Tuesday, May 31, 2016

Valuation

The topic for this week is non-market valuation.

Valuation means estimating what something is worth (to people, usually in dollars).

Non-market means that the goods or services that we are attempting to value are not traded in markets. That is, these are things of value, but we do not have prices to serve as signals of what they are worth.

There are a lot of misconceptions about the non-market valuation of natural resources of environmental goods and services.  The first and perhaps biggest misconception is that economists want to go around estimating the monetary value of things for no particular reason. This is far from true. We only attempt to understand the value of environmental goods and services when there is a reason to do so. For example, we might wish to understand the the tradeoffs that society faces for a development decision or a conservation project. Understanding the opportunity costs of lost environmental quality helps decision makers understand the worth of what stands to be lost.  Understanding the benefits of conservation (again, in dollar terms) helps us see if conservation initiatives are "worth it". In short, understanding the value of things can be useful for informing policy.

Another misconception is that if and when the monetary value a natural resource is estimated, this somehow "cheapens" the resource.  Again, I do not think this is true at all. Indeed, the default value of many environmental resources is zero, because many goods and services provided by the environment can be obtained for free. Valuation helps remind society that just because something is free, this does not mean it is not valuable.  

Finally, its important to consider that the process of non-market valuation is simply formalizing something that we do (implicitly) every day. For example, when you decide to drive your car instead of walking, you are implicitly stating that you value your own convenience more than you value the pollution that you cause by driving. On an aggregate level, when we vote for policies or politicians that favor other spending opportunities over spending on the environment, we are implicitly stating that we value those other things more than we value the environment. We even implicitly value human lives, including our own. When we choose to spend less money on road repair or highway safety, we are implicitly valuing human life. We could spend more money and have fewer people die, but we choose not to because it's "too expensive". When someone chooses to look at their phone when they are driving, they are revealing that they value that bit of information over their own safety and the safety of others. Our actions (individually and collectively speaking) reveal what we value.
The process of economic valuation makes the tradeoffs easier to understand and compare by expressing them in dollar terms.

Here are links to some good sources:

Why Economics Matters for Endangered Species Protection (Shogren et al., 1998)

The Role of Economic Valuation in the Conservation of Tropical Nature (Naidoo, 2008)

Conservation Pays (Yuskavitch, 2007, Defenders of Wildlife)

Marine Conservation: How Economic Valuation of Ecosystem Services Can Help (Environment Matters, 2008)

Can Environmental Economic Valuation Techniques Aid Ecological Economics and Wildlife Conservation? (Loomis, 2000, Wildlife Society Bulletin)

Of additional interest:

Economic Incentives and Wildlife Conservation (Bulte et al., 2003)

Tons of references and links here:  Economic Valuation References WRI

Information on coral reef  valuation can be found here and here and here and here.

Valuation and the endangered species act here.

More on the economics and value of endangered species here and here.


This is a tiny fraction of what's out there. What are your thoughts on valuation?  I'd especially like to see if students from different backgrounds look at valuation differently. When you post a reply, let us know your primary field of study. 

13 comments:

Jordan Zaiser said...

In reading about valuation, I find it interesting that many different things can change the value of a resource. Governmental policies, technological advancements, and the economy can change the value of a resource. Even changes in society and consumer demand can push for different value on certain resources over time.

I also find it interesting how value is measured by different people in a society. Some resources are valued by the amount of profit they provide for an industry (e.g. oil), but some are value for the aesthetic value (e.g. forests or migratory birds).

Being a History and Economics major, I prefer to focus on the evolution of environmental consciousness (e.g. Conservation and Environmental Movements) in the U.S. in relation to different time periods.

Hannah Imhoff said...

It was interesting to read about valuation because I find myself doing this quite frequently in regards to the wild life and endangered species. I never knew what I was doing was actually a part of economics. After reading through a little bit of "Why Economics Matter for Species Protection", I have to say that I think valuation is a great thing for everyone, not only economists, to learn and consider when making every day decisions, especially those that effect the wildlife and nature around us.

I am a Communication Studies major and am minoring in Economics so that doesn't really correlate with why I'm so passionate about endangered animals and wildlife but I'm glad to know that my way of thinking fits in with my minor.

Lexie Dempsey said...

I think that valuation is an absolutely detrimental aspect of decision making not just for environmental situations, but general social ones too. It is essential to know what things are worth to people in order to make the best decisions for society. Examples of issues that need valuation range from the value of a new highway to the value of gender equality. As a statistics and economics double major, I am deeply interested in non-use valuation techniques. I think that the contingent value method and choice modeling are fascinating because they use statistical methods to analyze a variety of situations. They are very versatile tools from which the researcher can evaluate values of a wide array of topics. These techniques are extremely important for environmental affairs, but I am also intrigued by their adaptability into other topics.

Nicole Ruest said...

Valuation is something I do on a daily basis without much though, so learning about all of the different ways people place values on things has helped me become conscious of that decision-making. For instance, when I'm driving and hear my phone buzz, I make a conscious effort to wait until my car is safely stopped to read/reply to a message. I know that it's not safe to text and drive, so I just don't do it. But I don't normally consider all of the different ways my safe driving has value (like reducing my risk of collision, traffic violations, or other potentially dangerous impacts of driving.) Now that I have some background information on the concept of valuation, I will probably put more thought into my decisions. For instance, how much do I value my safety and the safety of those around me when I make the decision to speed on the highway? I think valuation not only allows people to weigh the risks and benefits of their choices, but in some cases adds a healthy dose of guilt into the decision making process (if I consider everyone I could possibly negatively effect through an action, I may decide it isn't worth the potential benefits of said action.)

I am an Environmental Science major, so I place a high value on the health of the environment by default, and almost always believe that the positive effects of conservation outweigh the associated costs. I don't believe that one/ a few people's monetary gain is worth the health and well being of the human race.

Austin McGrayne said...

The topic of non-market valuation is an interesting one. Reading through Dr. Schuhmann's comments about valuing a text message on your cell phone (while driving) over driving itself, gives a real value to the action of reading that text.

The value is implicit, but it can still be figured in because, as Dr. Schuhmann said, by reading the text you are implying that you care more about the message, then you care about the safety of yourself and the safety of other drivers. To me, thats the best way of looking at that situation because it takes the focus away from the individual and puts it on the greater good of society; and in that certain situation, society as a whole can be greatly damaged if something goes wrong (individual drives off the road because their no paying attention) while the individual can only be marginally benefitted (if you believe reading that text is actually beneficial). With non-market valuation an actual value can be put on the situation so it easier for people to see that NOT reading the text message is much more beneficial to society then reading the text message is.

I also read into The Role of Economic Valuation in the Conservation of Tropical Nature by Robin Naidoo, it highlighted some benefits and oppositions that must be considered when talking about non-market valuation. The benefit that always come to mind when talking about Tropical Nature is conservation of Biodiversity. Biodiversity offers many benefits to humans that would not otherwise be available if it didn't exist, like rare medicines, oxygen to breathe, flood control, and habitats for endangered species, esc... However this reading highlighted the oppositions to non-market valuation more so then the benefits.

One opposition to non-market valuation is the credibility and of the economists and conservationists putting value on non-market goods. Since the parties involved normally have the interest of conservation, sometimes motives can be misconceived and scientific methods may be changed to reflect the conservation interest. And when economist and conservationists are revealing their results to developers or politicians who don't share the same conservation interest, their numbers need to be as unbiased as possible as to reflect the true value of non-market goods.

Another idea associated with credibility is sometimes non-market valuations can be to lofty. When this happens all parties involved may show to high of expectations and when actual dollar values start to come in and they are lower than expectations the credibility of economists and conservationists start to be questioned

A second opposition highlighted by Naidoo is that sometimes there is a lack of understanding by the involved parties between social benefits and private benefits. The big idea here is that social benefits can be much harder to quantify than private benefits, but the social benefits are normally MUCH larger than the private benefits.

Thirdly, Naidoo sheds light on the procedures of non-market valuation. In my opinion, this ties back to the first opposition of credibility. He talks about a lack of understanding on the procedures and that the results yielded from such studies provide false information; which hurts conservation as a whole. He also talks about bias again, stating that the people involved in non-market valuation usually have an interest of conservation and thus lets their interest sway their methodology and so their results are not true representations of the non-market good in interest.

Dr. Peter Schuhmann said...

Great post Austin! I hope that economists involved in non-market valuation studies do so in an objective and unbiased way. I think that most do. That is, we let the numbers speak for themselves, however they turn out. Sometimes valuation studies show that the benefits of conservation outweigh the costs, but this is not always the case. The truth is that not all conservation is worth it. We know this with certainty on a micro-level... very few of us walk everywhere and completely shun market goods and services that damage the environment. As for myself, when it comes to my work as a natural resource economist, I try my hardest to remain completely unbiased. I consider myself an analyst, not an advocate. If I were to start advocating for environmental conservation in all situation without first conducting sound analysis, no one would have any reason to believe any of my empirical work. That is, in order to be a credible and trustworthy economist, I cannot be an advocate for conservation unless the numbers unequivocally suggest that conservation is the best course of action.

Logan Plummer said...

Along with what Hannah was saying, I believe valuation is a key aspect of keeping resources around. In this day in age people are just looking for what has the biggest dollar value and without valuation it could be easily overlooked that natural resources do hold value even when be preserved.

Patricia Pierce said...

Valuation seems to be an important part in protecting our environment because it shows what people are really willing to give up in order to have a good or protect natural resources. However, I think that stated preference methods are less reliable ways of finding how much someone values a resource compared to revealed preference methods. You can better learn how much someone truly values the Earth by actually watching them recycle a soda can compared to asking them if they think recycling is important. Actions speak louder than words.

Dr. Peter Schuhmann said...

Patricia, what you say is indeed true. Given the choice I think all resource economists would prefer to operate in the world of revealed preference. People's actions provide defensible evidence of what they value. However, recognizing that non-use values are an important component of total economic value, and that these values are important to understand in many policy situations, we are left with no choice but to employ stated preference methods for their estimation. This is actually the subject of great debate... is having some number (estimated via CVM or CE and potentially biased) better than having no number?

Marc Monace said...

Now that I have an understanding for valuation, I'm having a hard time understanding why we have things like ethanol. The crops we grow are so valuable in terms of feeding the population, plus it has enormous non use value as well. How do governments justify using these crops for fuel? Is their another angle to this?

Evan Schillmoller said...

Marc, I believe the distinction comes in when you consider the amount of food options we have as compared to the amount of fuel options. Food is in a much more abundant supply, and we're able to grow more of it when we need to. Alternative fuelling options are so valuable because, as we all know, fuel is not a renewable resource, and once it's gone, it's gone. Not to mention, by using fuels we generally add to it's value when you consider that we're able to travel and move things around with much higher efficiency.

Ryan Grim said...

The valuation of a non-market item (even if it is biased) is better than having no number. With no number people tend to think of something as having no value. We have to have things turned into dollar signs or we don't have a good understanding of worth. When comparing conservation value to the value of developing something it is important to have a common ground value to look at.

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