Mark Schauer
email: science@eld-initiative.org

Keywords:

Typical units consist of web-based training as well as text-based study materials. Overall, the course

Course Format

The course will be conducted online as a MOOC on the Global Campus 21 ® free of charge. In addition to traditional course materials such as videos, readings and case studies, the online learning room provides interactive tools helping to build vibrant learning communities. These online communities support participants, expert tutors, and moderators in the co-creation of solutions. The course consists of 12 units, based on problemsolving using economics approaches and methods, e.g.

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Adapting decision-making and policy to land needs • Assessment for Economic Analysis and Valuation of Non-Marketed Goods and Services for Land Conservation • Multi-Criteria Analysis

User Benefit

Learn how to assess the economic benefits of land in order to be able to plan for sustainable land management.

Prerequisites

Have an interest in solving one of the most important challenges facing the world's population in the next few decades. value.! Price! and! value! are! also! different! concepts! in! economics.! The! economic! value! of! a! good! or! service! reflects! the! preferences! that! society! as! a! whole! has! for! this! good! or! service.! A! price! is! determined!by!the!market!as!the!result!of!interaction!between!demand!and!supply.!Price!reflects!the! true! economic! value! allocated! by! society! to! this! good! or! service! under! specific! market! conditions.! However,! markets! do! not! always! exist! or! may! be! imperfect.! This! leads! to! a! discrepancy! between! economic!value!and!price.! ! It!is!not!because!something!does!not!have!an!explicit!price!that!it!does!not!have!any!value!to!society.! This!is!in!particular!true!for!nonImarketed!goods!such!as!clean!air:!simply!because!you!cannot!buy!a! litre!of!clean!air!on!the!market!does!not!mean!that!clean!air!does!not!have!a!value!to!you!! ! Also,!market!prices!might!not!reflect!the!full!economic!value!to!society!as!a!whole.!When!this!is!the! case,! economists! talk! about! market% failures.! Market! failures! typically! arise! because! of! incomplete! information,!inefficient!property!right!allocations!or!what!are!known!as!externalities.! ! Let!us!consider!a!simple!example!of!a!market!failure!arising!because!of!an!externality.!Agricultural! commodities!such!as!wheat!are!traded!on!the!world!market.!However,!world!market!prices!of! commodities!do!not!consider!water!pollution!resulting!from!the!use!of!fertilisers!(nitrogen)!as!inputs! to!agricultural!production.!This!water!pollution!imposes!a!cost!to!society!as!it!affects!people's!health! and!reduces!their!work!output.!The!cost!of!water!pollution!in!this!case!is!measured!through!the!loss! of!productivity.!The!cost!of!water!pollution!could!also!be!measured!by!the!cost!of!water!treatment! (or!the!increased!cost)!to!water!users!and!taxpayers.

I20! (tax)! +20! (subsidy)! 0! Total% % I120! (Financial!price)! +20! ! I100! (Economic!price)! !
There!also!exist!price!distortions!generating!a!discrepancy!between!the!financial!and!the!economic! price.! Price! distortions! can! be! introduced! in! perfectly! functioning! markets! by! regulations! like! minimum!wage!policies!but!are!not!detailed!more!in!this!unit.! ! So,! contrary! to! the! quotation! by! Oscar! Wilde,! our! goal! here! as! economists! here! is! to! know! the! economic!value!of!something!-!i.e.!the!environmental!good,!service!or!feature!under!consideration!-! in!order!to!estimate!the!economic!price!it!should!have.!To!derive!this!economic!value,!there!are!two! available!options:!a)!estimate!it!for!nonImarketed!goods!or!services!by!using!environmental!valuation! methods,! or! b)! correct! observed! financial! prices! to! reflect! the! true! economic! value! of! the! good! or! service! under! consideration! from! the! perspective! of! society! as! a! whole.! For! the! rest! of! this! unit,! economic! value! or! economic! price! are! used! interchangeably! when! referring! to! the! true! value! of! a! good!or!service!from!society's!point!of!view.!Financial!prices!refer!to!actual!market!prices.! ! From:% % %

The This! section! is! meant! to! provide! you! with! a! guide! to! analyse! existing! case! studies! or! conduct! a! valuation!exercise!yourself.!The!method!description,!background,!assumptions!and!limitations!should! help!you!help!answering!the!following!questions!when!faced!with!an!economic!value!estimate:!How! reliable! is! the! value?! Can! it! be! replicated?! How! valid! is! it?! Does! it! match! the! value! allocated! by! society! as! a! whole! or! a! specific! group! in! society?! Does! it! correspond! to! the! total! economic! value! allocated!by!society!or!only!a!fraction!of!this!value?!

Section%Learning%Outcomes%

By!the!end!of!this!section!students!should!be!able!to:!

• Describe!the!total!economic!value!framework!

• Recognise!that!different!valuation!methods!lead!to!slightly!different!estimates!because!of!what! they!measure!and!how!they!measure!it! • Describe! the! steps! involved! in! each! of! the! valuation! methods,! the! main! assumptions!
underlying!each!method!and!some!methodological!and!empirical!limitations! ! 2.1% The%concept%of%Total%Economic%Value:%what%value%do%we%measure?% The!non%demandPbased!methods!consist!in!estimating!the!costs!incurred!from!an!increase!(decrease)! in!environmental!quality.!This!increase!(decrease)!in!costs!leads!to!a!decrease!(increase)!in!quantity! supplies! for! a! given! demand! associated! to! a! increase! (decrease)! the! economically! optimal! price.! What!is!measured!here!is!the!change!in!welfare!associated!with!the!change!in!the!cost!of!provision.! These! methods! can! be! very! useful! for! policy! decisions! in! practice! as! cost! data! is! often! available.! However,!because!the!influence!of!demand!for!environmental!goods!and!services!is!ignored!by!these! methods,! economists! often! prefer! to! use! demandHbased! methods! to! estimate! demand! for! environmental!goods!and!services.! ! DemandPbased%methods!are!called!so!because!they!rely!on!changes!in!demand.!They!allow!to!derive! a! demand! curve! for! comparison! to! the! cost! of! provision! (supply! curve).! Revealed% preference! methods!use!surrogate!markets!to!estimate!the!value!of!nonHmarketed!goods!and!reveal!preferences! from!market!behaviour.!These!methods!do!not!involve!change!sin!income!levels!and!rely!on!existing! payments! or! costs! incurred.! A! fraction! of! that! cost! is! explicitly! associated! with! the! nonHmarketed! environmental! good! or! service.! For! example,! apartments! near! Central! Park! in! New! York! are! more! expensive!than!similar!apartments!elsewhere!simply!because!they!are!close!to!the!Park.!A!fraction!of! their! market! value! is! linked! to! the! proximity! to! Central! Park.! The! property! market! is! the! surrogate! market!in!this!example.!Revealed!preference!methods!estimate!the!fraction!of!the!apartment!market! value!and!assume!it!corresponds!to!the!social!value!of!being!close!to!Central!Park.!Because!they!rely! on! existing! surrogate! markets,! these! methods! typically! capture! use! values! but! not! nonHuse! values.! The!hedonic!price!and!travel!costs!methods!are!examples!of!revealed!preference!methods!and!are! detailed!more!specifically!in!the!following!sections.! ! Stated%preference!methods!have!been!developed!so!as!to!capture!(some!of)!the!nonHuse!value!of!an! environmental!good!or!service.!They!are!called!"stated"!because!they!involve!people!directly!stating! how!much!they!would!be!willing!to!pay!for!an!increase!in!the!provision!of!an!environmental!good!or! service!(or!how!much!they!would!be!willing!to!accept!for!a!decrease!in!provision).!Stated!preference! methods!are!based!on!intended!rather!than!on!actual!behaviours!like!revealed!preference!methods.! However,! these! methods! do! not! lead! to! the! same! type! of! demand! being! estimated! because! they! involve!changes!in!income!levels!contrary!to!revealed!preference!methods.!The!contingent!valuation! and!choice!modelling!methods!are!examples!of!revealed!preference!methods!and!are!detailed!more! specifically! in! the! following! sections.! Because! they! rely! on! people! stating! their! preferences! rather! than! expressing! them! through! actual! markets,! these! methods! capture! the! use! value! and! (some! of)! the!nonHuse!value!of!the!environmental!good!and/or!service.! ! In! practice,! all! demandHbased! methods! are! prone! to! experimental! biases! and! often! lead! to! very! diverse! estimates! of! value.! These! methods! are! still! criticised! in! the! academic! literature.! They! are! however!improving!over!time!and!remain!the!only!methods!available!to!capture!nonHuse!values!so! far.! ! Revealed!preference!methods!measure!economic!value!as!a!change!in!consumer!surplus!and!rely!on! Marschallian!demand!curves.!Stated!preference!methods!measure!economic!value!as!a!change!in!the! area! under! a! Hicksian! demand! curve.! Consumer! surplus! can! be! defined! as! the! difference! between! ! the!money!consumers!would!be!willing!to!spend!and!the!actual!price!they!are!paying.!This!is!detailed! in!more!details!below.! ! Economists! can! use! two! different! types! of! demand! curves:! the! Marshallian! demand! curve! and! the! Hicksian!demand!curve.!The!Marshallian%demand!curve,!named!after!Alfred!Marshall,!is!the!demand! for! a! good! when! income! is! held! constant! and! utility! derived! from! the! good! varies.! The! Hicksian% demand!curve,!named!after!John!Hicks,!is!the!demand!for!a!good!when!the!utility!derived!from!the! good!is!held!constant!and!income!varies.!It!is!mathematically!possible!to!derive!one!type!of!demand! curve!from!the!other.!The!type!of!demand!curve!that!is!considered!for!further!economic!analysis!and! assessment!depends!on!the!study!context!and!assumptions.

Total! economic! value! is! one! of! the! most! common! frameworks! for! environmental! valuation.! This! framework! is! anthropocentric! because! it! is! based! on! how!
!In!practice,!it!is!often!easier!to!estimate! the!Marshallian!demand!curve!empirically!because!it!is!based!on!observable!variations!in!
! to! accept! do! not! overlap! exactly! despite! what! is! theoretically!suggested!in!the!above.!The!direction!of!the!change!considered!influences!estimates!of! economic! values.! This! phenomenon! is! called! hysteresis.! This! is! because! people! tend! to! be! more! willing! to! accept! more! money! for! an! increased! degradation! in! environmental! quality! compared! to! what!they!are!willing!to!pay!for!a!corresponding!improvement!in!environmental!quality.!This!leads!to! discrepancies! economic! value! estimates! depending! on! whether! people! are! asked! about! their! willingness! to! pay! (for! increasing! environmental! quality)! or! willingness! to! accept! (for! decreasing! environmental!quality).! ! It!can!be!shown!that:! Compensating%variation%<%Change%in%consumer%surplus%<%Equivalent%variation% ! The!theoretical!derivation!of!this!inequality!is!beyond!this!unit.!This!inequality!implies!that,!in!theory,! a!change!in!consumer!surplus!constitutes!on!average!a!good!estimation!of!economic!value.!However,! in! practice,! any! of! these! may! be! underestimated! or! overestimated,! so! despite! being! theoretically! appealing,!the!change!in!consumer!surplus!might!not!always!be!the!best!average!estimate.!The!most! appropriate!measure!of!welfare!change!needs!to!be!determined!based!on!the!specific!study!context.! ! Depending!on!your!economics!background,!this!section!might!not!make!sense!to!you!yet.!You!should! try! reading! through! the! description! of! the! different! methodologies! and! then! come! back! to! it.! It! should! be! clearer! the! second! time!! In! the! end,! this! section! should! have! given! you! a! feel! for! the! complexity!of!the!theory!behind!environmental!valuation!methods.! ! What! is! important! to! remember! is! that! the%
!values),! but! also! what! kind! of!approach! (non! demandHbased! or! demandHbased)! is! used! to! estimate! welfare! changes! and! how! it! is! measured! (changes! in! consumer! surplus,! willingness! to! pay! or! willingness! to! accept).!Additionally,!because!people's!willingness!to!accept!is!higher!than!their!willingness!to!pay,! estimates!of!economic!values!depend!on!the!question!asked!and!the!direction!of!the!change!under! consideration.!A!good!understanding!of!the!context!of!your!study!is!critical!for!choosing!a!valuation! method!that!gives!reliable!and!valid!estimates!of!the!true!economic!value.! !

2.3% NonPdemand%curve%approaches%to%valuation%

NonHdemand!curve!approaches!to!valuation!can!refer!to!the!use!of!market!prices,!replacement!costs,! doseHresponse! methods,! mitigation! behaviour! and/or! opportunity! costs! to! value! a! given! good! or! service!provided.!

! Market% prices! are! the! result! of! trade.! In! neoclassical! economic! theory,! perfect! competition! is! a! necessary!condition!for!prices!to!reflect!the!true!economic!value!of!the!good!or!service!considered,! as!if!driven!by!an!'invisible!hand'.!Market!prices!can!thus!be!used!for!environmental!goods!(forest)!or! services! (timber)! that! are! traded.! Prices! can! be! distorted! compared! to!
!In!this!example,!the!cost! of!improving!environmental!quality!is!the!cost!(forgone!profit)!of!decreasing!paper!production.!It!is! however!not!always!possible!to!link!a!production!output!to!a!change!in!environmental!quality!so!this! approach!is!not!always!applicable.! ! Mitigation% behaviour! relates! to! actions! that! people! take! to! avoid! the! negative! consequences! of! environmental! degradation.! For! instance,! one! way! to! mitigate! the! impact! malaria! is! to! limit! the! probability!of!contracting!the!disease,!that!is!getting!an!infected!mosquito!bite.!This!can!be!done!by! using! mosquito! nets! and! repellents.! The! cost! of! malaria! mitigation! is! in! this! example! the! cost! of! mosquito!
!cost!of!forest!preservation! is! the! forgone! agricultural! profit.! For! instance,! land! under! forest! often! corresponds! to! lower! value! agricultural! land,! that! is,! land! that! has! lower! than! average! forgone! profits.! Taking! the! average! agricultural!income!forgone!profit!as!a!proxy!for!the!forest!value!in!this!case!overestimates!the!true! agricultural!value!of!the!land!when!converted!to!agricultural!production.!Also,!if!the!proxy!measure! of! opportunity! cost! is! highly! variable,! its! average! value! is! not! an! accurate! value! of! the! true! opportunity!costs!incurred!either.!Also,!because!agriculture!is!the!second!best!use!of!the!land!after! the! forest,! even! if! the! true! opportunity! cost! is! estimated,! it! is! lower! than! the! current! value! of!
!-!Estimate!the!"hedonic!price!function",!that!is,!price!as!a!function!of!the! characteristics! Step%2!-!Estimate!the!inverse!Marshallian!demand!equation,!that!is,!price!as!a!function! of!quantity! ! Step%0!is!in!most!textbooks!not!considered!to!be!an!actual!step!of!the!hedonic!price!methodology.!
Step!0!consists!in:!i)!identifying!the!environmental!characteristic!to!be!valued,!the!surrogate!market! good! with! this! environmental! characteristic,! and! the! stakeholders! (users! as! this! is! a! use! value! method)!to!state!explicitly!how!"society!as!a!whole"!is!defined;!ii)!designing!a!survey!(questionnaire)! and! a! sampling! plan;

! iii)! creating! a! database! with! the! collected! data.! This! step! is! not! specific! to! hedonic!pricing!but!is!essential!to!obtain!representative!data!to!derive!reliable!and!valid!estimates!of! economic!values.!Step!0!leads!building!the!hedonic!price!database!required!to!undertake!both!steps! 1! and! 2.! A! hedonic! price! database! typically! includes! the! price! (e.g.! a! house! price)! and! levels! (quantities)! of! individual! characteristics! of! the! good! (e.g.! number! of! rooms,! distance! to! nearest! school,! percentage! of! sea! view),! respondent! characteristics! (income! range,! age,! education! level),! timing!of!
! good).! As! this! secondHstage! is! often! not! undertaken!in!practice,!further!details!are!beyond!the!scope!of!this!unit.! ! Step!1!is!prone!to!the!following!limitations.!First,!it!relies!on!a!surrogate!market.!This!market!needs!to! be!perfectly!competitive!so!that!prices!reflect!the!true!economic!value!of!the!good.!If!not,!then!a!bias! is!introduced!in!the!estimation!of!the!willingness!to!pay!(Step!1).!This!in!turn!causes!to!a!bias!in!the! estimation! of! the! demand! curve! (Step! 2).! The! second! limitation! is! linked! to! the! functional! form! chosen!in!Step!1.!Depending!on!the!functional!form!chosen,!the!marginal!prices!of!characteristics!can! vary! drastically.! The! robustness! of! the! results! obtained! in!
Step! 1! can! be! assessed! by! repeating! the! regression! for! several! functional! forms.! The! third! limitation! is! linked! to! the! fact! that! the! hedonic! method!relies!on!the!explicit!underlying!assumption!that!the!value!of!the!good!is!equal!to!the!sum!of! its! characteristics'.! This! assumption! is! often! not! met! in! realHlife,! as! the! sum! of! the! parts! (characteristics)!is!very!often!greater!than!the!total!(the!observed!price).!By!design,!the!hedonic!price! method! also! only! allows! to! estimate! the! use! value! but! not! the! nonHuse! value! of! an! environmental! characteristic.!The!nonHuse!value!can!be!just!as!high!(if!not!higher)!than!the!use!value!depending!on! the! context.! Not! taking! it! into! account! is! therefore! limiting! and! does! not! reflect! the! full! economic! value!to!society.! ! !

2.5% Revealed%preference%method:%the%Travel%Cost%Method%

The!travel!cost!method!is!the!second!revealed!preference!method.!The!idea!behind!this!method!is! that!the!more!people!pay!to!travel!to!a!site!of!interest,!the!more!that!site!is!economically!worth!to! society!as!a!whole.!This!method!is!therefore!based!on!the!use!of!the!travel!cost!to!estimate!the!value! of!nonHmarketed!goods!and!relies!on!surveys.!The!Marshallian!demand!curve!is!derived!by!relating! the!number!of!visits!(quantity)!to!the!costs!of!each!visit!(price).!As!for!the!hedonic!price!method,!this!

Entrance%fee%

Travel%cost% Total%cost% Number%of%people%

$1! $1! $2! 60! $1! $2! $3! 40! $1! $3! $4! 0! ! % % Total%=%100% ! Applying! the! same! reasoning! for! a! $2! entrance! fee! and! for! a! $3! entrance! fee,! the! overall! results! shown!in!Table!3!

2.6% Stated%preference%method:%the%Contingent%Valuation%Method%

The The!institutional!context!refers!to!whether!the!good!or!service!is!managed!by!a!public!body,!a!private! firm,!a!stakeholder!cooperative!or!individual!stakeholders.!People!have!preferences!for!these!types! of! organisation! and! these! preferences! are! reflected! in! their! bids.! Specifying! this! clearly! is! thus! essential!to!obtain!valid!and!reliable!estimates!of!willingness!to!pay!(accept).! ! The! payment! for! the! environmental! good! depends! on! the! study! context! and! the! type! of! value! targeted!(use!or!nonHuse).!Payment!can!be!made!through!various!payment!vehicles!such!as!entrance! fees,! local! property! taxes,! national! income! taxes,! sales! taxes,! development! aid! or! special! international!funds,!inHkind!donations!of!labour!or!local!subsistence!crops.!Similarly,!the!willingness! to! accept! payment! can! be! made! as! a! lump! sum,! tax! credits! or! tax! reductions,! inHkind! donations! of! labour!or!local!subsistence!crops.!The!choice!of!a!financing!method!influences!the!bid!levels!because! of!varying!distributional!effects!on!the!population.!The!payment!vehicle!needs!to!be!clearly!identified! in!the!hypothetical!market!set!up.! ! Step% 2! starts! with! the! building! of! the! sampling! plan,! in! order! to! obtain! representative! bids! for! the! whole!population.!There!are!different!ways!to!conduct!the!survey!but!delivering!it!through!faceHtoH face! interviews! often! ensures! a! higher! level! of! responses! and! helps! better! assess! the! respondent's! understanding!and!commitment!to!the!problem!of!interest.!The!goal!is!to!obtain!bids!for!each!level! of! environmental! provision! described! in! the! survey! as! well! as! data! on! the! respondent's! characteristics! (income,! age,! educational! level)! that! could! influence! how! much! they! bid.! They! are! several!ways!of!deriving!bids:!as!a!bidding!game,!as!a!closeHended!referendum!with!yes/no!answers,! as!a!payment!card!with!a!range!of!values,!as!an!openHended!question.! ! Step%3!consists!in!estimating!the!average!and!median!willingness!to!pay!(accept).!You!need!to!refer! to! a! more! specific! econometrics! course! for! more! details! on! regression! techniques.! The! mean! and! median! willingness! to! pay! (accept)! are! estimated! from! the! descriptive! statistics! or! from! the! regression!depending!on!the!survey!questions.!Protest!bids!H!that!is!bids!of!zero!that!do!not!reflect!a! zero! value! but! rather! a! refusal! to! answer! H! are! usually! ignored! in! order! to! compute! the! mean! and! median!willingness!to!pay!(accept).!If!closeHended!yes/no!questions!are!used,!a!discrete!choice!model! can! be! used! to! statistically! (econometrically)! estimate! the! probability! of! making! a! nonHzero! bid! (or! "yes"!answer)!as!a!function!of!environmental!quality,!incomeHlevel!and!respondent!characteristics.!In! this!case,!the!area!under!the!curve!gives!the!mean!willingness!to!pay.! ! Step%4!consists!in!estimating!the!bid!curve!i.e.!using!a!regression!to!estimate!the!willingness!to!pay! (accept)! as! a! function! of! respondent! characteristics! (income,! age,! education)! and! the! level! of! environmental! quality.! This! allows! us! to! estimate! how! the! willingness! to! pay! (accept)! varies! with! different!levels!of!characteristics.!The!data!can!then!be!easily!aggregated!to!derive!an!estimate!of!the! total! willingness! to! pay! (accept).! To! be! able! to! aggregate! results! and! derive! valid! and! reliable! estimates! of! economic! values! implies! that! the! population! of! reference! (i.e.! society! as! a! whole)! has! been!identified,!that!the!mean!willingness!to!pay!of!the!population!can!be!derived!from!the!sample! mean!and!that!the!time!period!over!which!the!benefits!are!gained!is!well!identified.! ! Although!fairly!straightforward!in!its!design,!the!contingent!valuation!methodology!is!prone!to!many! biases!(a!form!of!measurement!error)!and!its!application!can!be!tricky.!Firstly,!the!method!is!prone!to! ! design! biases.! These! biases! are! a! result! of! the! hypothetical! nature! of! the! market,! the! strategic! behaviour! of! the! respondents! and! interviewer,! the! "warm! glow"! effect! (i.e.! feelHgood! factor! from! giving! money! to! what! is! perceived! as! good! cause)! or! a! social! desirability! effect.! This! can! lead! to! respondents! providing! higher! (or! lower)! estimates! than! they! otherwise! would.! The! chosen! starting! point,! chosen! payment! vehicle,! type! of! questions! asked,! scale,! scope,! sequencing! and! context! also! affect!the!willingness!to!pay!(accept)!estimate.! ! Secondly,! the! method! is! also! prone! to! several! information! biases.! The! quantity! and! quality! of! information!embedded!into!the!hypothetical!market!specification!and!provided!to!respondents!has! been!shown!to!influence!willingness!to!pay!(accept)!estimates.!This!may!represent!more!information! or!different!information!than!respondents!would!be!faced!with!in!the!real!world.!This!might!lead!to! economic!values!that!do!not!represent!preferences!of!society!as!a!whole!but!rather!values!of!specific! stakeholder!groups.! ! Thirdly,!the!Contingent!Valuation!is!prone!to!the!partHwhole!bias.!This!refers!to!the!fact!that!the!sum! of! values! of! individual! components! of! a! good! (e.g.! elements! of! a! landscape! such! as! crops,! trees,! biodiversity)!is!greater!than!the!value!allocated!to!the!good!as!a!whole!(e.g.!landscape).! ! Fourthly,! the! market! set! up! is! hypothetical! and! respondents! might! provide! estimates! of! their! willingness! to! pay! that! are! also! hypothetical! and! might! not! materialise! in! realHlife! when! the! hypothetical!market!is!implemented.!This!is!especially!true!when!the!change!considered!is!very!risky! or!very!political!and!more!respondents!make!protest!bids.! ! A!fifth!step!could!be!included!to!assess!the!reliability!of!the!Contingent!Valuation!exercise!in!terms!of! the!answers!gathered!and!the!credibility!of!the!values!obtained.! !

2.7% Stated%preference%method:%Choice%experiment%

Choice!experiment,!also!called!choice!modelling!or!conjoint!analysis,!is!the!second!stated!preference! method.! It! was! designed! to! overcome! the! warm! glow! and! partHwhole! biases! of! the! contingent! valuation! method! by! making! respondents! explicitly! choose! between! alternative! scenarios.! These! scenarios! include! levels! of! environmental! or! nonHenvironmental! attributes! and! a! level! of! payment! which! varies! between! scenarios.! The! choice! experiment! method! forces! respondents! to! tradeHoff!

a1! 1,!2,!3! a2! 1,!2,!3! a3! 1,!2,!3! Payment% p1,!p2,!p3! ! !
!biodiversity! • 50%!of!desired!population! • 70%!of!desired!population! (status!quo)! • 80%!of!desired!population! Percentage!of!desired! population!of!eleven!indicator! bird!species! ! • 90%!of!desired!population! • 100%!of!desired!population!! Water!quality! • Less!than!10mg!Nitrate/l! • 10H25mg!Nitrate/l! • 25H50mg!Nitrate/l! • 50H90mg!Nitrate/l! • More!than!90mg!Nitrate/l! Water!quality!measured!as!the! content!of!nitrate/l!due!to! communication!with! respondents% Landscape!aesthetics! • Status!Quo! • Multifunctionality!scenario! • Grassland!dominated! scenario! • Intensity!scenario!(with! increased!field!sizes)! • High!price!scenario!(with! increasing!percentage! • of!cereals)! Landscape!
Attribute!a1! a1_1! a1_1! a1_3! Attribute!a2! a2_3! a2_2! a2_1! Attribute!a3! a3_1! a3_1! a3_2! Payment! p1! p2! p1! Tick!one!box!corresponding! to!your!preferred!scenario! !! !! !! ! !
There!are!several!methods!to!select!attributes!and!build!up!the!choice!cards!but!this!is!beyond!the! scope!of!this!unit.!One!constraint!is!that!the!attributes!and!their!levels!need!to!be!orthogonal,!that!is,! any!attribute!is!fully!independent!from!all!others.!This!is!a!necessary!condition!to!be!able!to!correctly! measure! the! tradeHoff! between! attributes! and! estimate! a! willingness! to! pay.! This! approach! is! very! computationally! demanding! and! a! newer! approach! H! called! efficient! designs! H! has! been! developed! more! recently.! The! efficient! designs! approach! consists! in! making! assumptions! on! the! sign! and! relative!magnitude!of!the!willingness!to!pay!(accept)!coefficient!for!each!attribute.!This!approach!has! been!recently!shown!to!lead!to!more!efficient!estimates!of!willingness!to!pay!(accept).! % the!specific!format!of!the!choice!card,!discrete!models!(logit,!probit),!pairedHcomparison!models!or! random!utility!models!can!be!used!to!statistically!estimate!the!marginal!willingness!to!pay!associated! with! each! attribute.! You! need! to! refer! to! a! more! specific! econometrics! course! for! more! details! on! these! estimation! techniques.! Aggregation! of! the! results! to! derive! the! total! willingness! to! pay! depends! on! the! assumptions! on! the! marginal! willingness! to! pay.! Willingness! to! pay! typically! decreases!with!increasing!scale!or!scope:!the!willingness!to!pay!per!hectare!is!higher!for!small!sites! (scarcer!resources)!than!for!bigger!sites!(less!scarce).!The!total!willingness!to!pay!for!the!bigger!site!is! typically!lower!than!the!willingness!to!pay!per!hectare!in!the!small!site!multiplied!by!the!surface!of! the!big!site.!Extrapolation!of!a!willingness!to!pay!value!from!a!small!site!to!a!bigger!site!needs!to!take! this!into!account.! ! Like!the!contingent!valuation!method,!the!choice!experiment!method!captures!the!nonHuse!value!of! a! good! or! service.! The! choice! experiment! method! also! relies! on! a! hypothetical! market! set! up! in! experimental!conditions!and!may!be!prone!to!biases.!This!method!is!very!demanding!in!terms!of!data! and! data! collection.! It! requires! a! high! level! of! human,! institutional! and! computational! capacity! because!of!the!specific!statistics!and!technical!skills!involved.!Because!respondents!are!requested!to! make! explicit! choices! between! scenarios,! this! method! also! relies! on! the! assumptions! that! ! preferences! are! both! stable! (i.e.! which! do! not! change! in! time)! and! consistent! (i.e.! if! scenario! A! is! preferred!to!B,!and!B!is!preferred!to!C,!then!A!is!preferred!to!C).!This!has!been!proven!not!to!always! be! valid! in! realHlife! and! these! assumptions! should! be! checked! upon! using! statistics! or! checking! individual!answers.! ! to!be!valued!(site!2)! ! Benefit!transfer!can!be!undertaken!by!identifying!two!sites!(Site!1!and!Site!2)!that!are!similar!in!terms! of! the! environmental! goods! and! services! they! provide.! If! they! have! similar! population! sizes! and! characteristics,!the!transfer!is!simply!the!allocation!of!Site!1's!economic!value!to!Site!2.!If!Site!1!and! Site!2!have!different!scales!and/or!scope!(i.e.!Site!1!is!1!ha!and!Site!2!is!100!ha!and/or!Site!1!has!1! environmental! good! and! Site! 2! has! 10),! the! known! economic! values! of! Site! 1! obtained! by! other! valuation! methods! need! to! be! extrapolated! before! allocation! to! Site! 2.! This! is! so! that! the! value! allocated!to!Site!2!from!Site!1!reflects!its!true!economic!value.!Sites!can!often!be!quite!different!and! located!in!regions!or!countries!with!very!different!populations!and!incomes.!MetaHregression!models! have! been! used! to! transfer! values! by! controlling! for! some! of! the! main! factors! of! variation! such! as! income!level.!You!need!to!refer!to!an!econometrics!course!for!more!details!on!how!to!estimate!the! economic!value!for!the!case!study!of!interest!using!metaHanalysis.! ! Despite! its! theoretical! appeal! and! potential,! benefit! transfer! is! still! prone! to! scale,! scope! and! sampling!effects.!These!can!impair!the!derivation!of!reliable!estimates!of!environmental!values!and! thus! need! to! be! tested! for.! In! practice,! adjustment! factors! might! be! required! for! benefit! transfer! which! depend! on! the! change! in! scale! considered.! Whether! or! not! to! adjust! values! for! accurate! extrapolation!and!how!to!best!do!so!still!needs!to!be!dealt!with!on!a!caseHbyHcase!basis.! ! conflicting! options.! It! helps! identify! a! preferred! option! in! multiHdisciplinary! contexts! without! requiring!agreement!on!the!preferred!option!or!how!to!weight!assessment!criteria!or!how!to!value! all!criteria!in!monetary!terms.!Assessment!criteria!can!be!quantitative!or!qualitative!(score)!and!can! relate!to!social,!technical,!environmental,!economic!and!financial!changes.!It!is!easy!to!use!and!has!a! wider!scope!than!costHbenefit!analysis!because!it!includes!qualitative!as!well!as!quantitative!data.! ! MultiHcriteria! analysis! is! not! an! environmental! valuation! method! as! such! but! rather! helps! identify! preferred!scenarios!without!using!economic!valuation!techniques.!It!is!used!as!an!alternative!to!costH benefit!analysis.!It!can!however!be!seen!as!the!ancestor!of!the!choice!modelling!method!because!of! it!similar!structure,!hence!its!description!here.!It!does!not!involve!a!variation!of!attribute!and!price! levels!but!rather!assesses!options!(scenarios)!along!several!quantified!or!scored!criteria!(attributes).! This! method! can! be! used! as! a! preliminary! to! environmental! valuation! to! screen! scenarios! and! identify! a! preferred! scenario! and! its! criteria! to! be! economically! valued! for! more! formal! economic! assessment.! ! Table%7:%Example%of%a%multiPcriteria%analysis%structure.%Source:%unit%author.% ! Option%1% Option%2% Option%3%

Step% 3! is! the! design! of! the! survey! instrument! (questionnaire).! As! for! contingent! valuation,! it! is! necessary! that!

2.8% Benefit%transfer%

Criteria!c1! ! ! ! Criteria!c2! ! ! ! …!! ! ! ! Criteria!cn! ! ! ! ! ! Step%2
!c1! w1! c1_1! c1_2! c1_3! Criteria!c2! w2! c2_1! c2_2! c2_3! Criteria!c3! w3! c3_1! c3_2! c3_3! Criteria!c4! w4! c4_1! c4_2! c4_3! VALUE%(SCORE)%OF%OPTION% w1*c1_1! +!w2*c2_1! +!w3*c3_1! w1*c1_2! +!w2*c2_2! +!w3*c3_2! w1*c1_3! +!w2*c2_3! +!w3*c3_3! ! +!w4*c4_1! +!w4*c4_2! +!w4*c4_3! ! !
This!method!also!has!its!limits.!There!is!a!risk!of!double!counting!for!overlapping!objectives.!It!relies! on! expert! judgement! which! does! not! always! correspond! to! preferences! of! society! as! a! whole.! The! ordinal! scoring! of! qualitative! impacts! is! potentially! too! arbitrary.! Where! significant! differences! in! weightings! occur! between! particular! groups,! preferred! scenario! might! drastically! differ! between! groups.!It!might!be!difficult!to!derive!a!scenario!that!would!be!acceptable!to!all!groups.!Finally,!this! method! is! subject! to! small! sample! biases! which! arise! when! the! sample! is! too! small! to! allow! for! extrapolation!to!the!entire!population.! ! ! From:% % %

The A cost-benefit analysis compares the net benefit derived from implementing the project to the without project net benefits for each stakeholder (or each stakeholder group). That is the incremental net benefit is derived as follows:

Incremental net benefit = With project net benefits -Without project net benefits

The idea is that the project is worth undertaking if the incremental net benefit is positive, i.e. if the net benefits are greater for the with project scenario than for the without project scenario. This requires knowledge of the economic values for the costs and benefits and their timing as detailed in the following sections.

3.3

Which costs and which benefits?

Benefits and costs can be estimated from unit quantities and prices. Table 1 shows examples of quantities and unit prices that can be used to estimate costs and benefits for a range of land uses. For example, the benefits associated with are agricultural yields times the number of hectares cropped times the price per ton of crop. For a national park, benefits correspond to the number of visitors times the entry fee charged per visitor. The benefits derived from carbon storage are the number of tonnes of carbon stored times the price for each tonne of carbon. Costs can be decomposed into variable costs and fixed costs. Variable costs vary with the quantity used (the higher the quantity used, the higher the cost). Fixed costs do not vary with the quantity used (e.g., insurance, building depreciation…).

The gross margin and net income can then be computed for a given year as follows:

Gross Margin = Benefits -Variable costs Net income = Gross Margin -Fixed costs

Time Preference and discounting to compare values

Let us start with an example to help you understand what time preference is: Your choice on whether to take the money now or later depends on both how long you have to forego the money for and how much more money you receive to compensate for that extra waiting time. This is the same principle behind earning interest on your savings in a bank account: the bank pays you extra for leaving your money in your account to compensate for you not spending it today. In economics, the trade-off made between receiving money now and later is called a time preference.

! If I
Costs and benefits are typically incurred at different times of a project. These are not directly comparable because of inflation and time preferences. Preferences do not change significantly over the timeframe of the project by assumption. To undertake a cost-benefit analysis, all costs and benefits need to be comparable in how they are measured (price system), their currency as well as across time. Real prices can be derived from observed nominal prices by correcting for inflation. To assess a project's worth, the incremental net benefits need to be made comparable in time before they can be summed up. Discounting is the technique used to express equivalent economic or financial values at one given point in time. Costs and benefits occurring in the future are discounted to obtain the value they would have if they were occurring today. This value is called the present value.

The current value of future benefits and costs is computed as follows:

Present Value = Discount Factor * Value (year considered)

The discount factor directly reflects on time preferences. Several formulas exist for the discount factor. One of the most common ones is:

Discount Factor = 1/(1+r)^(t-1)
where r is the discount rate (social discount rate in an economic analysis) and t is the year. The further in the future the cost and/or benefit occurs, the less it is worth today. Also, the higher the rate of discount (r), the less the future is worth compared to the present. A simple way of remembering this is that the higher the rate of discount is, the quicker an amount of money loses value in time.

Economists call the preference for the present (i.e. "getting the money today") a positive time preference. People are said to have a zero time-preference when they are indifferent between getting the money in the present or in the future. If they prefer getting it in the future, they are said to have a negative time preference. These terms correspond to the sign of the discount rate used (e.g. positive time preference for a positive discount rate). €

1 (1+ 10%) 1-1 € 1 (1+10%) 2-1 € 1 (1+10%) 3-1 € 1 (1+10%) 4-1

! Taking 10% as the social discount rate, can you recalculate the discount factor and discounted benefit detailed in the table? ! Can you compute the present value of a benefit of 200 arising in Year 10 for r=10%? How does it compare to the present values of the same level of benefits in Year 3 and Year 4?

! Can you compute the present values of the benefits when r decreases to 5%? Are they greater or smaller than for r=10%?

Because of the timing of costs and benefits, the choice of a discount rate is not neutral and can influence the decision to undertake a project or not. A project that starts with high costs and have benefits later is less likely to be undertaken for a higher discount rate (giving a lower weight to later benefits than a smaller discount rate). This typically characterises environmental improvements. On the contrary, a project that starts with high benefits and have costs later (e.g. a nuclear power plant) is more likely to be undertaken for the same higher discount rate.

Choosing the appropriate rate of discount can be challenging. The rate varies across space, time and groups and is generally higher in younger and/or less developed countries. The chosen rate of interest often reflects current generation's time preferences and ignores future generation's time preferences. Future generations are not here to signal their time preference (yet!) and their influence tends to be ignored when choosing a discount rate. The more the present time has value to current generations (i.e. the higher the discount rate) the more weight is given to present generations compared to future generations.

By design, a lower discount rate assumes more intergenerational equity than a higher rate. The Stern Review on the Economics of Climate Change caused controversy at the time of its release (2006), because it considered a 1% rate of discount. 1% is a relatively low value, which gives almost equal weight to both today and tomorrow's generations.

The social discount rate should, in theory, be determined based on current and future preferences of society as a whole for the present but also reflecting on current and future preferences for intergenerational equity. A good cost-benefit analysis should include a discussion on the consequences the chosen rate of discount rate has for future generations.

As a result of this time preference, strong identification of when benefits and costs arise is important to derive valid conclusions from a cost-benefit analysis. How to set the discount rate is a choice that needs to be justified and the consequences of this choice must be discussed. The social discount rate can be estimated through stakeholders survey. Another option would be to consider the (social) opportunity costs of capital, that is, the rate of interest that would be earned by placing the money in a bank account rather than spending it now.

Economic indicators of a project's worth

Several indicators have been developed to assess whether a project is worth implementing. The main three indicators used for assessment are the net present value (NPV), the internal rate of return (IRR) and the benefit-to-cost ratio (BCR).

The net present value (NPV) or net present worth is computed after all economic values have been obtained and/or estimated. The net benefit for the with-project scenario is computed by subtracting the costs from the benefits for all years. The same is then done for the without-project scenario. The net incremental benefit corresponds to the extra benefit derived from the project and is computed by subtracting the without project net benefit from the with project net benefit. The discounted value of the incremental net benefit is then computed taking year 1 as the year of reference and a 10% discount rate. The NPV of the project is the sum of the present value of the incremental net benefits across all years. These computations are illustrated in Table 3. The project is considered worth undertaking for a NPV greater than 0 (positive) and not worth undertaking for a NPV less than 0 (negative). The NPV can be used in a financial or an economic costbenefit analysis. This indicator does not allow comparisons across alternative projects, but only to make a decision on whether a given project is worth undertaking or not. For instance, for a project with a NPV of 100 and a project with a NPV of 1, both projects are worth undertaking. However, the project with the lowest NPV might be of more value to society as a whole despite being characterised by this lower value. This is because NPV values are not comparable for projects with different timeframes, scale and scope. To undertake a valid comparison between alternative projects, it is safer to use the next indicator, the Internal Rate of Return.

The Internal Rate of Return (IRR) is the discount rate at which the net present value equals zero. In other words, the maximum interest rate that can be earned from investing resources in a project. The project is accepted for an IRR equal to or greater than the opportunity cost of capital, that is the interest rate that can be earned from investing the same resources in the next best alternative project.

The IRR is derived by changing the discount rate until at least one positive and one negative NPV are obtained. Going back to the previous example, NPV=62 for a 10% discount rate. If the discount rate increases to 25%, the NPV becomes -17. The IRR can be computed using the following formula: IRR = lower discount rate + difference between rates * NPV at lower rate / sum NPV (signs ignored)

In the above example, IRR = 10% + (25%-10%) * 62 / (62+17) = 21.8%. This means that the project would lead to an interest rate of 21.8%. This is higher than the interest rates paid by banks on savings (opportunity cost of capital), so the project is worth undertaking. The IRR value is prone to measurement error but its accuracy can be improved by changing the interest rates until obtaining a positive and a negative NPV that are both close to zero. It is important to note that the internal rate of discount value is not necessarily always unique, in which case the IRR values cannot be used to decide on a project's worth.

The benefit-to-cost ratio (BCR) is the first indicator that has been historically adopted by project managers to assess the worth of a project. It computes the ratio obtained by dividing the present value of the benefit stream by the present value of the cost stream, discounted at the opportunity cost of capital. A project is accepted if the BCR is greater than or equal to 1. Using the same example as above, the relevant values can be computed and are summarised in Table 4. The BCR is 170% for an opportunity cost of capital of 10% and the project is considered worth undertaking. to pay for the goods and services considered from the point of view of society as a whole. One of the easiest ways to undertake an economic cost-benefit analysis is to first perform a financial analysis and then adjust each financial value to derive its economic equivalent.

Adjustments between financial and economic values are needed because of market price distortions that arise when markets are not perfectly competitive. The type of adjustment varies with: (i) the type of value being considered (transfer payments, traded good, non-traded tradable good, non-traded nontradable goods), (ii) the reference adopted for measuring the costs and benefits (world or domestic price system) and (iii) the currency (domestic or foreign) in which benefits and costs are expressed.

The adjustment process outlined below leads to the shadow values required for an economic costbenefit analysis.

Economic values can be derived or estimated from financial values in 3 steps:

Step 1 -Adjust for transfer payments (taxes and subsidies)

Step 2 -Adjust for price distortions in traded goods

Step 3 -Adjust for price distortions in non-traded goods (tradables and non-tradables).

Step 1 consists in removing transfer payments from the financial values, i.e. payments that corresponds to a redistribution of wealth within society. This is a step undertaken for values expressed in the domestic price system only. They change the financial incentives faced by an individual but not the wealth of society as a whole. Taxes and subsidies are typical examples of this kind of redistribution. This also applies to user fees that are transferred from a user to a provider within a given society.

Step 2 consists in adjusting the financial price values to remove market imperfections and distortions introduced by policies such as minimum wage or land market regulations. There are two different aspects that need to be checked upon to ensure that economic values are measured and expressed in a consistent way: the point of reference and the currency. Shadow prices are derived for the same point of reference or numéraire ("measuring unit"), e.g. using a world or a domestic price system. In the world price system, the opportunity costs to the country of traded goods are assumed to correspond to border prices. These opportunity costs are valued using the cif (cost, insurance, freight) for imports and the fob (free on board) for exports. In the domestic price system, economic values correspond to what society is willing to pay for goods and services. For both price systems, economic values can be expressed either in a foreign currency or the domestic currency. When values are expressed in different currencies, the Shadow Exchange Rate (SER) is used for conversion of values into one single currency for consistency.

Step 3 consists in adjusting the values of tradable but non-traded goods (i.e. good that can theoretically be traded but are not trade in practice) in the World price system. This can be done by using a conversion factor when financial prices are considered good estimates of opportunity costs. The conversion factor is the ratio of the shadow price to the domestic market price. It is called standard conversion factor when an average ratio is used. Non-tradable goods need to be valued using specific economic valuation methods in order to estimate their opportunity costs. In the domestic price system, the values of non-traded and non-tradable goods are estimated based on their opportunity costs.

Table 5 summarises the adjustments to be made depending on the price system used. The actual transformation is a bit more complex than detailed above but this should give you an idea of how to adapt a financial cost-benefit analysis into an economic cost-benefit analysis. You can refer to the recommended readings for more information on how to perform such adjustments. Because an economic cost-benefit analysis adopts the perspective as society as whole, it can be used to assess the desirability of a project from this perspective. It does not, however, reflect on incentives faced by individual stakeholders or stakeholder groups and should thus be complemented by a financial costbenefit analysis for a thorough assessment of the proposed project.

Once transfer payment have been removed and shadow economic values of costs and benefits have been estimated, the economic indicators used for the financial analysis -i.e. the net present value, the internal rate of return and the benefit-to-cost ratio -can be derived from the perspective of society as a whole. The values may not match those of the indicators derived from the financial analysis, and may sometimes lead to contradicting conclusions. Ultimately, the decision to undertake the project or not when indicators are contradictory between the financial and economic analyses will depend on how much priority is given to actual financial flows over the value to society as a whole. It may be socially acceptable to go ahead with a development project that leads to small losses for society as a whole

Figure

  Figure!1.! !

  !situation,!from!society's!point!of!view,!the!full!cost!of!agricultural!production!is!the!cost!of! water!pollution!added!to!the!cost!of!agricultural!production!(equal!to!110!in!%

  !costs!of!water!pollution!and!the!costs!of!agricultural!production!are!borne!entirely!by!farmers,! the!externality!is!said!to!have!been!internalised.!Assuming!demand!remains!the!same,!the!quantity!of! agricultural!commodity!produced!and!water!pollution!decrease!as!a!result!of!this!internalisation!(as! represented! in! Table! 2).! Because! of! the! reduction! in! agricultural! commodity! quantity! produced,! commodity!prices!increase!and!internalising!the!externality!is!only!worth!doing!if!the!increased!price! of!agricultural!commodities!is!offset!by!the!reduction!in!the!cost!of!water!pollution.!! ! !optimises!the!combination!of!agricultural!production!and!water!pollution!and!not!just! agricultural! production.! That! way,! resources! for! agricultural! production! are! used! in! a! more! economically!efficient!way!which!is!desirable!from!society's!point!of!view.! ! However,!in!realIlife!farmers!usually!only!pay!for!the!cost!of!agricultural!production.!Because!the!cost! of! water! pollution! is! not! borne! by! those! who! produce! it! (farmers),! water! pollution! is! what! economists!call!an!externality.!In!more!general!terms,!an!externality!is!something!generated!by!one! party!but!which!costs!or!benefits!are!borne!by!another.!Externalities!are!common!causes!of!market! failures.!In!the!above!example,!water!pollution!is!an!externality!generated!by!farmers!with!costs!of! water!treatment!borne!by!the!rest!of!society.! ! Water! pollution! is! a! typical! example! of! a! negative! eternality! because! it! imposes! a! cost! on! a! third! party! (consumers! of! drinking! water)! and! consequently! on! society! as! a! whole.! Externalities! are! however! not! always! negative:! they! are! positive! when! a! benefit! is! provided! free! of! charge! to! third! parties.!Pollination!is!a!typical!example!of!a!positive!externality.!The!cost!of!beeIkeeping!are!borne!by! beeIkeepers! with! pollination! provided! to! farmers! free! of! charge.! Pollination! increases! agricultural! and! tree! yields! around! the! beehives,! thereby! increasing! benefits! of! neighbouring! farmers! and! consequently! the! whole! of! society,! without! farmers! compensating! beekeepers! for! these! extra! benefits.! ! In! the! above! example,! farmers! implicitly! have! property! rights! over! their! land! and! own! any! benefit! provided! to! them! on! this! land,! which! includes! pollination.! If! beeIkeepers! were! granted! property! rights!over!pollination!provided!by!their!bees,!then!farmers!have!to!compensate!beeIkeepers!for!the! pollination!service!provided.! ! So! far,! we! have! talked! about! the! economic! value! of! a! good! or! service.! This! goes! back! to! the! difference! between! what! prices! and! value! are,! but! also! refers! to! a! difference! in! viewpoints.! When! talking!about!prices,!we!tend!to!adopt!the!viewpoint!of!an!individual!or!firm!trading!within!a!given! society!or!economy.!When!talking!about!economic!value,!we!typically!take!the!perspective!of!society! as!a!whole,!with!or!without!trade.! ! Imagine!you!would!like!to!buy!a!good!being!sold!at!the!price!of!$100.!This!good!is!subject!to!a!20%! consumption!tax!and!ends!up!costing!you!$120!at!the!till.!The!$20!are!taken!from!you!as!an!individual! through! the! tax! and! redistributed! within! your! national! economy,! i.e.! as! subsidies! to! poor! farmers.! This! is! I20! for! you,! but! +20! for! someone! else! in! your! economy.! This! $20! tax! does! therefore! not! change!the!wealth!of!society!as!a!whole!but!is!a!transfer!payment!from!you!to!someone!else!within! the!economy.!$120!is!the!price!you!paid!for!the!good!but!society!as!a!whole!paid!only!$100!for!it.! ! Page%4/4% !

  !Economics! of!Land!Degradation! ! Principles!of!economic! analysis! !and!valuation!for!sustainable! management!of!land! ! United! Nations! !University,! Institute!for!Water,!!Environment!and! Health! (UNUIINWEH),! a! very! short! introduction! to! environmental! valuation.! This! section! aims! to! give! you! a! basic! understanding! of! the! assumptions! behind! established! valuation! methods,! why! different! methods! lead!to!different!estimates,!how!each!of!these!methods!works,!what!kind!of!results!they!lead!to!and! some! of! their! limitations.! Even! though! the! following! focuses! on! environmental! valuation,! these! valuation!methods!are!not!specific!to!the!environment!and!can!be!applied!to!other!goods!that!are! not!traded!on!a!market!such!as!health!and!healthcare,!proximity!to!schools.!

  society! values! these! goods! and! services.! This! perspective! is! based! on! the! use! of! utility! as! a! measure! of! preference.% Utility! represents! how! much!enjoyment!society!as!a!whole!derives!from!a!good!and/or!service.!Utility!is!a!flexible!concept! reflecting! your! preference! for! consumption! or! nonHconsumption! of! a! good.! For! example,! let! us! assume!you!like!eating!fruit:!in!economics!terms,!you!derive!utility!from!consuming!fruit.!However,!if! ! not! like! fruit,! you! derive! utility! from! not! consuming! fruit.! Utility! applies! to! individual's! preferences!between!goods!whilst!society's!preferences!are!measured!by!welfare.! ! Total! economic! value! and! the! associated! utilitarian! perspective! is! not! the! only! economic! approach! available! to! decisionHmakers! but! it! is! based! on! explicit! trade! offs! and! social! preferences.! This! corresponds!to!the!way!decisionHmakers!take!decisions!in!realHlife:!how!much!should!society!invest!in! mangroves! versus! clean! air?! How! much! should! society! invest! in! maintaining! the! quality! of! the! environment!versus!investing!in!healthcare?! ! This!framework!divides!the!total!economic!value!of!a!good!or!a!service!into!a!use!value!and!a!nonHuse! value.! Use% value! refers! to! the! benefit! derived! from! the! use! of! the! environmental! good! or! service.! Examples!of!use!values!are!the!revenues!derived!from!harvesting!fish!or!from!extracting!oil!from!the! ground!(including!offHshore),!from!the!recreational!use!of!a!given!site!such!as!a!neighbouring!park!or! forest,!or!from!living!in!a!home!with!an!ocean!view.!These!uses!can!be!direct,!like!fish!harvesting!or! indirect,!like!flood!regulation.! ! NonPuse%values!are!values!allocated!by!society!to!goods!and!services!but!do!not!stem!from!the!use!of! these! good! and! services.! You! might! for! instance! value! the! Great! Barrier! Reef! in! Australia! or! the! Amazonian!forest!even!if!you!do!not!nor!will!ever!use!it.! ! Use!and!nonHuse!values!are!assumed!independent!one!from!the!other!and!mutually!exclusive.!This! assumption!means!that!use!and!nonHuse!values!can!be!estimated!separately!and!then!added!up!to! derive!the!total!economic!value:! ! Total%Economic%Value%=%Use%Value%+%NonPuse%Value% ! NonHuse!values!can!be!further!broken!down!into!Option,!Existence,!Bequest!and!Stewardship!values! (Figure! 1).

Figure% 2 :Figure%3

 2 Figure% 2:% Consumer% surplus% is% the% area% ABE% and% producer% surplus% the% area% EBD.% The% sum% of% consumer% and% producer% surplus%is%equal%to%welfare%(area%ABD).%The%demand%curve%is%a%Marshallian%demand%curve.%Source:%unit%author.%

  the! true! economic! value! by! policies! (minimum! price! or! wage),! market! settings! (monopoly,! oligopoly),! the! mode! of! trade! (auctions).!In!nonHperfectly!competitive!markets!settings!(monopoly!and/or!oligopoly)!prices!are!set! higher! than! under! perfect! competition! and! are! consequently! also! considered! as! distorted.! Price! distortions! can! also! be! introduced! when! goods! are! auctioned! rather! than! traded! under! a! perfectly! competitive!market.!Taxes!and/or!subsidies!need!to!be!removed!from!market!prices!to!estimate!the! true! economic! value.! Taxes! and! subsidies! are! transfer! payments! within! the! economy! and! do! not! change! society's! welfare! nor! the! true! economic! value! of! the! good! considered.! The! use! of! market! prices! is! an! easy! enough! proxy! for! economic! value,! but! is! not! as! straightforward! as! it! first! appears! and!should!be!used!with!caution.! ! Replacement% costs! also! rely! on! market! prices,! but! the! value! of! the! good! or! service! is! measured! instead!by!how!much!it!would!cost!to!replace!it.!For!instance,!a!forest!could!be!valued!by!how!much! it! would! cost! to! replant! it.! This! method! relies! on! market! prices! and! is! thus! prone! to! the! same! ! problems! as! the! market! price! method.! Replacement! costs! only! measure! a! fraction! of! the! true! economic!value!of!a!good:!it!does!not!include!the!value!of!the!good!linked!to!preventing!changes!nor! takes!the!demand!for!this!good!into!account.!For!instance,!benefits!provided!by!an!established!forest! are! timber! exploitation,! water! filtration,! carbon! storage,! recreational! and! amenity! values.! Newly! planted! forests! however! do! not! provide! these! benefits.! The! value! of! this! established! forest! is! thus! greater!than!the!costs!of!seedlings!(replacement!costs).! ! DosePresponse%methods!are!based!on!linking!a!change!in!output!H!typically!a!change!in!productivity!H! to!a!change!in!environmental!quality.!Environmental!quality!is!considered!as!a!factor!of!production!in! this! approach! and! increasing! production! has! an! impact! on! environmental! quality.! For! instance,! a! paper! mill! produces! paper! but! its! production! also! create! water! pollution.! Increasing! paper! production!increases!water!pollution!(decreases!the!environmental!quality).

  the!survey!(spring,!summer,!fall,!winter).! ! Reliable!and!valid!estimates!can!be!extrapolated!from!a!sample!to!the!overall!population.!Estimates! are!said!to!be!(statistically)!reliable!when!repeated!measures!lead!to!the!same!value,!in!other!word! when!results!can!be!replicated.!Estimates!are!said!to!be!(statistically)!valid!when!their!value!is!close! to!the!true!unknown!value.!There!are!two!ways!of!ensuring!collection!of!data!representative!of!the! overall!population.!The!first!is!to!design!a!sampling!plan!to!collect!data!from!a!representative!sample! from! the! population! (in! this! context! "society! as! a! whole")! before! data! collection.! The! second! is! to! collect! data! on! respondents! and! check! that! average! values! and! distributions! of! each! respondent! characteristic!match!those!of!the!population!after!the!data!is!collected.!This!is!often!done!by!asking! respondents! to! provide! characteristics! about! themselves:! the! area! where! they! live,! their! income! ! range,! their! age,! their! education! level,! in! other! words! anything! that! might! make! preferences! vary! across! individuals.! We! also! need! to! take! seasonal! variations! into! account! as! they! could! influence! people's!willingness!to!pay.!Respondent!characteristics!and!time!patterns!are!typically!included!into! regression!analysis!to!"control!for!variation"!and!derive!reliable!and!valid!estimates.! ! Step%1!is!often!referred!to!as!the!first!stage!of!the!hedonic!price!method.!It!consists!in!regressing!the! price!of!a!good!(e.g.!a!house)!on!its!characteristics!(size!of!the!house,!number!of!rooms,!distance!to! the!nearest!school,!distance!to!the!park!considered,!distance!to!other!parks).!The!coefficient!of!one! characteristic! estimated! by! the! regression! corresponds! by! assumption! to! a! marginal! willingness! to! pay,! i.e.! the! marginal! unit! price! for! each! characteristic! (e.g.! price! paid! for! an! extra! square! meter,! price!for!an!extra!room,!price!for!an!extra!meter!to!the!nearest!school).!This!method!often!assumes!a! specific! relationship! between! the! overall! (known)! price! and! its! characteristics,! which! is! mathematically!modelled!by!a!specific!functional!form.!You!need!to!refer!to!an!econometrics!course! for! more! details! on! potential! functional! forms! and! estimation! techniques.! The! influence! on! the! coefficient! values! of! this! assumed! relationship! can! be! tested! by! changing! the! functional! form! adopted.! ! Step%2!is!often!referred!to!as!the!second!stage!of!the!hedonic!price!method.!Willingness!to!pay!is!the! area! under! the! demand! curve.! Knowing! willingness! to! pay,! we! can! easily! derive! the! demand! curve! using! mathematical! techniques.! Step! 2! consists! in! using! the! marginal! willingness! to! pay! (characteristic! coefficients)! estimated! in! Step! 1! as! parameters! in! the! estimation! of! an! inverse! Marshallian!demand!equation.!In!other!words,!this!step!assumes!that!the!price!of!the!characteristic!is! a! function! of! the! quantity! of! this! characteristic! as! well! as! other! parameters! that! can! influence! demand!for!a!good!or!characteristic.!The!variables!used!for!Step!2!regression!need!to!be!independent! from! the! variables! used! in! Step! 1.! Step! 2! regression! ideally! includes! variables! such! as! income,! quantities! and! prices! of! substitute! and! complementary! goods,! tastes,! the! type! of! environmental! good! considered! ("normal",! "inferior",! or! "superior"

  Figure%4:%Distance%decay%function%derived%from%the%application%of%the%travel%cost%method.%Source:%unit%author.%

  Figure%5:%Marshallian%demand%curve%derived%from%the%application%of%the%travel%cost%method.%Source:%unit%author.%

  -!Set!up!the!hypothetical!market!by!describing!the!environmental!good,!the! institutional!context!and!a!credible!payment!vehicle.! Step%2%-!Build!the!sampling!plan!of!survey!respondents!and!collect!survey!data!on!the! levels!of!environmental!provision,!obtained!bids!and!respondent's! characteristics! Step%3%-!Estimate!mean!and!median!willingness!to!pay!(accept)! Step%4!-!Estimate!the!bid!curve!i.e.!the!willingness!to!pay!(accept)!as!a!function!of! respondent!characteristics!(income,!age,!education)!and!the!level!of! environmental!quality,!then!aggregate!the!data! ! Step% 1! relies! on! building! a! hypothetical! market! for! survey! respondents! to! make! credible! bids.! This! involves!describing!this!hypothetical!market!with!the!appropriate!level!of!details,!so!respondents!can! make! informed! choices.! This! hypothetical! market! has! three! components:! (i)! a! description! of! the! environmental! good! or! service,! (ii)! a! description! of! the! institutional! context! in! which! the! environmental!good!or!service!is!to!be!provided!and!(iii)!the!method!of!financing!or!payment!vehicle.! Focus! groups! representative! of! the! society! considered! are! useful! in! testing! and! refining! the! hypothetical!market!set!up!and!description.! ! The! description! of! the! environmental! good! or! service! specifies! precisely! the! current! state! of! the! environmental!good!or!service,!the!consequences!of!a!change!for!this!state!and!who!the!change!is! likely!to!affect.!It!can!be!a!simple!text!description!but!photos!or!animated!films!can!also!be!used!to! show!how!changes!impact!the!current!state.! ! It!also!needs!to!clearly!identify!the!time!at!which!benefits!from!the!change!would!arise!as!this!might! influence! the! respondents'! willingness! to! pay.! For! example,! you! may! be! willing! to! pay! more! for! benefits!(e.g.!replenished!fish!stock)!arising!within!5!years!than!in!10!years'!time!only.! !

  explicitly!different!proposed!scenarios,!thereby!revealing!their!preferences!for!overall!scenarios!and! individual!attributes!of!the!scenarios.!For!the!same!reasons!as!the!Contingent!Valuation!method,!it!is! a!stated!preference!method.!By!varying!the!scenarios!for!each!respondent!and!across!the!different! respondents,!the!willingness!to!pay!(accept)!for!each!scenario!and!each!attribute!can!be!statistically! estimated.! ! Welfare!changes!are!measured!through!changes!in!willingness!to!pay!(accept).!In!theory,!the!incomeH compensated!Hicksian!demand!curve!can!be!mathematically!derived!by!integrating!the!willingness!to! pay! (accept)! function.! However! in! practice! this! is! not! often! done.! The! main! interest! of! using! the! method!is!to!obtain!a!proxy!for!the!economic!value!from!the!change!in!welfare!induced!by!a!change! in! environmental! provision:! the! average! or! median! willingness! to! pay! (accept)! is! often! directly! ! Table%4:%Identification%of%attributes,%their%current%level%or%(most%likely)%levels%for%a%given%change.%Source:%unit%author.% Attributes% Levels%

  the! respondent! understands! the! problem! fully! and! gives! a! credible! and! accurate! answer!reflecting!their!actual!H!rather!than!hypothetical!H!willingness!to!pay.!Also!as!for!contingent! valuation,!the!survey!instrument!includes!a!description!of!the!current!state,!likely!changes!and!their! positive! and! negative! consequences.! It! should! include! just! enough! information! so! that! the! respondent! gives! an! answer! as! close! to! a! realHlife! setting! as! possible.! Respondents! are! often! presented! with! several! choice! cards.! One! respondent! faces! several! choice! cards! and! no! two! respondents! face! the! same! set! of! choice! cards.! This! ensures! enough! variability! in! the! answers! provided! to! undertake! a! reliable! and! valid! estimation.! Questions! on! the! respondent's! attitude! towards!change!and/or!conservation!can!be!included!to!better!assess!the!credibility!of!the!answers! provided!and!provide!information!on!reasons!behind!choosing!one!or!another!alternative.!As!for!all! environmental! valuation! methods,! the! survey! finishes! with! questions! on! the! respondent's! characteristics! (income,! age,! education…).! This! survey! may! be! delivered! faceHtoHface! for! increased! effectiveness!and!better!direct!assessment!of!answer!validity!and!accuracy.!A!pilot!questionnaire!can! be! tested! on! representative! focus! groups! to! identify! how! to! improve! the! questionnaire! before! the! formal!data!collection.! ! Step%4!consists!in!estimating!the!willingness!to!pay!and!then!aggregating!the!results.!Depending!on!

  Economic!valuations!can!be!costly!in!terms!of!financial,!time!and!human!resources.!Benefit!transfer! offers!a!cheaper!alternative!to!other!valuation!methods!as!it!reuses!already!available!information.!As! a! result,! benefit! transfer! shows! great! potential! for! development! as! well! as! integration! of! environmental! valuation! into! policyHmaking.! The! method! has! developed! in! relation! to! valuing! demand! for! (rather! than! supply! of)! environmental! goods! and! services.! Benefit! transfer! simply! consists!in!"transferring"!economic!values!from!one!case!study!with!a!known!nonHmarket!economic! value!to!a!similar!site!to!be!valued!in!monetary!terms.!This!transfer!of!values!can!be!in!theory!made! across!time,!space,!populations!and!sometimes!across!ecosystem!goods.! ! Benefit%transfer!consists!of!two!steps:! Step%1%-!Identify!a!case!study!of!reference!as!a!source!of!economic!value!for!the!nonH marketed!good!of!interest!(site!1)! Step%2!-!Transfer!the!economic!value!from!the!case!study!of!reference!to!the!case!study!

  !involves!putting!a!quantitative!or!qualitative!value!for!each!criterion!and!each!option.!Ideally,! the! more! socially! desirable! the! outcome,! the! higher! the! criterion! value! to! ensure! consistency! of! ranking! across! the! different! criteria.! What! really! matters! are! the! relative! variations! for! a! given! criterion! between! options! H! that! is,! the! tradeHoff! between! 2! options! for! a! given! criterion.! For! ! instance,! Option! 1! is! associated! with! losing! 10! landHbased! jobs,! Option! 2! with! losing! 8! jobs! and! Option!3!with!losing!no!job.!To!obtain!the!right!ordering!between!options,!a!score!of!0!(=10H10)!can! be!given!to!option!1,!2!(=10H8)!to!option!2!and!10!to!option!3!(=10H0

Table ! 1

 ! ).%

	Table%1:%Example%of%an%externality.%
	%	Farmer%	You%	Economy%as%a%whole% =%Farmer%+%You%
	Agricultural%cost%	100!	0!	100!
	Water%pollution% cost%	0!	10!	10!
	Total%cost%of%
	agricultural%	100!	10!	110!
	production%
	!
	!
	Table%2:%Example%of%an%internalised%externality.%
	%	Farmer%	You%	Economy%as%a%whole% =%Farmer%+%You%
	Agricultural%cost%	92!	0!	92!
	Water%pollution% cost%	8!	0!	8!
	Total%cost%of%
	agricultural%
	production%

Table% 3:% Example% of% financial% and% economic% prices% in% a% 2Bperson% economy% (negative% figures% are% amounts% paid;% positive% figures%are%amounts%received).%Source:%unit%author.%

	%	You%	Subsidy%recipient%	Economy%as%a%whole% =%You%+%Subsidy%recipient%
	Price%	I100!	!	I100!
	Transfer%
	payment%

! Option% value! is

	!
	! the! value! allocated! by! society! to! the! potential! future! use! of! a! good! or!
	service!and!accounts!in!some!measure!for!uncertainty.!For!instance,!you!might!live!far!away!from!a!
	blue!whale!breeding!site!but!would!still!like!to!be!able!to!enjoy!watching!blue!whales!at!some!point!
	in!the!future.!You!would!therefore!be!ready!to!pay!to!protect!blue!whales!and!maintain!the!option!to!
	watch!them!later!in!your!life.!Existence%values!refer!to!the!value!placed!by!society!on!the!existence!
	of!an!environmental!good!or!service.!For!instance,!you!may!never!have!the!opportunity!to!personally!
	see!a!live!blue!whale!in!its!original!habitat,!but!you!like!the!idea!that!it!exists!and!would!be!happy!to!
	pay!to!help!preserve!its!existence.!Bequest%value!is!the!value!placed!by!society!on!the!environmental!
	state! passed! onto! the! next! generation.! For! example,! you! might! want! your! children! to! live! in! a!
	pollutionHfree! environment! and! therefore! place! a! value! on! bequeathing! them! a! pollutionHfree!
	environment.! Stewardship% value! is! the! value! placed! by! society! on! the! maintenance! of! a! healthy!
	environment! for! all! living! organisms! and! not! just! humans.! Conservationists! and! people! living! off!
	services!provided!by!the!environment!(farmers,!fishers…)!typically!have!stewardship!values.!
	!

Figure% 1:% Decomposition% of% the% Total% Economic% Value% into% use% and% nonPuse% values.% The% sizes% of% the% boxes% are% not% representative%of%any%order%of%magnitude.%Source:%unit%author.%

	! The!
	difference! between! the! types! of! values! (e.g.! use! and! nonHuse)! is! often! fuzzier! in! real! life! than! this!
	Total! Economic! Value! framework! suggests.! It! is! not! always! easy! to! differentiate! between! the!
	different!types!of!values!in!practice.!
	!

! The! total! economic! value! provides! a! simple! conceptualisation! of! the! different! types! of! economic! values.! It! also! serves! as! the! basis! for! categorising! the! different! valuation! methods.! Some! valuation! methods! capture! use! value! only! whilst! other! valuation! methods! capture! use! value! plus! varying! proportions! of! nonHuse! value.! However,! this! framework! is! not! as! easy! to! apply! in! practice.

2.2% Economic%measures%of%value:%How%do%we%measure%changes%in%welfare?%

	!
	What! we! want! to! measure! are! changes! in! society's! welfare! associated! with! the! loss! or! gain! in!
	environmental!goods!or!services.!Welfare!is!an!economic!measure!of!society's!level!of!"happiness".!
	These! changes! in! welfare! represent! the! benefits! or! costs! to! society! as! a! result! of! a! change! in!
	environmental! service! provision.! Changes! in! welfare! are! assumed! by! neoclassical! economists! to!
	depend!on!society's!preferences.!Changes!in!welfare!require!knowledge!on!both!demand!and!supply!
	but!are!often!estimated!in!contexts!where!demand!is!not!easily!observable.!Welfare!changes!are!thus!
	not!straightforward!to!measure!in!practice.!
	!
	The!methods!described!in!the!following!sections!are!based!on!slightly!different!measures!of!welfare!
	changes.!These!are!described!in!more!details!in!the!next!sections.!There!are!three!types!of!valuation!
	methods:!
	1. Non!demandHbased!methods!
	2. DemandHbased!revealed!preference!methods!
	3. DemandHbased!stated!preference!methods.!
	!

method% you% choose% influences% the% estimate% of% the% economic% value% obtained% as% a% result

.! This! is! because! the! chosen! method! not! only! influences! how! much!of!the!total!economic!value!you!estimate!(for!either!use!value!only,!or!use!and!nonHuse

  ! of! mosquito! nets! is! a! proxy! of! the! value! of! mitigating! malaria.! The! price! of! mosquito!nets! does! reflect! perfectly! on! society's! preference! for! mosquito! nets! assuming! nets! are! traded! in! a! perfectly! competitive! market! but! only! indirectly! measures! of! people's! preference! for! avoiding! malaria.!Because!of!these!drawbacks,!economists!have!favoured!the!demandHbased!methods!which! rely!on!the!elicitation!of!people's!preferences!as!described!in!the!next!section.! !

	2.4% Revealed%preference%method:%the%Hedonic%Price%Method%
	Hedonic!pricing!is!one!of!the!two!revealed!preference!methods.!It!is!based!on!the!use!of!a!surrogate!
	market! with! actual! (observed)! market! behaviours! to! estimate! the! value! of! nonHmarketed! goods!
	(referred!to!as!"characteristics"!for!this!method).!This!method!relies!on!the!assumption!that!people!
	value!a!good!based!on!the!sum!of!its!characteristics.!Welfare!changes!are!measured!by!changes!in!
	consumer!surplus.!The!most!cited!contributor!to!the!development!of!this!method!is!Lancaster!(1966).!
	!
	the!
	forest.!If!this!was!not!the!case,!then!there!is!no!reason!to!keep!the!land!under!forest!and!not!clearing!
	it.!

! ! Most! of! these! methods! are! convenient! for! estimating! economic! value! of! environmental! goods! and! services.! They! however! lead! to! values! which! do! not! directly! reflect! people's! preferences! for! the! environmental!good!or!service!but!rather!their!preferences!for!the!proxies!considered.!For!instance,! ! the! costThe!hedonic%price%method!consists!of!one!generic!and!two!specific!steps:! Step%0!-!Build!the!survey!and!sampling!plan!to!collect!data!on!the!good's!price,!the! good's!levels!(quantities)!of!individual!characteristics,!respondent's! characteristics!and!timing!of!survey! Step%1

  !Contingent!Valuation!method!is!one!of!the!two!stated!preference!methods.!a!stated!preference! method! because! it! does! not! rely! on! a! surrogate! markets! to! "reveal"! preferences! but! is! based! on! a! statement!of!how!much!(or!rather!how!much!more)!respondents!would!be!willing!to!pay.

	!
	!
	The!Contingent!Valuation!method!is!based!on!establishing!a!credible!hypothetical!market!and!asking!
	people! to! state! how! much! they! are! willing! to! pay! to! conserve! a! given! nonHmarketed! good! or! to!
	accept!a!reduction!in!provision!in!order!to!estimate!the!economic!value!of!this!good.!
	!
	Welfare!changes!are!measured!through!changes!in!willingness!to!pay!(accept).!In!theory,!an!incomeH
	compensated!Hicksian!demand!curve!can!be!mathematically!derived!by!integrating!the!willingness!to!
	pay! (accept)! function.! However,! in! practice! this! is! not! often! done! and! the! average! or! median!
	willingness! to! pay! (accept)! is! directly! taken! as! a! proxy! for! the! economic! value! to! be! used! in! costH
	benefit!analysis.!
	!
	The!contingent%valuation%method!consists!of!four!steps:!
	Step%1%

Table% 5:% Example% of% landPbased% attributes% from% a% case% study.% Source:% adapted% from% Borresch% et% al.% (2009,% Table% 2% Indicators%for%the%included%Landscape%Functions%page%4)%

	Landscape%	Values/Levels%	Explanation%
	function/characteristic%
	Plant!biodiversity%	• 170!plants/km²!	Absolute!number!of!plants!
		• 190!plants/km²!	investigated!per!km²!
		• 205!plants/km²!(status!quo)!
		• 225!plants/km²!
		• 255!plants/km²%
	Animal

  ).!A!similar!ranking!process!can! be!applied!to!each!criterion!(Table!8).! !

	Table%8:%Example%of%multiPcriteria%analysis%criteria.%Source:%unit%author.%
	!		Option%1:%	Option%2:%	Option%3:%
			BusinessHasHusual!	5%!decrease!in!	0%!decrease!in!
			scenario,!10%!	land!area!per!year%	land!area!per!year%
			decrease!in!land!
			area!per!year%
	Criteria%c1:!loss!of!landH	0!	2!	10!
	based!jobs!(score)!
	Criteria%c2:%likelihood!of!	80%!	60%!	30%!
	floods!
	Criteria%c3:%loss!of!		40%!	5%!	1%!
	recreational!and!cultural!
	activities!
	!
	The! absolute! value! of! one! criterion! might! affect! the! overall! outcome! if! it! is! too! different! from! the!
	others.!That!is,!if!all!criteria!but!one!have!their!values!between!1!and!10!and!the!last!criterion!has!
	values!between!100!and!200,!this!last!criterion!affects!the!final!choice!of!option.!A!change!of!scale!for!
	this!criterion!can!effectively!solve!this!scaling!problem.!
	!
	!
	Step% 3! involves! determining! weights! for! each! criterion.! This! can! be! done! through! selected! focus!
	groups!and!for!various!stakeholders.!Ideally!the!final!mix!of!stakeholders!should!be!representative!of!
	society!as!a!whole.!Each!individual!stakeholder!can!assign!weights!to!each!criterion.!The!weights!are!
	then! aggregated! to! derived! mean! weight! across! all! respondents! for! each! criterion.! The! scores! are!
	then! computed! for! each! option! as! the! weighted! sum! of! the! criterion! values! (Table! 9).! The! highest!
	value!corresponds!to!the!most!socially!desirable!option,!either!for!one!stakeholder!group!or!society!
	as!a!whole!depending!on!the!nature!of!the!respondent.!
	!
	Table%9:%Example%of%the%general%outcome%from%a%multiPcriteria%analysis%for%selection%of%the%most%socially%desirable%option.%
	Source:%unit%author.%
	Criteria%	Weight%	Option%1%	Option%2%	Option%3%
	Criteria

Table ! 1:!Example!of!quantities!and!prices!to!estimate!costs!and!benefits!for!a!range!of!land!uses.!Source:!unit!author.! Type of land use: Agriculture National park or conservation area Carbon storage Benefits

 !

		labour, hired labour…)
	Price	Market price per unit	Labour wage	Price per tree seedling
		agricultural input;
	(per quantity unit)	labour wage
	Quantity Crop yield (tonnes/ha)	number of visitors	Number of tonnes of
		times area cropped	(country nationals,	carbon stored
		(ha); number of	foreign tourists…)
		animals (kg of meat)
	Price	Market price for crops;	entry fee per visitor;	Carbon market price
		Market price for	willingness to pay per
	(per quantity unit)	animals; Market price	visit (if no entry fee
		for meat	charged)
	Variable Costs
	Quantity Quantity of agricultural	Number of park	Number of trees
		inputs (fertiliser, water,	employees (park	planted
		seeds, animal feed and	rangers, welcome
		fodder, fuel and	centre…)
		machinery, family

  give you $10 today, would you take the money? Yes! ! If I give you $10 but you can choose between receiving this money today or tomorrow, when would you take it? You would probably choose to have it today rather than tomorrow but waiting till tomorrow should be fine too. ! Taking this further, if you have to choose between receiving $10 today or next year, you would most probably choose to have the money today rather than next year. Now, if you could choose between receiving $10 today or $11 next year, what would you choose? And what if I offered you $20 next year instead?

Table 2

 2 provides examples of present values.

Table ! 2:!Example!of!timing!of!benefits!and!computation!of!their!present!value.!Source:!unit!author.! Year 1 (present) Year 2 Year 3 Year 4

 !

	Benefit	100	140	200	200
	Discount rate	10%	10%	10%	10%
	Discount factor
		=1	=0.9091	=0.8264	=0.7513
	Present value
	= Discount factor	100	127	165	150
	* Benefit

Computation of net present values based on

Table 2.

Table ! 3:!Example!of!timing!of!benefits!and!the!computation!of!the!net!present!value.!Source:!unit!author.!

 !

	With Project	Year 1	Year 2	Year 3	Year 4
		(present)
	Benefit	100	140	200	200
	Costs	300	150	0	0
	Net benefit	-200	-10	200	200
	Without Project
	Benefit	100	90	90	90
	Costs	80	80	80	80
	Net benefit	20	10	10	10
	Incremental net benefit	-220	-20	190	190
	Present value of
	incremental net benefit (10%	-220	-18	157	143
	discount rate)
	Economic Net
	present value (10% discount		= -220 -18 + 157 + 143 = 62
	rate)

Table ! 4:!Example!of!timing!of!benefits!and!costs!and!computation!of!the!benefit&to&cost!ratio.!Source:!unit!author.!

 !

	With Project	Year 1	Year 2	Year 3	Year 4
		(present)
	Benefit	100	140	200	200
	Costs	300	150	0	0
	Without Project
	Benefit	100	90	90	90

Table ! 5:!Adjustments!to!derive!shadow!prices!from!financial!prices.!Source:!unit!author.!

 !

Course organisers

• , provided he/she has actively and collaboratively participated in the course.

! Cost&benefit!analysis!

Section Overview

This section is a brief introduction to the principles behind cost-benefit analysis and the type of conclusions that can be derived from it. Cost-benefit analysis is often used to assess whether a project, an action or a planned change are worth implementing compared to doing business-as-usual. More specifically, this section describes how to undertake a financial cost-benefit analysis from actual (financial) prices, and then how to adapt it to the viewpoint of society as a whole to derive an economic costs-benefit analysis (also called social cost-benefit analysis). This section is meant to provide a guide to critically analyse an existing cost-benefit analysis or to conduct one yourself.

Section Learning Outcomes

By the end of this section students should be able to:

• Describe the cost-benefit analysis framework • Identify relevant stakeholders, area of interest and a timeframe • Identify and value costs and benefits with and without project • Describe how to structure a financial cost-benefit analysis • Explain why economists use discounting and its consequences for consideration of future generations

• Calculate financial indicators to assess if it is worth undertaking the project • Explain why sensitivity analysis is important and how to undertake it • Describe the steps involved in adapting a financial cost-benefit analysis to obtain an economic cost-benefit analysis

Identification of stakeholders, area of interest and timeframe

Firstly, as for any good study, it is important to understand the context in which the assessment is to be done very carefully and thoroughly. A good understating of the study context is essential to build a cost-benefit analysis that closely matches real-life conditions and derive reliable results for informed decision-making. Failing to do so invariably leads to inaccurate and/or misleading outcomes with policy-makers and project managers taking the wrong decisions. As well as a waste of financial and human resources, consequences of these ill-informed decisions can be disastrous especially for vulnerable populations (e.g. the poor). So it is very important to do a good job from the start and get it right! Session/Week 5 Date March 30 th -April 6 th 2014

Cost-benefit analysis is a tool that helps assess whether a project is worth undertaking compared to business-as-usual. As part of the context analysis, the area of interest (project scale) and the main stakeholders should be clearly and explicitly identified. The main stakeholders often include local communities, local or national government bodies, non-governmental organisations (NGOs), donors... Participation of local stakeholders into the cost-benefit analysis process can often help identify who should be considered as impacted by the project and with what scale/scope. Including the right people form the start help raise awareness about the project. This is also helpful to calibrate the cost-benefit analysis so as to more closely match real-life conditions and derive results that leads to good decisionmaking.

It is also very important to consider on what timescale the change (project) occurs in order to give an appropriate timeframe to the cost-benefit analysis. Again, this can be fostered by stakeholder participation for greater assessment accuracy.

The constraints faced by stakeholders, the area of interest and the chosen timeframe impact the amounts and variation of costs and benefits across stakeholders, space and time. These constraints should also be identified as part of the context to better frame the cost-benefit analysis and potential associated risks.

Identification of "with project" and "without project" scenarios

Cost-benefit analysis is a method derived from accounting. It is used by policy-makers and project managers to assess whether an action, planned change or project is worth undertaking. This framework of analysis considers that a project is worth undertaking if the net benefits derived from it are greater than the costs. This is often undertaken separately for each stakeholder or group of stakeholders. Costs and benefits of the project are to be identified as clearly and precisely as possible. They can be broken down into as many categories as appropriate. They can be calculated from individual prices and quantities. The net benefit derived from the project is computed as follows:

With project net benefits = With project benefits -With project costs

Even if we keep doing business-as-usual, benefits and costs vary from one year to the next. The likely pattern of variation in costs and benefits (or in prices and quantities) needs to be identified. Similar to the with project scenario, the without project (or business-as-usual) net benefit can be computed as follows:

Without project net benefits = Without project benefits -Without project costs All three indicators are complementary and when possible should be computed to assess a project's worth. In our example, all three indicators lead to conclude that the project is worth undertaking. However, these indicators do not necessarily always lead to the same conclusion, in which case a further formal discussion on whether the project is worth undertaking needs to be included with the cost-benefit analysis.

These indicators can be computed in a financial setting (ie when costs and benefits correspond to actual money flow in the economy) as well as in an economic setting (where costs and benefits correspond to the values allocated by society as a whole, which may or may not match actual prices).

In the case of a financial analysis, the economic indicators of a project's worth can sometimes be referred to as "financial indicators".

Sensitivity analysis to assess risk and resilience

One of the limitations of cost-benefit analysis is that it often relies on average values for quantities, prices, costs and benefits. This means that the analysis and the economic indicators derived from it provide a good idea of whether the project is worth undertaking on average but fail to consider the viability of the project under extreme events such as droughts, floods, food crises, financial crises. This is important because extreme events are becoming more frequent as a consequence of climate change.

A sensitivity analysis aims to assess consequences on the project's economic worth for risks arising from the project itself or external forces. A good sensitivity analysis helps assess the resilience of the consequences of project implementation and its social consequences. This is particularly critical to assess whether livelihoods of already fragile populations can be sustained even under extreme events or not.

A simple way of conducting a sensitivity analysis is to identify the main quantities and/or prices that are likely to change, e.g. because of droughts, floods, changes in inputs or fluctuations in commodity prices on the world market. This can be done in consultation with the relevant stakeholders and/or based on local or international expert opinion. The average values originally used in the cost-benefit analysis are changed to the new "extreme" values and the economic indicators of a project's worth are recalculated to assess whether the project remains economically worth implementing.

If the project is worth doing on average but not under extreme events, a policy-maker might want to consider either not undertaking this project or providing some form of safety net such as an insurance scheme or subsidies for when these extreme events occur especially for projects targeting fragile populations. This decision depends on wider political considerations and needs to be discussed with the relevant stakeholders to figure out what the best applicable solution is.

Alternatively, the values of quantities and prices of inputs (raw materials, labour, minimum wage, discount rate...) can be changed to obtain "switching values" -the values for which the project becomes economically undesirable (e.g. the input value which leads to NPV=0). You can change one value at a time and/or a bundle of values. You then need to estimate whether the values under which the project becomes economically undesirable are likely to arise or not, in light of previous and future biophysical and economic patterns and by discussions with local and national stakeholders and experts. Again, depending on the results and consultation with stakeholders, you may want to abandon the project and/or introduce safety net mechanisms.

Social analysis and Environmental analysis

A good financial or economic assessment not only comprises a cost-benefit analysis but also a social analysis and an environmental analysis to assess the consequences of the project on the different populations (ethnicities, villages…) as well as on the environment (pollution, natural resource availability…). These are not detailed in this unit but are essential to assess accurately the success and resilience of the project considered for implementation.

Derivation of economic costs and benefits from financial values

A financial analysis is based on the financial costs and benefits to participants (individuals, firms, organisations) whereas an economic analysis is based on the costs and benefits to society as a whole. Financial costs and benefits are typically observed through market prices, user fees… In this unit, we are interested in economic values rather than financial values.

Economic values are referred to as shadow prices, as they are "in the shadow" of the financial values that can be observed in real-life. Economic values correspond to opportunity costs and/or willingness (negative NPV in the economic analysis) but that allows poor stakeholders to benefit from it (positive NPV in the financial analysis).

Because the values of the costs and benefits have changed, a new sensitivity analysis should be performed. The environmental and social analyses undertaken in relation to the financial cost-benefit analysis still need to be conducted undertaken as a complement to the financial and economic costbenefit analyses.

From:

The


Filip Maksimovic

Brad Wheeler

David C Burnett

Osama Khan

Sahar Mesri

Ioana Suciu

Lydia Lee

Alex Moreno

Arvind Sundararajan

Bob Zhou

Rachel Zoll

Andrew Ng

Tengfei Chang

Xavier Villajosana

Thomas Watteyne

Ali Niknejad

Kristofer S J Pister

A Crystal-Free Single-Chip Micro Mote with Integrated 802.15.4 Compatible Transceiver, sub-mW BLE Compatible Beacon Transmitter, and Cortex M0

Keywords: low-power radio, system-on-chip, smart dust, crystal free, BLE, 802.15.4

We present an 802.15.4 compatible transceiver that operates without any off-chip frequency reference. With integrated Cortex-M0, the chip can also transmit BLE beacons with only three external connections (power, ground, and antenna). The RF transmitter operates with >10% system efficiency at -10 dBm output power from a regulated supply. The entire chip, including the microprocessor, can operate below 1 mW peak power when transmitting. The analog receiver power consumption is 1.03 mW from a 1.5V battery.

Introduction

Building a standards compatible 802.15.4 or BLE radio with no crystal reference is challenging due to local oscillator (LO) frequency drift, phase noise, chip/bit clock jitter, and real time clock jitter (for time slotted protocols). We report a low-power transceiver (TRX) that, through one-time calibration and periodic network compensation, operates without the use of an external frequency reference while maintaining compatibility with commercial off-the-shelf 802.15.4 wireless SoCs. The key elements of our solution are a digital controlled oscillator (DCO) with a sourcedegenerated capacitor DAC for fine-tuning/ modulation, and a combination of room-temperature frequency calibration with a network-based IF-tracking loop in the receiver. The transmitter (TX) is also capable of transmitting BLE advertising (iBeacon) packets using only power, ground, and antenna connections, and no other external components. The TRX is co-integrated with a Cortex-M0 and packet handling.

Implementation and Measured Results

The RF DCO is implemented with a class-B CMOS LC tank architecture. The thick-metal 65 nm process allows for a large inductance and high Q (7.4 nH and a Q of 18, both simulated). A high LQ product is important for having a voltage large swing, which impacts both mixer and PA performance so that no power is burned in high frequency LO buffering. Two separate, overlapping, 5-bit capacitor DACs located at the drains of the cross-coupled devices are used for band and channel tuning. 5-bit fine tuning and direct frequency modulation is performed with a degenerated capacitor [1]. The minimum frequency resolution is between 90 kHz and 100 kHz across the ISM band (an equivalent C of ~9.4 aF) without the use of a varactor, series capacitor, or dithering. The full DCO tuning range is 26%, and the peak FOM is -188 dBc/Hz. A benefit of operating without a PLL, in addition to power savings, is a reduced turn-on time. With a pre-set frequency, the LO settles from cold start within 50 s (Fig. 2). This is limited by the settling time of the constant-g m current source that is filtered to prevent its noise from degrading the phase noise of the oscillator. An integer divider is used for LO frequency calibration and testing, and can be used for chipping clocks of both 802.15.4 and BLE TX.

Transmitter efficiency versus output power is shown in Fig. 3. The peak system (LO + PA) sub-mW efficiency is 11.8% at approximately -10 dBm output power with a TX power consumption of 847 W. This power does not include microprocessor power and is calculated from the regulated PA and LO voltages (~800 mV). The transmitter can back off to -20 dBm output power with 600 W power consumption from a 1.5 V battery voltage, albeit at < 2% system efficiency.

The receiver is a mixer-first low-IF architecture that uses a passive resonant tapped-capacitor match both for voltage gain and to boost the 50 source impedance to approximately 1.1 k (simulated). In-phase and quadrature oscillation is derived from the LO with a single stage RC polyphase filter. The complex down-conversion mixer is followed by an OTA with tunable resistive feedback for gain control. Filtering is performed using a series of three second-order discrete-time switched-capacitor IIR filter stages [2] that form a bandpass filter centered at the 2.5 MHz IF. The signal is sampled with two four-bit ADCs at 16 Msps. RX performance is in Fig. 4.

Crystal-Free Operation Single-temperature calibration is sufficient to find channels in the ISM band, as shown in Fig. 5. However, if temperature changes, the LO frequency will drift. Doing a one-time measurement of three frequency points at room temperature allows for a polynomial fit calibration accurate to within ±40 ppm for all 802.15.4 channels (Fig. 5). Once an initial channel has been acquired, network based feedback can be used to maintain channel accuracy in the presence of temperature and supply variations. To demonstrate crystal-free operation across temperature, an off-the-shelf TI CC2538 was used to transmit 802.15.4 packets every 125 ms. The RX, which had already been calibrated to find the initial channel, locked onto this series of incoming packets and activated its radio in sync with the expected rate of incoming packets. For every packet received that had a valid CRC the receiver estimated the average IF and tuned the LO DAC to maintain a constant IF as in [3]. The RX chipping clock, which is derived from a free running RC oscillator, can be calibrated by making a comparison against the divided LO frequency. The resulting LO and RX chip clock accuracy is shown in Fig. 6. $" &6:482 56< !;@2 .>056@20@A>2 .:1 /8;07 16.4>.9 &A<<8E 0;:16@6;:6:4 06>0A6@? .>2 :;@ ?5;C:

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Acknowledgements

The authors acknowledge the students, faculty, and sponsors of the Berkeley Wireless Research Center and the Berkeley Sensor and Actuator Center, silicon donation from TSMC, and Integrand and Lorenz tools. This work is funded in part by the Intel ULP Radios for IoT ISRA program.