davies, & Hussain, 2000, p. 85) there is
acceptance that the method include traditional economic use values and the more intangible non
use values as set out in Figure 1. Direct Use, describes a removable product in nature such as timber,
fish or water. Ecological Value is a non-removable product in nature such as a sunset or waterfall.
Option Value is the value in the ability to use the environment at some point in the future.
Traditional economic valuation is then applied to the environments non-use values including:
Existence Value, which is the social benefit derived from simply knowing that a certain good or
service exists or an environmental quality or habitat exists (i.e. endangered species protected) and
Bequest Value, being the value of satisfaction derived from the knowledge that an environmental
quality or habitat is preserved for others and future generations.

Figure 1. The concept of Total Economic Value of the environment. Source: (Plottu & Plottu,
2007).

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The TEV of the environment, as represented in Figure 1, is expressed as the summation of these
value categories or the sum of all benefits obtained from a resource. TEV = Direct Use Value +
Ecological Value + Option Value + Existence Value + Bequest Value.

Difficulty arises in society’s acceptance of the methods used to arrive at realistic results for the non-
use values in particular. This is due to the complexity in integrating the multidimensionality of
environmental value into rational decision making by the surveyed public. Questions surround the
ability for the TEV concept to take into account decision making matters that lay beyond or behind
the methods for deriving use values and the credibility of those values are necessarily questioned.
Credibility of the use values resides in the ability for inclusion of reversible, irreversible and
patrimonial choices of society (Plottu & Plottu, 2007).

Economists are often criticised for ‘monetarising’ the environment (ascribing monetary values to
environmental characteristics), suggesting this method of quantifying environmental value is “better
than nothing”. However, it is not the environment that is being valued as much as the people's
preferences for changes to occur in their environment and their preferences for change to take place
in their lives (The Centre for Social and Economic Research on the Global Environment, 1997, p. 6).
The economists theory is that if the environment is not monetarised then no economic calculation
can be performed and thus components of the environment that have important economic and
social value will automatically be excluded from the resource allocation decision making process.
While the TEV technique is the preferred method of environmental valuation by many, its critics
believe TEV requires to be modified to produce a valuation protocol approved by interdisciplinary
co-operation of the natural sciences so a balanced set of information can be agreed which will form
the basis of survey referenda for environmental decision making (Bishop & Romano, 1998).

While there is social angst toward current valuation theory of environmental resources there is a
maturing science developing that could be used effectively by policy and decision makers involved in
reallocation of scarce environmental resource. Greater understanding and trust of environmental
valuation methodology is required by the potentially affected parties, particularly where society is
required to reveal their preferences when environmental change is proposed. Economists measure
this preference for change and the willingness to accept change in order to determine the value or
cost of change in the environment to society. This is done by using econometric methods of
preference measurement of the market and non-market components of the environment which in
turn inform the use values and non use values of the TEV concept. While the consistency in accuracy
of these measurements is still misunderstood by many better understanding will evolve as greater
use of the method will encourage its refinement.

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VALUATION METHODS
Methods used for valuing the environment are based the assumption that society is willing to pay
for environmental improvement or accept compensation for environmental impacts. The use of
revealed preferences and stated preferences methods are used to determine the value of a
proposed environmental change to the affected society. Figure 2 represents the appropriate
methods of analysis including the market based method, the surrogate market based method and
the non-market based method.

Figure 2. Environmental Valuation Methods. Source: (National Oceanic and Atmospheric

Administration).

Market based methods of valuation, where applied to market based environmental resources, are
generally ascribed monetary values without general concern due to the abundance of source data.
Surrogate market methods of valuation, where there is an absence of clearly defined markets and
non market values, are the most contentious and require strong justification if the values derived are
to be accepted by decision makers. This is because the underlying motivation of respondents in
these markets is unique to personal circumstance and as such is not an ‘arms length’ source of
valuation information.

THE SURROGATE MARKET

Valuation of the surrogate market, such as using the Travel Cost Method (TCM), asserts that
recreational experiences may command prices. However, concern surrounds the treatment of
multiple purpose trips and the estimation of the value of time of in research results. The Hedonic
Pricing Method (HPM) recognises that the value of a large number of environmental goods is a
function of a bundle of characteristics but there are questions over whether researchers have
identified correctly the quintessential bundle of characteristics pertinent to the community affected
by the proposed environmental change. Defenders of the methodology declare the HPM method
uses statistical or econometric techniques to isolate the value of each characteristic.

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Recent technologies have improved valuation methods. For example surrogate market pricing of an
environmental good or characteristic, while typically being open to some debate, has the benefit of
being quantifiable through spatial econometrics and the use of geographical information systems
(GIS) to increase accuracy of the resulting values (Atkinson, 2008). While the likes of GIS technology
increases accuracy, the monetarisation of non-market based environmental resource remains
contentious often because of the low percentage of sample respondents and the perceived bias in
the sample.

Non Market Methods

As shown Figure 2, it is not feasible to use the revealed preference approach to measure non-market
value. Stated preference methods of analysis are generally used in this regard, including the more
accepted contingent valuation method (CVM), often used independently or in recent times jointly
with an emerging method called the Choice Experiments Method (CEM). CVM is based on survey
responses to a proposed environmental change. Critics of the method point to the method’s inability
to detect “free riding” as well as pointing out the potential for strategic, hypothetical and
embedding of biases that are often considered to be contained in the survey results. However, CVM
is the only approach available to measure benefits of environmental protection based on existence
values (Goodstein, 2002, p. 149). CVM has been credited with being able to elicit survey responses
and reveal types of benefits that other methods cannot (Mitchell & Carson, 1989). A perceived
weakness of CVM is the reliance on the survey respondent accurately relaying their response in the
terms of willingness to pay (WTP) for or a willingness to accept (WTA) an environmental change in
the specific environmental resource under consideration. In addition the CVM survey is hypothetical
and there is a perception that the respondent is considered not to be responding with the same
consideration that would be given to a real world transaction. This has lead to questions over the
realism of CVM results (Diamond & Hausman, 1994) (Oglethorpe & Miliadou, 2000).

Another non-market valuation approach is the Choice Experiments Method (CEM) which combines
characteristics theory of value with random utility, theory where respondents are asked to choose
between different bundles of environmental goods which are described in terms of their attributes
or characteristics of which one is price (Hanley, Wright, & Adamowicz, 1998, p. 414). The CEM
employs a series of questions with more than two alternative choices designed to elicit responses
that allow for the estimation of preferences over attributes (as opposed to ranking or rating them) of
an environmental outcome (Adamowicz, Boxall, Williams, & Louviere, 1998, p. 64). The main
concern with the CEM is there being the possibility the value of the total environment being greater
than the sum of its attribute values. This criticism is particularly relevant where the range of choices

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open to a respondent in a CEM survey are more than an individual can be reasonably expected to
consider (Hanley, Wright, & Adamowicz, 1998, p. 417). More recently observations of CVM and CEM
applications suggest CEM may also suffer from the alleged problem with CVM surveys, namely
hypothetical bias, although it is proposed that a cheap talk script can significantly decrease the
potential for preference surveys to suffer inflated value results (Carlssona, Frykblomb, & Lagerkvistb,
2005). Much of the literature indicates that preference sampling methods do not of themselves deal
with the rationale behind the elicited responses. For the latter reason there is a growing acceptance
that revealed preferences and stated preference responses are highly complementary and can be
used in joint estimation of preferences (Louviere, Hensher, & Swait, 2000). Combining revealed
preference and stated preference response data enhances the unique strengths of these respective
data while minimizing their limitations.
CONCLUSION
Environmental valuation techniques assume that society’s individuals are self-interested and
demonstrate preferences of how much society values environmental goods and services and
therefore human welfare. The use of monetary methods, such as TEV, has become a key method of
converting people’s values of the environment into measurable terms that can inform
environmental policy. From the literature reviewed it appears that TEV methods have become more
reliable in quantifying the acceptability for change in the environment within a society. The reason
for the improvement in TEV is the advancement in the understanding of methods used to uncover
the value of surrogate and non-market preferences. The challenge now will be to integrate the
multidimensional results of environmental value into rational decision making. It is suggested this
challenge could benefit most from interdisciplinary collaboration between psychologists, survey
researchers, market researchers, economists, and econometricians to produce standardised
research models that are robust to community criticism and whose results will have the confidence
of decision makers.

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REFERENCES
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Passive Use Values: Choice experiments and contingent valuation. American Journal of Agricultural
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Atkinson, G. a. (2008). Environmental Cost-Benefit Analysis. Annual Review of Environment and Resources , 33,
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Diamond, P., & Hausman, J. (1994). Contingent Valuation: Is some number better than no number. Journal of
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