Flood prevention schemes: guidance for local authorities

ANNEX B: COMPONENTS OF ECONOMIC VALUE AND ENVIRONMENTAL ASSETS

Introduction

B1 Economic value is determined by individual preferences and, where there is a market in the goods or services in question, can generally be taken as the market price, at least as a first approximation. Many goods and services, however, have no market price, either because they are provided 'freely' by the state, such as defence, law enforcement and street lighting, or are otherwise freely available to all, such as a panoramic view. However, such goods still have an economic value. In the appraisal of flood prevention schemes it is the valuation of environmental or recreational assets for which there is no readily available market price that is likely to prove problematic. On top of the economic value deriving from the direct use of an unpriced asset, there are other components of economic value which might arise in some cases. These are:

• a functional value, where an asset serves a number of functions and yields benefits other than those deriving from its direct use by 'consumers';
• an option value given to maintaining the option of being able to use the asset in the future, although it is not currently used;
• an existence (often termed a 'non-use' or 'passive use') value representing a value which people attach to the continued existence of an asset for the benefit of current or future generations, even though they make no direct use of it themselves.

B2 Care always needs to be taken to avoid double counting by estimating total economic value in one way and then adding on some components which have already been implicitly included within the calculation.

The need to derive existence values

B3 In principle, all of these elements should be appraised when valuing changes to an unpriced environmental or other asset which arise as a result of carrying out - or not carrying out - any flood prevention scheme. In practice, however, it is likely to be changes in the use and functional value of the asset that will dominate. Three questions should be addressed initially.

(1) Under what circumstances is it necessary to appraise existence values?

(2) How can it be done?

(3) Is it likely to affect the result of the benefit-cost analysis if it is done?

B4 If the answer to the third question is 'No', so that the inclusion of existence value is unlikely to have any bearing on the outcome of the analysis, the first 2 questions become entirely academic. The use of existence values in practical contexts will, moreover, carry a considerable degree of uncertainty. Consequently, any estimates are likely to prove contentious. This is particularly so since those schemes where existence values are likely to have an important bearing on the final choice of option tend themselves to be contentious. Hence, rather than including explicit existence values within the benefit-cost analysis, it may be preferable to adopt the pragmatic approach of attempting to quantify, in non-monetary terms, the relative impact of existence values on the options under consideration, on the basis of consultations with interest groups and the wider public. Consideration can then be given as to how large the implicit monetary values would have to be to affect the choice of scheme, and whether such values are plausible on the basis of the information deriving from the consultation process. With the direct attribution of monetary values to existence values there is a danger of discussions becoming sidetracked into philosophical arguments about whether a monetary value ought to be attached to the environmental asset in question as well as methodological arguments about the adequacy of the particular technique used to derive that value.

B5 The results of any study of existence values will, however, generally be less contentious if there is a consensus that some 'do something' option is preferable to the baseline alternative so that the question essentially reduces to one of deciding whether it is worth spending a particular sum of money.

B6 There are 2 circumstances when it may be necessary to include an assessment of existence value. These are:

(1) where a proposed scheme protects only an environmental asset from loss or damage;

(2) where a proposed scheme would protect an environmental asset, amongst other properties, but the readily valued benefits are not sufficient on their own to justify a scheme.

B7 Even here it might be more helpful to look first at alternatives, such as the cost of replacing the asset or of its local protection, before embarking on an appraisal of existence values. Seeking to appraise the existence value of losses or damage to environmental assets, arising as a consequence of one or more of the 'do something' options, however, is unlikely to be helpful in reaching a decision on the best option. If such losses are unavoidable then, through discussion with interested parties, the scope for compensatory works should be explored.

Determining existence value

B8 If it does prove necessary to appraise the existence value of some change in environmental assets, then a methodology such as contingent valuation (Mitchell and Carson, reference 16) or conjoint analysis (Louviere, reference 15) should be used to derive this value. Such a study needs to be carried out by well-qualified practitioners and is liable to be quite expensive (>£50,000) taking some time (> 6 months) to complete. Ideally, in advance of the main fieldwork, qualitative studies will be undertaken, for example, using focus groups (Krueger 1988, reference 14). Such studies should seek to explore exactly what it is that the public values, or for which they are prepared to pay, and why they are prepared to pay. It is a useful opportunity to gain an understanding of how the public defines the decision that must be made, and how they believe it ought to be made. Again, in a main contingent valuation or conjoint analysis study itself, emphasis should be put on gaining an understanding of how different members of the public approach the choice. Additionally, it will be helpful to discuss the formulation of the study with interested parties, including the statutory consultees.

B9 One of the major issues in studies of existence value has been whether a value for the particular site is being obtained or something rather more ill-defined, such as a preparedness to pay for environmental protection as a whole. Care therefore needs to be taken that the values elicited from any study are specific to the asset in question, and do not relate to that type of asset in a more generic sense. For example, if an existence value for a SSSI is being sought, the interview schedule should be designed so that a clear distinction can be made between a preparedness to pay to preserve the specific SSSI and SSSIs in general.

B10 Another major issue in appraising existence value is the specification of the appropriate population. What are the geographical boundaries defining the population that is deemed to place an existence value on the asset and, by implication, which population is prepared to pay for it? It clearly makes a profound difference to the calculation of the existence benefit of protecting a site if an average existence value (the sample mean amount for individual preparedness to pay) of £1.60 a year relates to the population of the entire country, or only the population living within 5 kilometres of the site in question. The identification of the appropriate population is often neglected so that a relatively small monetary value (mean individual preparedness to pay), ends up being multiplied by a very large but essentially arbitrary population figure.

B11 This question can first be explored through the qualitative studies; for instance, by selecting the samples for the studies from populations living at various distances from the site in question. Secondly, the population to which the mean preparedness to pay is applied should not be wider than the population that was sampled in the quantitative study. Thus, if only people living within 10 kilometres of the site were interviewed, then it is a conservative assumption that people living further away are not prepared to pay to protect the site. Within the sample, it may be worthwhile exploring whether there is any relationship between the distance individuals live from the site and either the likelihood that they are prepared to pay at all, or the total amount they are prepared to pay. Where there is such a relationship, the population mean should be calculated by the appropriate weighting by distance.

B12 The individual figures found in the study will be intended to reflect the total economic value, both use and existence, of the site to the particular individual. Usually, they will contribute some use value to some individuals that will have been valued by other means. If so, this element must be removed from the sample estimates, to leave only existence value, and hence avoid double- counting of use values within the benefit-cost analysis. If it is assumed that the only difference between 'users' and 'non-users' is that one group uses the site and the others do not, users should be expected to be more likely to be prepared to pay, and to pay more, than non-users. This difference should be equal to the use value of the site to those users. Therefore, on this argument, the mean sample preparedness to pay of non-users can be used as the basis for generalising to the relevant population. However, the argument depends on the validity of the assumed sole difference between users and non-users, which must be checked. It is also necessary to determine whether there is a statistically significant difference between the preparedness to pay of the 2 groups.

Guidance for contingent valuation and other studies

B13 In general, both the contingent valuation and conjoint analysis techniques should be treated as experimental methods rather than routine tools. Consequently, it is necessary to establish the validity of the results, particularly that individual differences in preparedness to pay reflect those differences which are expected theoretically. Equally, because they are experimental techniques, it would be undesirable to set such restrictive rules as to inhibit innovation and the development of improved methodologies. Therefore, other than the adoption of social survey good practice, the rules below define what should be achieved, rather than prescribe the means to achieve those ends.

B14 The minimum requirements for a contingent valuation or conjoint analysis study are:-

• Sample size should be a minimum of 500 individuals.
• This shall be a random sample of the population to which it is intended to generalise the results.
• Professional quality fieldwork is required, complying with the Interviewer Quality Control Scheme and the Code of Conduct of the Association of Market Survey Organisations. This fieldwork should normally be undertaken by a specialist fieldwork organisation.
• Personal interviews with respondents are required rather than postal surveys or telephone interviews.
• The results may not be generalised to a wider geographical population than that included in the sample.
• The effects of distance on both the probability that an individual is prepared to pay and the amount that an individual is prepared to pay shall be analysed.
• The 'use value' component of preparedness to pay shall be removed from preparedness to pay when estimating existence value.
• The likelihood that an individual is prepared to pay, and the amount that an individual is prepared to pay, shall be reported separately.
• Since theory predicts that both the likelihood an individual is prepared to pay and the amount that such an individual is prepared to pay depend upon a number of factors, notably income, the extent to which the results are consistent with theory shall be reported.
• A report of the reasons why the values obtained can be treated as specific to the site in question is required.

Further reading

B15 There are many books and publications available on this topic but references 12 to 16 provide a selection of texts, including those referenced in this Annex. Bateman and Willis (reference 12) provide a good review of the state of the art in theory and methodology and Burgess, Clark and Harrison (reference 13) give a critical examination of how people actually respond in a contingent valuation study seeking to derive an existence value for a specific site.