CHAPTER 2

Economic Value of Wetlandsi A Review of Literature

Despite Wet|and’s ecological and economic significance, they were traditionally

viewed as “wastelands” that could be sacrificed for the sake of increasing social

welfare. The recent attempts of natural and social scientists to highlight the

significance of these ecosystems have drawn various procedures andmethodologies to account for the sustainable uses of these ecosystems indevelopment projects. While the ecologists targeted on identifying variousecological functions and services of wetlands to establish their economic and

social relevance to humanity, economists were mainly engaged in evolving

procedures to attribute monitory values to such uses. The objective of thischapter is to survey briefly relevant literature on the economics of wetland

valuation. The chapter is divided into four sections Section 1 presents a brief

survey of studies dealing with economic valuation of wetlands. ln doing these

surveys, special care is taken to explore the major issues of wetland valuation

and the various theoretical approaches developed to address them. Section 2

brings together the major findings of various case studies on wetland valuation to

highlight how these studies are useful in planning and managing wetlands. A

brief note on the limitations of the approach and reasoning for using the valuation

framework is presented in section 3. This is followed by a brief summary of the

chapter in section 4.

2.1 Economic Valuation of Wetlands: A Methodological Review

Economic valuation “is an attempt to assign quantitative values to goods and

services provided by environmental resources, whether or not market prices are

available to assist us. It is conceived of as putting a number, either on an ordinal

15

or cardinal scale, on the utility accruing from current production, which may be

either consumed or saved" (J. S. Mill). According to environmental economists,

wetlands deliver a variety of direct and indirect benefits to various sections of the

society and therefore the process of assigning monetary values invoke moral and

ethical arguments. Economic value of an ecosystem function or service is thecontribution it makes to human welfare and is measured in terms of each

individual’s own assessment of his or her well being and what one is willing to

pay for the commodity, less what it costs to supply it (Smith, 1995). Freeman,

(1993) pointed out that wetland's value is the sum of the present values of the

flow of all private goods and non-marketed goods and service from this natural

system. These arguments led to the development of the general taxonomy of

Total Economic Value (TEV) that represents the economic value of wetlands‘.

2.1.1 Total Economic Value (TEV)

8Several economists (Krutilla, 1967; Boyle and Bishop, 1987; Bateman and

Turner, 1993; Freeman, 1993) have offered well-composed definitions of total

economic value and the relationships among its components. Total economic

value of a wetland area is the sum of the amount of money that all people who

benefit from the wetland area would be willing to pay to see it protected(Whitehead 1992). Accordingly, it is the sum of its direct, indirect, option and

existence values (Pearce, 1991). ln this sense, estimating economic values

would guide resolving the fundamental issues of wetland uses and abuses

Economists disagree on the components that constitute economic value.Broadly, environmental values can be broadly split into use and non-use values

‘ The total economic valuation fi-amework is a means to identify different uses and services, which oould bepotentially provided by an environmental good or service and to facilitate an understanding of the origins ofdifferent wetland values. it helps to ensure that all-important values are accounted for in the valuation exercise.

16

(Pearce 1993; Barbier, 1994). The former is further divided into direct use valuez

and indirect use values depending on whether the resource is used as an input in

production or directly as consumption good or for protecting or sustaining

economic activity indirectly (Barbier et al., 1997). Option value is defined as the

value of actually retaining the good for future consumption and expected value of

future consumption of the good (Weisbrod, 1964). It is the value an individual

places on the environment for future consumption. lt represents an individual‘s

willingness to pay to maintain the option of utilizing a resource at some time in

the future. Quasi option value“ refers to uncertain future benefits (Torras, 2000).

Existence value,5 the most debated component of non-use value, is commonly

used to denote the value individuals place on the environment unrelated to its

present or future use (Turner et al., 2000). it represents an individual‘swillingness to pay to ensure that some resource exists. Part of this motivation

may be the desire to bequeath the resource to future generations (Bishop 1987).

Non-use value on the other hand refers to the monitory gain to people who derive

satisfaction from the mere existence of a resource, even though they may never

see it or consume any product obtained from it (Boyle and Bishop, 1987“; Pearce

1993). Two broad types of non-use values - ‘existence value’ and ‘bequest value’

- are recognized (Weisbrod 1964; Krutilla 1967).

2 Direct use value includes goods input in production or good consumed directly such as fishery resources, paddy,mangroves etc and services such as recreation, tourism and ferry etc.

3 Economists often disagree on what constitutes each type of value. According to Aylward and Barbier (1992), thedistinction between components of indirect use values lies predominantly in the support function of ecologicalsystems on the one and their protection function on the other hand. Farnsworth et al. (1981) used the tern‘inherent’ value instead of indirect value. Costanza ct al. (1997) refers to them as “Infrastructure values” of anecosystem while Norton (1986) used the term ‘contributory value’.

‘ Quasi-option values also exist according to some economist. It is the value of obtaining better information bydelaying a decision that may result in irreversible environmental loss (Walsh et al., 1984).

5 Only in I967 was existence values identified as a potential benefit of natural assets. They were altogetherunknown before that date (Krutilla, 1967). Existence value have been variously defined in the literature as bequestvalue, cognitive value, non-patemalistic altruism, patemalistic altruism, option value, intrinsic value, ethical,moral and social values (McConnell, 1983; Randall and Stoll, 1983; Smith, 1987; Boyle and Bishop, 1987;Loomis, 1988; Stevens et al., 199i; Bishop and Welsh, I992; Kopp I992; Freeman, I993; McConnell, 1997;Kramer and Mercer, 1997; Turner et al., 2000).

17

Although the “total economic value taxonomy" is the forerunner in wetland

valuation, economists have pointed out two serious obiections to this approach.

First, some economists object to using a framework with classification of values

into use and non-use values. This is not fully satisfactory since it does notexplicitly differentiate between alternative life-support functions of anenvironmental resource (Gren et al., 1995) and therefore fails to reflect Total

Primary Values (TPV) of the ecosystem (Turner et al., 1993). But going beyond

total economic value to measure the extra ‘glue value’ that comprises total

primary value is extremely difficult (Barbier, 1995). Secondly, wetlands being

complex systems, simple aggregation of the value of ecosystem benefits are not

acceptable since some functions are pre-conditional to others (Gren et al., 1995).

Departing from the conventionally followed definition of the components of total

economic value, Maler (1992) distinguished between values revealed by markets

and those not revealed by markets.’ His argument was that estimations could be

made of benefits based on observed behaviour, but lack of complete knowledge

about ecosystem services made it impossible to value the whole system.

As noted, most objections raised were regarding the components of TotalEconomic Value rather that the framework as a whole. It has been accepted and

used by many economists as a first step. Hence, it provides a useful framework

and starting point for a wetland valuation study. Figure 2.1 below presents the

famous taxonomy for estimating the total economic value of wetlands.

6 Although a lack of consensus exists with regard to the components of Total Economic Value, academiciansgenerally agree that a clear distinction exist between the concept of Total Economic Value and Total Value of anecosystem (Tumer et al., 1993). Total Value of a system is much more than just an aggregation of its individualparts and includes a ‘glue value’. Most studies conclude with the observation that only a part of total wetlandvalues can be captured in monetary terms and this part is referred to as total economic value.

7 The former referring to those values obtained fi'om observed market behaviour while the latter refers to all othervalues that can never be revealed from observing individual behaviour in markets.

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Fig. 2.1

Taxonomy of wetland valuation

Total Economic Value

UM Val1lM '- C-------............. . ..............................

----1 ............... ·························r················

0;_ I U .. Inclifed use ValUes

V.'ues (FuncIional vatues)

1 ............ -1 ............................... -, r--' ....... , &onn ptOtedion,

FIItI. Fuel wood. Nutrienl Trapping. RectHtion, Feny etc. HabltatlNlAeIV

Flood control etc

I M8fII;. analy$l$, Travel Cos, Method • ContingenI Valuation Method, Changes In produdIvily, Hodonlc prices, Energy Analysis . Dam. COIls avoided. ReplaOllmlKt costs, Damage cost. Preventive oxpendilunt, Indirect SobsbMe Approach, ContIngent Valuation Indirect Oppoftunity Cost Approach, M""'"

Source: Adapted from Barbier (1994) and modified

2.1.2 Valuation methods

Oplion, Quasi Option V.IUIIS

Existence, Bequest v ......

.............. J ....................... J-............. . Futu,. :::: Inclnct 1

.. -KnowtedgIl of conGn .... J I I

IndNIOual CMice Model, I Conditional Value DI Contingent Information Models. ValUation Cootingent Valuation M~"'"

~"'"

An importanl advanlage of using this framework is its ability to identify all the

relevant benefits and value them using appropriate methods'. Valuation

techniques are essentially divided into three broad classes. namely the physical

linkage. abatement cost and the behavioural linkage methods. Figure 2.2 depicts

various methods of valuation.

Valuation methods may originate rrom economics. ecology. social psychology. philosophy or other disciplines (B ingham et al.. 1995).

19

Fig. 2.2 Valuation Methods

Valuation Methods

Physical Bchax-"iouralI ,inka§2§E Linkage(Scientific) (liconontie)

Revealed StatedPreference Pref ercnce

Source: ESCAP (1997)

2.1.2.1 Physical Linkage and Abatement Cost Method

ln the physical linkage model, the value of an ecosystem is measured using

physical measures such as energy, biomass etc based on linkages or causal

connections between the physical effects of an environmental change and its

effect on other factors such as processes or persons. The objective is tomeasure changes in net benefits as revealed in physical terms or market prices

caused by environmental damages/improvementsg.

A second set of methods found in the literature, is the damage cost orreplacement cost methodsw. It is based on the view that the cost of abating an

environmental damage would estimate the value of the damage- Value is

9 Such studies employ energy analysis methods (EAM) and ecological modeling to value ecosystem assets bydirectly relating to their energy processing abilities.0 . .

1 This metliod 1S also referred to as Damage cost or Dose Response approach.

20

reflected in the proxy costs of providing, maintaining or restoring environmental

goods and services (Bishop, 1998).

Since boththese methods use the biophysical and functional relationships as thebasis of value rather than an attempt to measure the environmental value of

resources, economists do not generally favour these methods for wetlandvaluation.

2.1.2.2 Behavioural Linkage Method

The behavioural linkage methods, on the other hand, assume that the value of an

environmental good should be based on people's willingness to pay (V\fl' P) to

secure better environmental quality or to escape deterioration. These techniques

estimate behavioural parameters“ that reveal preferences directly (market

prices, net factor income, cost of avoidance), or indirectly in the market (travel

cost method and the hedonic price method) or are stated in a survey (contingent

valuation, choice experiments and conjoint analysis).

2.1.2.2 (1) Market Based Techniques

Price is the value in exchange of a good or service. Market based methods

therefore use'market prices for valuation. These methods have the advantage of

easy applicability as well as simplicity in methodology. Most of the calculations

can be done using simple accounting techniques like change in productivity”

The usefulness of any particular classification depends upon how well it illuminates important similarities anddifferences among types of service flows. Mitchell and Carson (1989) have otfered classification of methods forestimating values that are based on two characteristics of the method. The first characteristic is whether the datacome fiom observations of actual human behavior. The second yields monitory values directly or must be inferredindirectly through technique based on models of human behaviour and choice.

'2 The basic assumption of this method is -that mvironmental changes cause changes in productivity of resourcesand/or environmental goods or services. in such a case, the cost of environmental change is estimated usingmarket prices, provided these resourcesl environmental goods and services have a direct market value.

21

(Barbier et al., 1993), production function approach“ (Barbier, 1994; Bell, 1997),

present value generated per unit area“ or the residual rent approach“.Annexure 2.1 provides details.

2.1.2.2 (2) Non-Market Based Techniques

[a.] Revealed Preference Methods

Non-marketbased techniques are broadly classified into revealed preference

and stated preference approaches. The revealed preference approach infers

value of the missing markets for environmental resources from data onbehavioural changes in actual markets related to the resource/service in some

way. The value of an environmental amenity is estimated directly or indirectly

from the purchase price of a commodity whose market value at least partly

depends on the quality of the environmental amenity in question. Threeapproaches - travel cost, random utility and hedonic price models - are worth

mentioning.

In this approach, the environmental attribute (soil stability, water quality, etc) is considered as an input in theproduction fimction, which relates the output of a particular marketed good or service (for example wetlandagicultural production, fishing catches) to the inputs necessary to produce it. The effects of the other factorsaffecting production can be incorporated into the production function as well. Although this method is verypopular and widely applied, it is not commonly used in multiple use systems such as wetland studies especiallythose measuring total economic value since its application is slightly more problematic (Mater, I992; Aylward andBarbier, 1992; Barbier eta1., 1993; Barbier, 2000).

I3

1‘ Under this method, the gross value of change in production over the time period the environmental changeoccurred is calculated for each time period and discounted to get the present value. Then the total gross value perunit area is calculated by dividing the change in production by the total area affected. This method is applicablewhen the aflected resource enters the consumption process with a minimum additional cost. This approachhowever, ignores the cost of inputs, which are expended in extracting the resource.

*5 In this approach, the cost of extracting or harvesting the resource is subtracted from the market value of theresource. When the extraction/harvest costs includes labour costs (as usually would be the case), it is theopportunity cost of labour and not the market wages that is considered.

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The travel cost methodls (TCM) is often used to measure direct uses of wetlands

such as the recreational benefits. This method attempts to place a value on a

non-market environmental good (such as a recreation site) by drawing inferences

from expenditure made to “consume” the good, including the cost of traveling to

the site, entry fees, on~site expenditures and outlays on capital equipment (such

as fishing equipment or a boat). It translates the physical, psychological and

social benefits generated by the individual use of this non-marketableenvironmental resource for recreational purposes, into monetary terms. Anumber of studies were conducted in different parts of the world to estimate the

recreational values of wetlands (Farber, 1988; Amacher et al., 1989). Seesection 2.2 and chapter 6 for details.

The Random Utility Model (RUM) is conceptually similar to the travel cost model.

They seek the same kind of values and use similar logic. However, instead of

focusing on the number of trips a tourist takes to a given site in a season, these

models focus their choice amongst the discrete alternative recreational sites.

This type of model is particularly appropriate when there are many substitutes

available to the individual and when the attempt is to value a change in the

quality characteristics of one or more site altematives.

'6 The travel cost method originated in a letter from Harold Hotelling to the director of the US Park Service in 1947,but was-formally introduced in the writings of Trice and Wood (1958) and Clawson and K.net$ch (I966). Sincethen, all research on travel cost methods in the last 50 years have attempted to elaborate on the original suggestioneither theoretically or empirically. Hotelling suggested measuring differential travel rates according to traveldistances that visitors overcome in reaching a site. Exploiting the empirical relationship between increased traveldistances and associated declining visitation rates should permit the estimation of a true demand relationship. Itwas generally believed then and is still believed that development of a method to measure economic values ofoutdoor recreation and outdoor recreation policies should be based on underlying preferences of visitors and theeconomic constraints that govem their choices. Clawson (1959), Knetsch (1963) and later Clawson and Knctsch(I966) were instrumental in further development of travel cost method.

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The Hedonic Price Method” (HPM) attempts to evaluate environmental goods

or services by estimating their effects on certain market prices such as property

and land. It is based on the assumption that the prices of marketed goods such

as houses are affected by the numerous characteristics including size, location,

neighbourhood, etc.

[b.] Stated Preference Methods

The stated preference approach avoids conventional markets and searchesstimulated markets (UNEP, 1995). A survey instrument is designed in which a

market like situation is constructed. Respondents record their choices in the light

of the hypothetically changed circumstances and the data are used to calculate

the value of environmental amenities and other goods or services. TheContingent Valuation Methodw (CVM) is the most common form of stated

preference method for valuing non-market goods. lt is a standardized and widely

used survey method to estimate willingness to pay for use, option, existence, and

bequest values (Mitchell and Carson, 1989; Brent, 1995; Fisher, 1996).

'7 Hedonic models are used to capture the relationship between the bundle of environmental characteristics and itsprice. Hedonic models estimate the implicit price of the characteristics of a good. Environmental attributes such astrees, aesthetic views, etc also influence market price of the commodity. By explaining the price of the commoditywith these features using a multiple regression model, it is possible to isolate and value the effects ofenvironmental characteristics on property prices and infer how much money individuals are willing to pay-forcertain environmental attributes. The value of the change in the environment is therefore given by the commodityprice change. However, even when implicit prices for environmental amenities can be estimated, the comectionbetween the implicit prices and value measures is techniailly very complex and sometimes empiricallyunobtainable.

'8 The contingent valuation method began to be used in the early 1960s. Robert Davis (1963, 1964) usedquestionnaires in an attempt to measure the benefits associated with outdoor recreation in Maine. Acton (1973)conducted the first contingent valuation study examining health risks. He estimated willingness-to-pay forimproved ambulance service to heart attack sufferers. Historically, the growth of the contingent valuation methodas a viable altemative for estimating the benefits of public goods was in part fed by funding fiom the United StatesEnvironmental Protection Agency, beginning in the mid 1970s. The method developed through gradualacceptance and use by United States Government Agencies. An important milestone was the acceptance by theUnited States courts of the use of contingent valuation method in natural resource damage assessments under the1980 Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). In July I984, areview panel of experts, including economists and psychologists, actively involved with contingent valuationresearch (NOOA Panel) concluded that although the contingent valuation method held promise, furtherexploration of the technique was necessary (Mitchell and Carson, I989). Through the 1970s and 1980s, contingentvaluation (CV) research progressed steadily.

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Contingent valuation method tries to obtain information on consumers‘preferences by posing direct questions about willingness to pay. “lt basically asks

people what they are willing to pay for a benefit, andlor what they are willing to

accept by way of compensation to tolerate a cost. This process of "asking" may

be either through a direct questionnaire/survey, or by experimental techniques in

which subjects respond to various stimuli in "laboratory" conditions. What is

sought are personal valuations of the respondent for increases or decreases in

the quantity of some good, contingent upon a hypothetical market” (Munasinghe,

1990). The Contingent valuation method involves constructing a hypothetical

market or referendum scenario in a survey. lt represents the amount people

would be willing to pay to avoid a specifiedenvironmental damage, to achieve a

stated improvement in environmental quality, or to receive a specified supply of a

public good.

Early work attempted to examine the “design bias” effects (Mitchell and Carson

1989). Later, much attention was, in contrast, given to explain large differences

between willingness to pay (WT P) and willingness to accept (WT A)'9 measures

of value (Schulze et al., 1983; Knetsch and Sinden, 1984; Cummings et al.,

1986; Shogren et al., 1994; Goldar and Misra, 2001; Bateman et al., 2002).

Standard economic theory’s prediction is that WTP and WTA should be approximately equal. ln practice, thediscrepancy between an individual’s willingness-to-pay (WTP) and willingness-to-accept (WTA) for the sameamenity, was sometimes four to fifteen times (l-lammack and Brown (1974) Hausman, 1993). This disparity washeavily researched throughout the late 1970s and 1980s and four possible explanations began to emerge: rejectionof the WTA property right, consumer cautiousness, prospect theory and modifications of established economictheory (Mitchell and Carson, 1989). Mansfield (1999), Hanemann (1991), Tversky and Kahneman (I991), Hoehnand Randall (1987), Boyce ct al., (1992) examined various issues behind this variability. Mitchell and Carson(1989), after extensive review of the literature surrounding the WTP-WTA discrepancy, concluded that thisdiscrepancy may be due to a combination of the factors discussed above. Randall (1987) reported that thediscrepancy between WTP and WTA values tended to narrow as respondents repeated the valuation process.Hanemann (1984) argued that this discrepancy was due, in part, to the discrete choice fonnat prevalent in CVMsurveys. Theoretical work by Hanemann (I986) further explored the work of Randall and Stoll (I980) andreported that the size of the WTP-WTA gap depended upon availability of substitutes for the hypothetical publicgood in question, narrowing as the number of available substitutes increased.

19

25

Although the Blue Ribbon Panel (NOAA panel) put forth a set of guidelines2° on

the use of contingent valuation method especially in the case of non-use values

(Carson et al, 1996), the controversy surrounding the method continued(Hausman, 1993; Diamond and Hausman, 1993; Hanemann, 1994; Bateman and

Langford, 1997).

2.2 Wetland Valuation: A Review of Selected Case Studies

During the last two decades, a large number of empirical studies have been

undertaken by individual researchers to value wetlands. These studies can be

broadly divided into impact analysis, partial valuation and total valuationstudies”. Impact analyses studies are relatively few and are undertaken when

quick decisions are to be made. ln cases where an ecosystem study is notwarranted but only certain aspects need be valued, a partial valuation study is

done”. Total valuation studies aim to comprehend the economic values of

various direct and indirect benefits including ecosystem functions and services in

its entity.

3 The principle recommendations were as tbllows: (1.) A dichotomous choice format should be used; (2.) Aminimum response rate from the target sample [70 %] should be achieved; (3.) In-person interviews should beemployed with some role for telephone interviews in the piloting stages; (4.) WT P, not WTA, measures should besought; (5.) After excluding protest bids, a test should be made of whether WTP is sensitive to the level ofenvironmental damage; (6.) CVM results should be calibrated against experimental findings; otherwise a 50percent calibration factor should be applied to CVM results; (7.) Respondents should be reminded of their budgetconstraints; and (8.) Respondents should be given “adequate” information about the enviromnental change inquestion.

1‘ According to Barbier et al (1997), three broad categories of issues are most relevant to the economic analysis ofwetlands. Impact analysis is an assessment of the damage inflicted on the wetland from a specific externalenvironmental impact (Bann, i997; Dixon et a1., 1988). Partial valuation is used in the assessment of two or morealternative wetland use options. Here, choices involving diversion, allocation or conversions of wetland resourcescompare the net benefits generated by each of the wetland uses (Barbier, 1994; Hanley and Craig, I991). The thirdtype of wetland valuation is a T olal valuation of the total economic contribution, or net benefits, to society of thewetland system. lt is most appropriate where a full accounting of the costs and benefits associated with a particularwetland is required (Costanza ct al., 1989; Gren, I995).

n See annexure 2.2 for a summary of studies.

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2.2.1 Partial Valuation Studies

According to Barbier et al., (1997), partial valuation studies involve assessment

of alternate options of two or more wetland uses. Those studies date back at

least to 1926, when Percy Viosca, Jr., a fisheries biologist, estimated the value of

fishing, trapping and collecting activities from wetlands in Louisiana (Vileisis,

1997). Economists entered the arena of estimating value of wetlands much later

(Boyer and Polasky, 2002). A landmark early valuation study on wetlands was by

Hammack and Brown (1974). They focused on wetlands as waterfowl habitat and

estimated the value in terms of hunting using market valuation. It was only later

on that attempts to value wetlands moved beyond estimates of direct benefits.

Studies estimating only direct benefits have used the market price methods sinoe

they are the easiest to compute, particularly when the commodity already has a

market (de Beer and McDermott, 1989). Majority of these studies opted for net

values - the gross value of a benefit less the costs that must be incurred to

receive that benefit measuring direct use values of wetlands.

Since these partial valuation studies estimated only direct benefits of wetlands

without considering the ecosystem functions that contributed to these values,

they did not generate much meaning. This failure was soon resolved with the

development of theoretical approaches and methods that meaningfullyincorporated the economic significance of various ecological functions into the

process of valuation. Such studies adopted methods like the marginal value

product, residual rent approach, production function approach or present value

generated per unit area approach to value various benefits of wetlands (Far'oer

and Constanza, 1987; Farber 1988; Barbier, et al., 1993; Gren 1995; Acharya

0998)“; Emerton et al., 1998; Seyam et al., 2001; King 2002).

Following these lines, attempts were made to quantify economic values of

various ecological functions of wetlands around the world. Thibodeau and Ostro.

27

(1981) attempted to value five different ecological benefits of the Massachusetts

wetland using replacement cost methods. The value of open space per capita

was calculated using a telephone survey of local appraisal. The value of the

marshes as nutrient sinks was calculated as the associated cost savings at

sewage treatment plants. The difference between the cost for wetlands wells and

the cost of providing water from the next best source was used to value the

supply of water. The value of recreation was estimated by the use of results from

other studies where travel expenditures and consumer surplus had beencalculated.

Bell (1997) used a non-linear bio-economic production function method to place

an economic value on the contribution of wetlands in supporting recreational

fishing in the Florida wetlands. The production function linked the recreational

catch to angler fishing effort and wetlands. Leschine et al., (1997) used the

replacement cost method to produce a proxy for values of the flood protection

sen/ioes of Western Washington wetlands. Cost estimates for engineeredhydrologic enhancements to wetlands that currently provided flood protection

was used to establish proxies for the dollar-per-acre value of the flood protection

these wetlands currently provide. Acharya (2000) also used the production

function approach to capture the value of hydrological services of the Hadejia­

Nguru wetland ecosystem in northern Nigeria (i.e. agricultural production and

domestic water demand analysis). However the study itself points out that thesevalues were not an estimate of the total value of the environmental functions

performed by the wetlands nor did they fully capture the value of the recharging

function itself. It also emphasized the importance of integrating such values in

development and conservation policies.

Barbier (2000) used production functions to value wetland’s contributions to local

fishery in South Thailand and Mexico. Static and dynamic approaches were

28

adapted to value ecological functions. This study was different in that afterattempting an economic valuation, it concluded by pointing out the importance of

management regimes and institutional norms in determining long run benefits

generated from the system. Farber (2002) estimated the storm protection and

fishing values from wetland of south Louisiana using a ‘yield function’ that

established a statistical relation between fishery catch, effort, wetlands area and

fishers that reflect the annual marginal value product of wetlands. Recreational

values (hunting and fishing) of wetland preservation from the Barrier Island were

also estimated using survey information collected by Bergstrom et al., (1989).

Although valuation studies in developed countries began with direct benefits

valuation, they subsequently moved to indirect and non-use benefits consideringthem to be of more relevance.

Similar studies were also undertaken in developing countries. Eaton and Sarch,

(1997) conducted a study on the economic value and importance of wildresource production systems in agriculture and fishery of the floodplain ofHadejia-Nguru in northern Nigeria. Emerton et al., (1998) attempted to quantify

the benefits associated with different economic activities, of Nakivubo wetland in

Kampala, Uganda, with the aim of providing information on profits and returns

from reclamations and conversions of wetlands for industrial developments using

market valuation techniques. ln order to value wetlands services, the study used

indirect methods like replacement costs and mitigative expenditure. The study

called for greater internalization of externalities by modern users. Seyam et al.

(2001) attempted valuation of freshwater wetlands in the Zambezi Basin, Kenya

based on market prices. Direct use values of floodplain agriculture, fishproduction, wildlife services and goods, livestock grazing, eco-tourism,biodiversity, natural products and medicine were estimated using different

methodologies. Certain studies also employed various proxy methods to estimate

recreational values (Hanemann et al., 1987; Hodgson and Dixon, 1988; Edwards,

1992; Pendleton, 1995; Desvousges and Waters, 1995; Cesar, 1996; Dixon et

29

al., 1993; Driml, 1999). Studies in developing countries gave more importance to

valuation of direct benefits and the ecosystem functions that contributed to those

benefits. These studies either looked very briefly into or mentioned the role of

institutional norms and sharing mechanisms in determining value generated.

While some ecological economists were engaged in the valuation of various

direct and indirect benefits using ‘market valuation’ and ‘proxy methods’, several

others were involved in estimating direct benefits of wetland services using travel

cost methods” (Leeworthy, 1986; Bergstrom et al., 1990; Markandya, 1992;

Green, 1992;) or contingent valuation method (Titre et al., 1988; Bell, 1989; de

Groot, 1994). van Vuuren and Roy (1993) used the travel cost method toestimate the recreational benefits of bird hunting, angling and trapping in the

wetlands of the Canadian lake St. Claire. Similarly, Navrud and Mungatana

(1994) applied the travel cost and the contingent valuation methods to value the

recreational value of wildlife viewing, which was used as a valid, but very

conservative, estimate of the total economic value of the wildlife species.Estimating expenditure and consumer surplus associated with on-siterecreational uses of this coastal wetland, they pointed out the need for forming

more effective policies for wetland management.

Contingent valuation studies on the other hand concentrated on elicitingeconomic values of various wetland functions that have no market (Costanza and

Farber, 1985). Many studies also applied contingent valuation method to value

the direct benefits of wetlands (Farber and Costanza, 1987; Titre et al., 1988;

Hanley and Craig, 1991; Bergstrom and Stoll 1993). lt is interesting to note that

most of such studies focused on estimating recreational values of wetlands.

23Travel cost models have been used extensively to model recreational demand for other ecosystems such asnational parks (Beal,l998; Lansdell and Gangatharan, 2001; Mendelsohn et al., 1992), national forests (Englin andMendelsohn, 1991; Willis and Garrod, 1991), coral reefs (Dharmaratne, 1999; Dharmaratne and Braithwaite,1998), wildemess (Smith. 1975), improved water quality (Smith et al., 1991) and for recreational activities such asrecreational fishing, angling, railing and canoeing etc. (Amacher et al., 1988; Bell and Leeworthy, 1990; Farberand Costanza, 1987; Whitehead et a1., 2000).

30

Bergstrom et al. (1989) conducted a contingent valuation study to estimate

people's willingness to pay to maintain waterfowl hunting, freshwater andsaltwater fishing, recreational fishing and crabbing in Louisiana coastal wetlands.

Kosz (1996) used the contingent valuation method to estimate Austrians’willingness to pay over 14 years for the ‘Donau-Auen‘ national park as asubstitute to the ecological values provided by wetlands. Farber (1996) used the

contingent valuation method to estimate willingness to pay for recreational fishing

and waterfowl hunting in coastal Louisiana wetland. The main conclusion of

these studies was that economic valuation using contingent valuation methods

could contribute substantially to transparent decision making and environmental

policies. Pate and Loomis (1997) elicited people's willingness to pay to control

wetland contamination and maintain salmon fishing and wetland habitat in San

Joaquin Valley wetlands, California. Pyo et al., (2001) applied contingentvaluation method to estimate non-use values for conserving coastal wetlands of

Youngsan River in Korea. During the survey, respondents were asked for the

maximum amount of additional household taxes which they would be willing to

pay (WT P) monthly for a conservation programme designed to maintain current

levels of conservation quality at coastal areas instead of coastal development.

Studies that apply contingent valuation (CV) techniques using dichotomous

choice models were also popular (Loomis et al., 2000). Zhongmin et al., (2003)

applied the contingent valuation method to elicit consumer willingness-to-pay to

restore the ecosystem services of Ejina wetlands. The study used a payment

card format. The willingness to pay estimated was considerably less than the

estimated cost of restoration of the project. Most of these studies wereconcerned only with valuing the benefits of the wetlands and highlighting the

need to incorporate estimated values in any policy considerations for futuredevelopment of the wetlands.

Many researchers, of late, started using a combination of direct valuation, travel

costs and contingent valuation methods for providing better understanding of

31

economic values of wetlands. They argued that sinoe the benefits provided by

wetlands were very diverse, they could only be captures through a combination

of different methods. Such studies that used simple aggregation to estimate total

economic -value were severely criticized by many. However, for want of better

alternatives, this methodology was also reluctantly accepted by many. Farber

and Costanza (1987) estimated the value of the wetland ecosystems in monetary

terms using both conventional economic methods and biophysical methods

(energy analysis). Indirect methods were used to estimate the value ofcommercial fishing and trapping, recreation and storm protection. They used the

analysis of an earlier study by Lynne et al. (1981) to estimate the value of shrimp

harvest and oyster production for the Louisiana wetlands. The value of storm

protection was calculated by means of a wind damage distance decay function.

The travel cost method was applied to estimate the recreational value of thewetlands. Bateman and Turner (1993) used the contingent valuation method to

estimate willingness to pay for protection from saline flooding from the wetlands

of Norfolk Broads. The study used a combination of direct valuation andcontingent valuation methods. Lee (1998) looked at the productivity values of

coastal wetlands in Korea, including fisheries, habitat functions, waste treatmentservices and aesthetic functions and concluded that economic valuation had an

important role in contributing to well-informed policy decisions.

2.2.2 Total Valuation Studies

Studies attempting total valuation of wetlands assessed the total economiccontribution/net benefits to society (Barbier et al., 1997). Gren (1994) conducted

a total valuation study of the Danube River floodplains to determine the potential

benefits from improved water quality and over all management of the Danube.

The study used ecological-economic models and benefit transfer methods. ln a

highly controversial paper, Costanza et al., (1997) undertook a study on the

current economic value of 17 ecosystem services for 16 biomes, based on over

32

100 existing published studies and a few original calculations. Many of thevaluation techniques used in the studies were based, either directly or indirectly,

on ‘willing ness-to-pay’ estimates. They estimated the value per unit area of each

ecosystem service for different ecosystem types, using either the sum ofconsumer and producer surplus, the net rent (or producer surplus) or gross value

(using price multiplied by quantity produced as a proxy for the economic value of

the service). Majority of the value of services identified were outside the market

system (indirect services). It is to be noted that such studies claiming to estimate

total economic contribution/net benefits to society were relatively few and often

subject to controversy.

2.2.3 Indian Case Studies: A Brief Review

Systematic studies on the economic values of Indian wetland ecosystems started

way back in early Nineties“. These studies concentrated on identification of

wetlands of national importance, assessment, promotion of research anddevelopment activities and formulation and implementation of Management

Action Plans (MAP). Comprehensive wetland valuation studies in the country

were conducted later on. Very few studies are conducted on the economicsignificance of Indian wetlands. Chopra and Adhikari (1999) used a dynamic

simulation model in a ‘STELLA’ environment to understand linkages between

underlying ecological relationships and economic values emerging from them.

They pointed out that economic values focus on use values in short run, whether

within or outside the market, while ecological values provide an underlying long

run notion of value. Travel cost method” was then used to investigate the nature

2‘ Annexure 2.3 gives a summary of the major wetland studies in India

25 Survey-data collected on tourists travel and stay expenses, duration of stay, and various socio-economiccharacteristics, were used to build a semi-log demand fimction. The study indicated that travel cost was a validproxy variable for price in determining demand for tourism services. Due to the joint product nature of theservices provided by the park, it was considered more appropriate to estimate oonsumer’s surplus from local costestimates.

33

of link between these two types and to estimate the value of Keoladeo National

Park. In another remarkable study, James and Murty (1999) attempted toestimate non-user benefits from the cleaning up activities of river Ganges using

contingent valuation method. Households were asked to reveal their preferences

for three levels of water quality namely that before, during and after the clean up.

An open ended bidding game was used with a variant of a payment card.Respondents were also asked two closed-ended follow up questions. The

payment vehicle chosen was payment to a reputable charitable organization. The

Cobb Douglass form was used for econometric estimation.

Another serious attempt of wetland valuation was undertaken by Verma et al.,

(2001) on Bhoj Wetlands in Madhya Pradesh. Since there were multiplestakeholders, the study did not attempt to calculate a single value for all thebenefits. lnstead it used a combination of valuation techniques together. The

value of benefits accruing to various people whose livelihoods depended upon

wetland (fishermen, boatmen, trapa cultivation and road side vendors) was

estimated using the principle of market valuation. The value of supplying drinking

water to the city and the value of preventive measures that people used to avoid

water borne diseases was also estimated. The contingent valuation method was

used to estimate the willingness-to-pay for enjoying better recreational facilities

from Bhoj Wetland. In addition to this the effect of the presence of the wetland on

the value of properly prices was also estimated using hedonic pricing method.

This study did not attempt to add up individual values to arrive at annual Total

Economic Value (T EV) estimates as there could be possibility of overlapping of

wetland values. lnstead it only estimated various use values generated bystakeholder to reflect the economic importance of the Bhoj Wetland. Kumar

(2001) attempted an economic valuation of the ecological functions of wetland

along the Yamuna River corridors of Delhi. Four ecological benefits (hydrological

functions, biological productivity, nutrient storage and habitat for flora and fauna)

of the wetland were valued using a range of valuation techniques. The value of

34

hydrological functions (\Nater recharge benefit for agriculture and water supply to

households), livestock fodder and nutrient benefits were valued usingreplacement cost method. Fishery production and thatching grass production

were valued using the market price approach. Nutrient storage function was

valued using cost of procurement method and the habitat for biodiversityfunctions and recreational benefits were valued using the contingent valuation

method. Parikh and Datye (2003) used a multidisciplinary approach to address

the subject of wetland management. Based on a collection of multidisciplinary

wetland valuation studies, they argued that estimating economic benefits and

values must incorporate traditional knowledge of local users. In other words, the

institutional contexts are important in valuation exercises.

There have also been a few attempts to elicit values of wetlands in Kerala. Nayak

et al., (2000) attempted to look into the present mode of resource use and the

biophysical changes taking place in north Kerala. They reviewed major resource

use systems and subsistence patterns in the study area and also assessed the

ecological status of the resource base as perceived by the local community. This

study did not however, attempt an economic valuation. The first systematicattempt” to look at the various issues surrounding wetland resource use and the

causes for wetland biodiversity degradation in the Cochin estuary wasundertaken by Thomson (20023; 2002"). The study identified the major benefits

provided by the Cochin backwaters and the different stakeholders who had

appropriated the wetland resources over the year. The major causes for the

degradation of the backwaters were analyzed in detail. It also estimated the

value direct benefits provided by the backwaters. Santhakumar (2000) attempted

2° Manoharan (1996) undertook a contingent valuation and travel oost study in the Periyar Tiger Reserves to estimateits eootourism values. He estimated its value as Rs.676 per hectare for locals and Rs.9.5 per hectare for visitorsfrom Kerala. Similarly, Jyothis (2001) draws from the preference elicitation of the people living in and around thePeriyar Tiger Reserve in the Western Ghat Regions of Kerala State, using a contingent evaluation questionnaire tomeasure peoplc’s participation in the management of a protected area for biodiversity conservation. These studiesdo not pertain to wetlands; however, they are the first attempts in using the contingent valuation methodology inKama

35

valuation of the coastal wetlands in Cochin and Bangladesh, focusing on use

values arising from the four major functions of the coastal wetlands namely input

to fish production, recreation, protection of coastal land and carbon sequestration

using surrogate market prices and indirect methods such as the estimate of

avoidance cost, cost of substitutes etc. Jeena (2001) analyzed the economic and

institutional factors in the use and management of the Cochin wetlands,concentrating on the fishery sector particularly. Thomson (2003) undertook a

detailed study of the Cochin estuary in which the direct, indirect and non-use

benefits provided by the estuary were estimated. The study used market-based

techniques to estimate the direct benefits from the estuary, the travel costmethod to estimate recreational values of wetlands and the contingent valuation

method to estimate indirect and non-use benefits provided by the estuary. This

study however estimated gross vales and not net values.

A variety of valuation techniques have been reviewed above and some clear

patterns emerged. Most studies on temperate wetlands recognized recreation as

an important wetland use and applied either travel cost or contingent valuation

methods to obtain a measure for its value. ln contrast, tropical studies are more

concerned with the economic significance of these ecosystems on the livelihood

activities of local communities. An interesting issue concerns whether economic

valuation ensures prudent uses of these resources among different users and

across generations. The theory of economic valuation outlined in the survey of

studies does not claim this at all. In fact, right set of institutions and efficient

modes of governance are pre-conditions to achieve sustainable uses ofresources. The message conveyed in the survey, however, is that valuation

studies throw enough light into the manner in which resource specificities anduses are inter-related and are unavoidable if serious interventions have to be

made to enhance economic values.

36

2.3 Scope and Limitations

So far, the study explained various methodological approaches developed and

used by various analysts to estimate economic value of wetlands. Most of the

earlier studies on economic valuation however, emphasized the fact thatestimating economic values of wetlands is essential and the framework of total

economic value is probably the first step towards this direction as it captures

preferences of present and future generations and guide rational choices of

resource uses across generations. At the same time there are major drawbacks

in the ways of deducing value. For instance, it is often contested whether market

prices do reflect the full social costs of production. Second, most services of

wetlands are not presently traded in the market raising challenges for valuation.

Much more serious is the neglect of institutional contexts on which thepreferences and choices are determined. The role of institutional dynamics on

allocations and inter-temporal choices is crucial in the production of values. A

much more serious issue concerns the logic and assumptions involved in the

additive principle of total economic values. Most often the principle of simple

addition adopted for arriving social value is challenged for lack of sensitivity to

social differentiation among resource users and the weight they attribute to

various outcomes. Standardizing the weights especially in the process ofdeciding preferences and choices of people differentiated on the basis ofclasslcaste/ethnicity may cause serious errors. However, these limitations are

definitely not arguments for rejecting the use of total economic value framework

for eliciting economic values of wetland useslbenefits. ln fact total economic

value provide one of the most accepted starting points to account for the overall

benefits of these ecosystems to humanity.

37

2.4 Summary and Conclusion

The objective of this chapter was to survey the available literature on wetland

valuation. The study started out by a review of valuation theories and thenexamined the major findings of some selected case studies on wetland valuation

both from developed and developing countries. The survey reviewed a variety of

methodologies and techniques available for valuing wetlands. Differentmethodologies are useful for different types of environmental amenities orsituations. Valuation methodologies useful in all environmental contexts do not

exist. The commonly accepted procedure to estimate the total economic value ofwetlands is to select one or more valuation methods as the situation warrants.

The measurement of the value of various goods and services varies substantially

depending on geographical location, ecosystem specificities, flow of benefits,

resource appropriation mechanisms of different resource users, their perceptions

on economic values and the methods of valuation. In many cases, economic

analysis is made on the basis of limited insight into local level perspectives and

highly aggregated data.

Studies on wetland valuation rely on market values wherever markets areavailable for calculating net or gross values. Interestingly enough, such studies

do not analyse the ecological base of the benefits and non use values provided

by wetlands or the institutional contexts of various resource user groups.Contingent valuations and other supplementary tools are useful under suchcircumstances. The basis for economic valuation of wetlands is set under these

principles. The next chapters analyze these details and subsequently undertakevaluation of benefits derived from Cochin wetlands.

38

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