Ideally, economic values for ecosystem services quantify tradeoffs between clearly defined reference conditions (the natural range of variability of a specific type of wetland before it was altered) and the condition after a proposed alteration. Difficulties in valuation methodologies arise because ecosystem services are typically not traded in markets, and thus do not "reveal" their monetary value in the way conventional economic goods and services do. Below are examples of econometric techniques for determining market values for ecosystem services.

Indirect Markets/Revealed Preferences

Revealed preference techniques examine the price people are willing to pay for marketed goods that have an environmental component. This provides a market proxy for the value of naturally functioning systems. The drawback to methods in this category is that the value revealed by observed behavior will almost always understate the true social value of an asset, since most environmental assets are public goods, and many are provided by governments rather than by markets.

Avoided Cost estimates the value of services that allow society to avoid costs that would have been incurred in the absence of those services. For example, coastal wetlands and estuaries help inland communities avoid property damages caused by flooding from storm surges.

Replacement Cost estimates the potential market value of services that could be replaced with man-made systems if a technological alternative were feasible. For example, water treatment facilities often warm the outgoing water, and as a result cause stream warming, which is not allowed by the Clean Water Act. Many water treatment facilities can build cooling towers or chillers to cool the treated water before returning it to streams. Riparian wetland restoration can provide equal amounts of cooling, with better ecological outcomes.

Factor Income estimates the value of ecosystem services that directly provide for the enhancement of individual incomes. Water quality improvements can improve fish habitat, thereby increasing the yield of fish and the individual incomes of the fishermen. However, this requires developing a relationship between water quality improvements and increased fish production.

Travel Cost can reflect the implied value of the service to the user if access to some ecosystem services requires travel. Wetland recreation such as bird-watching by visitors whose value placed on that area can be estimated to be at least what they were willing to pay to travel to it.

Hedonic Pricing estimates the additional price that people are willing pay for extra amenities provided by ecosystem services. For example, prices of houses adjacent to natural areas, wetlands, rivers, estuaries, or beaches tend to exceed the prices of houses without such amenities. The added value of proximity to amenities can be identified independent of the overall market price of the house.

Stated Preferences

Stated Preference techniques ask individuals or groups, in a highly structured way, what they would be willing to pay for a set of hypothetical environmental improvements or what they would be willing to accept (as compensation) for hypothetical environmental degradation. Such surveys are expensive, controversial, and are most reliable when the questions concern specific ecological services that are directly related to individuals' well-being. The more complex the improvement or change, the more difficult is the valuation.

Contingent Valuation and Conjoint Analysis are types of stated preference techniques that estimate the demand for ecosystem services by posing hypothetical scenarios involving some valuation of alternatives. Using a random survey of the general population of a community with several nearby wetlands, it would be possible to ask residents what they are willing to pay for increased water quality, thereby generating a direct estimate of value.

Source

National Research Council, 2004. Valuing Ecosystem Services: Toward Better Environmental Decision-Making. The National Academies Press, Washington, D.C., p. 277.

Compiled by Treg Christopher, Institute for Natural Resources (2012)