Limits to Valuation

The valuation of benefits can be highly valuable to policymakers faced with difficult choices and limited budgets, as box 11 illustrates, but there are limits to how well these valuation techniques can capture people's preferences. There are also limits to using any measure of individual's willingness to pay as the sole basis for judging society's priorities. There are many issues one could raise; several are described here:

The number of protected areas worldwide has quadrupled in the past fifty years. Governments face difficult choices, however, because protected areas can be costly to manage and maintain, and they often displace people and shut off large areas to farming, logging, and other activities.

In Thailand, for example, the government has made efforts in recent years to establish and maintain a number of protected areas, including several national parks. One example is the 850-square-mile Khao Yai National Park in central Thailand, where economic analyses have evaluated some of the benefits and costs of the national park. Given the enormous difficulties involved, these analyses produce fairly rough estimates, but ones that nevertheless offer very useful insights. First, one aspect of the economics of environmental valuation has been to establish a checklist of the types of potential values for a complex resource like a national park. The checklist of values can include recreation and tourism, watershed values, ecological processes, biodiversity, education, research, aesthetic, spiritual, cultural/historical, option value, existence value, and global life support (Dixon and Sherman 1990). Even though some of these values may be impossible to quantify, identifying the categories can still be useful since a partial accounting of benefits and costs can sometimes be sufficient to give policymakers the information they need for a decision. In the case of Khao Yai, for example, the following estimates were made for some categories of benefits and costs:

BOX 11

Forest Preserves in Thailand

Millions of US$,

Benefits annually

Watershed protection $1.3

Soil erosion (cost of replacement) $3.0

Recreation and tourism $1.4

Trekking and camping $0.1

Extractive values (local communities) $2.2

Contribution to elephant survival $4.9 Costs

Enforcement expenditures $-0.5

Opportunity cost (development) $-1.6

Total Net Benefit $10.8

Despite the roughness of the estimates and the omission of estimates for some categories of benefits, the numbers nevertheless support the value of protecting the park, suggesting a positive annual value of $10.8 million even with some benefits omitted.

Second, one way governments can minimize the costs imposed on nearby communities is by allowing certain kinds of activities (e.g., hunting, wood collection) in buffer zones rather than imposing uniform restrictions in all areas of the park. In the case of Khao Yai, economic analysis estimated that the net benefits from the park would rise by $5.3 million over fifteen years using this kind of multizone approach that allowed extractive activities in buffer zones, and that this would also provide incentives for local people to cooperate with preservation aims in other zones (Albers 2001).

And finally, differences in incentives for park protection from the national versus the global perspective were found not to be dramatically different since foreign tourists provided a strong preservation incentive to the Thai government (Albers 2001). Overall, analyses like these provide extremely useful information and insights for governments faced with managing complex resources where the benefits and costs can be very difficult to measure.

Sources: Heidi J. Albers, A Spatial-Intertemporal Model for Tropical Forest Management Applied to Khao Yai National Park, Thailand, Discussion Paper 01-35 (Washington, DC: Resources for the Future, 2001).

John Dixon and Paul Sherman, Economics of Protected Areas (Washington, DC: Island Press, 1990).

First, economic theory assumes that individuals know exactly what their preferences are so that they can state their willingness to pay for any given set of commodities. When it comes to buying the kinds of goods or services individuals are familiar with, such as clothing, restaurant meals, or cars, this may be a reasonable assumption. But when it comes to environmental or other public goods, is it reasonable to assume that people know what they want or would be willing to pay for? This problem doesn't apply only to environmental public goods, but to manufactured public goods as well. The contrast is revealing. For example, national security is an important public good that is provided in part by having a strong military. But we don't use CV

methods to value, for example, the public's willingness to pay to make the nation's thirteenth aircraft carrier able to travel 35 miles per hour rather than 30 miles per hour. Most people are not well enough informed to make such a judgment, and the same is probably true for many environmental issues. Consider the following: what if careful surveys were conducted to estimate society's willingness to pay to take actions to keep the manatee, the Bengal tiger, or the panda from going extinct in the wild, but when we added up those amounts it turned out not to be enough to succeed? What would we conclude? Would we conclude that society is willing to let the species go extinct? Or might we wonder if some individuals may have thought success could be achieved at a lower cost per person and if they might revise their stated preference with more information?

Second, some observers worry about inconsistencies between people's behavior and economists' models of that behavior. Economic theory assumes people's preferences are continuous so that the marginal value of a small increase in consumption of good X will be about the same as for a small decrease in consumption of good X. But the "loss aversion" evidence on WTP versus WTA contradicts that assumption. Does that mean the theory is invalid and unusable? It's not clear what affect this has on these valuation methods.

Other behaviors don't exactly fit with the "rational optimizer" model of behavior. There is evidence that people often behave by following "rules of thumb" in a complex and uncertain world rather than evaluating the marginal trade-offs for every effect of every decision. And there is strong evidence from laboratory "games" in psychology and experimental economics showing that people don't always act in a self-interested way, but sometimes cooperate or act in ways that may appear to be altruistic. These kinds of inconsistencies between certain kinds of economic predictions and actual behavior raise questions about the degree to which economic valuation measures may be misleading when used to measure changes in social welfare. But again, it's just not clear how serious these problems may be.

Finally, an argument can be made that in some cases society should not base policy choices simply on an adding up of individuals' willingness to pay.4 It may be that what people want to achieve for society, the kind of world they want to live in, is not adequately reflected in their own, day-to-day choices or stated preferences. At times we observe people benefiting from free riding; at other times we see people willing to pay taxes and to contribute to the common good (including approving of speed limits lower than their own habits would suggest). These differences probably reflect a more complex relationship between what people think is good for society and what choices they make for themselves.

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Project Management Made Easy

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