The implicit market approach assumes the linkages between the marketed goods and services and the non-marketed goods including ecological, biological, and environmental values. In this situation, changes in ecological, biological, or environmental quality is reflected in prices of consumer goods, such as houses, land, and wage. Some of the common techniques used include the travel cost method, hedonic pricing method, and wage differential method.
The travel cost method (TCM) seeks to determine the value of a protected area, such as recreational forest. Theoretically, the demand for a recreational site (e.g., number of visits per year to a forest area) is a function of exogenous variables like uniqueness of the area, transportation cost, income, age, educational level, and socio-economic characteristics of the users. Data should be collected in the actual area affected through intensive surveys of the users. The price is usually the sum of the entry fees to the site, cost of travel, and opportunity cost of time spent. The economic value (consumer surplus) of a protected area is estimated once the demand curve is derived from the survey. It should be noted that this economic value is site specific and cannot be used to proxy the value of other protected areas. The individual or zonal travel cost method can be used to value recreational benefits of forest recreation areas, national park, marine parks, or any recreation-related activities.
The hedonic pricing method (HPM) is also known as the property value technique. The basic idea of this technique is that prices of land and properties (house) can be influenced by different characteristics of land, size, air, water quality, and other characteristics of forest or biological resources. The marginal willingness-to-pay for improved environmental benefits (due to better environmental quality) is reflected in the increased price of property in better environments (i.e. implicit prices of the characteristics of a property). This technique requires a competitive property market, significant number of transactions per unit of time in relation to the size of market, and good data availability concerning all relevant variables that affect property price.
Read and understand the following presentation:
Travel Cost Method.
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Hedonic Pricing Method.
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Read the following articles:
Dwyer, J.F., Kelly, J.R., & Bowes, M.D. (1977). Improved procedures for valuation of the contribution of recreation to national economic development. WRC Research Report No. 128. Urbana: University of Illinois.
Garrod, G. D., & Willis, K. G. (1992). Valuing goods’ characteristics: an application of the hedonic price method to environmental attributes. Journal of Environmental management, 34(1), 59-76.
Garrod, G., & Willis, K. G. (1999). Economic valuation of the environment: methods and case studies. Cheltenham: Edward Elgar Publishing. ISBN: 1 85898 684 2
Haab, T. C., & McConnell, K. E. (2002). Valuing environmental and natural resources: the econometrics of non-market valuation. Cheltenham: Edward Elgar Publishing. ISBN: 1 84064 7043 5
King, D., & Mazzotta, M.J. (2000). Ecosystem valuation. Washington D.C: US Department of Agriculture and NOOA. Retrieved from http://www.ecosystemvaluation.org/travel_costs.htm
King, D., & Mazzotta, M.J. (2000). Ecosystem valuation. Washington D.C: US Department of Agriculture and NOOA. Retrieved from http://www.ecosystemvaluation.org/hedonic_pricing.htm
Pandit, R., Polyakov, M., Tapsuwan, S., & Moran, T. (2013). The effect of street trees on property value in Perth, Western Australia. Landscape and Urban Planning, 110, 134-142.
Rosen, S. (1974). Hedonic prices and implicit markets: product differentiation in pure competition. The Journal of Political Economy, 82, 34-55.
Tyrväinen, L., & Miettinen, A. (2000). Property prices and urban forest amenities. Journal of Environmental Economics and Management, 39(2), 205-223.
Bateman, I. J., Carson, R. T., Day, B., Hanemann, M., Hanley, N., Hett, T., Hett, T., Jones-Lee, M., Loomes, G., Mourato, S., Özdemiroglu, E., Pearce, D.W., Sugden, R., & Swanson, J. (2002). Economic valuation with stated preference techniques: a manual. Cheltenham: Edward Elgar Publishing, Inc. ISBN 1-84376-919-4
Champ, P. A., Boyle, K. J., & Brown, T. C. (Eds.). (2003). A primer on nonmarket valuation (Vol. 3). Dordrecht, The Netherlands: Kluwer Academic Publishers. ISBN 0-7923-6498-8
Dixon, J. A., & Hufschmidt, M. M. (Eds.) (1986). Economic evaluation techniques for the environment. Baltimore: The John Hopkins University Press. ISBN 0-8018-3352-3
Please answer the following self-reflection questions. After formulating your answers, you may post them online at the Knowledge Café for this course as a way to share your ideas and glean knowledge from other students’ responses.
SrQ#3.1: Why is the travel cost method only appropriate for valuing direct use value?
SrQ#3.2: Do you think that we should include all the costs, including travel time, in the travel cost method as well as time spent on-site? If so, how do you want to value the cost of time in the travel cost method?
SrQ#3.3: What is the appropriate attribute of environmental characteristics that can be included in the hedonic pricing method for valuing the amenity benefit of forest ecosystem?