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III. Institution building for integrated ocean management

Parts I and II provide information from which criteria for institution building can be derived. Both the constraints that affect current organizational arrangements and the success or the limitations demonstrated by new experiments in institution building contain a wealth of experience that should not be overlooked.

The review of institutional problems showed that the core of the matter resides in the need to strengthen the political and planning infrastructure for ocean development while improving the linkages among the various components of the marine governance system. The national experiences reviewed offer a number of approaches to this end. However, before discussing the specifics of institution building, three premises should be taken into consideration.

First, the existing institutional structure must be, as much as possible, the foundation for performing new ocean/coastal related tasks. All countries already have an institutional structure in place that can, with appropriate support, perform many or most of the functions involved in ocean policy formulation and implementation. Consequently, what is needed is the strengthening of the decision-making and communication processes rather than creating new institutions.

Second, strengthening the infrastructure for ocean development involves not only operational and structural adjustments but the provision of the necessary means - capital, technology, human resources, and managerial capabilities - so the institutional structure is capable of performing effectively what is demanded of it. In the majority of countries, these are lacking. Shortcomings are felt particularly in the availability of expertise and technical capacity to address coastal and ocean management issues, marine scientific research, information systems for planning and management, marine technology, and overall funding. (United Nations 1990)

Third, in designing institutional arrangements, provisions should be made for the incorporation of decision-making mechanisms that take account of the environmental and socio-economic linkages between the coastal and ocean areas, and that facilitate the formulation of management strategies which reflect these linkages and integrate coastal (land) and ocean (sea) management efforts.

Institution building strategy

With a structure in place, there is a need to devise an institution building strategy by which, ideally, the following aims are attained:

1. Ocean affairs are elevated within the public policy agenda so marine related policies may be discussed with a view to formulating an integrated national ocean policy.

2. Policy objectives and national priorities set forth in the national ocean policy are effectively integrated within national development planning.

3. All levels of government as well as all interested parties, whether in the private or public arena, are involved in the formulation and execution of an integrated ocean development or EEZ plan.

There are a number of institutional options to address the above challenges. The objectives are, on the one hand, to secure political will and a firm commitment to ocean development at the highest levels of government, and, on the other hand, to build capabilities and awareness within and outside the government and to increase the involvement of governmental and non-governmental organizations as well as of the business and academic communities, in ocean affairs.

National experiences indicate, for example, that the involvement of national and provincial/state planning bodies in the formulation of CAM plans in some South-East Asian countries was a very effective means to ensure government acceptance and to secure budget allocations. (Chua Thia-Eng 1989) That is a valid assessment; however, the objective goes beyond that. In other words, decision-makers should perceive that the marine sector can make an effective contribution towards attaining the interests and objectives of national development. Only in this way is there a chance that ocean affairs can have a prominent role in the overall strategy of a country.

The policy level

Integrated ocean policy requires the highest level of political direction and oversight in order to ensure its success. Although there is no ideal organization to perform the task of formulating an integrated ocean policy and of interagency coordination, national experiences indicate that one of the most effective mechanisms to achieve this objective is the establishment of an inter-ministerial, inter-agency board or council, at the highest political level, presided over by the minister in charge of the lead marine-oriented agency of the country. This body would bring together governmental and non-governmental organizations involved in ocean/coastal affairs. It should provide the necessary leadership and the opportunity and the leverage for policy priority-setting and inter-agency coordination to a degree that previously has not been possible. It may also establish technical committees to conduct studies as required by both policy and planning bodies.

The planning level

Traditionally, a national planning office, or a similar agency, has the responsibility for coordinating the formulation and implementation of national economic policy. Thus its influence extends over the whole of the marine sector. This agency is charged with the formulation and coordination of all general plans for economic and social development and for their presentation for evaluation and approval by higher authorities. In the formulation of their sectoral development plans, all public agencies should follow the planning norms established by the national planning agency. Through their responsibility for making investment recommendations, they have a strong influence in the allocation of budgetary funds among governmental institutions.

Moreover, planning agencies have long-standing experience in short-range and long-range policy analysis and government investment planning. This gives them a unique advantage over other sectoral agencies in terms of their capability to assess the interactions among ocean sectors, and to make comparisons among sectors, in order to establish priorities and to make investment decisions. This task, which is politically sensitive, can only be accomplished by an organization that is located at the highest level in the governmental structure (Knecht et al. 1984). Thus the highest planning body of the country is the ideal choice to give operational effectiveness to ocean policies by becoming the focal point for ocean/coastal planning. The rationale behind this assertion is the following (Vallejo 1991):

- responsibility for strategic ocean/coastal planning and for investment planning should be located at the highest level of the governmental hierarchy. This would include addressing the constraints faced by governments regarding funding of ocean and coastal planning and management efforts as well as allocation of scarce financial resources;

- to perform effectively, the planning body needs the authority to prepare and implement a comprehensive development plan;

- governing, inter alia, the inherent relationships of sustainable resource development and environmental protection; the improvement of the information base for management decisions; the development of human resources; and other needs as required;

- establishing the stages and sequences of development;

- coordinating technical studies in support of policy planning investment decisions, together with universities, technical institutions, and the business community;

- programming in terms of standards, time schedules, technological requirements, and other means to implement the plan effectively;

- to attain the goals of integrated ocean planning, the planning authority should use a number of instruments for strengthening the involvement of all levels of government and other interested parties.

In addition, experience suggests that the technical work of formulating and implementing a plan should be shared at two different levels of planning: while overall direction of the effort at the national level should be located at the national planning agency or other lead agency, the technical work of formulating and implementing the plan should descend through all levels of government and non-governmental entities who should actively participate in the planning and implementation phases. This applies particularly to CAM which requires administrative structures and decision-making systems that descend to the local level.

As illustrated in the cases examined (see tables 1-4), the degree of decentralization depends on various factors, such as the purpose of planning (for example, strategic planning, regional planning, local planning), the geographical locale of planning (such as a multiple resource region, an estuary, a semi-enclosed sea), the thrust of planning (for example, to zone resource locations and use patterns and then to set guidelines for resource use), and the planning approach selected (such as, bottom-to-top approach). Among all these types of situations, planning and management may be carried out by the central planning agency, by various levels of government, by special government agencies in partnership with the industry, and in some cases by local people.

Likewise, there may be several combinations in the degree of authority, dependence, funding, and responsibility of all agents involved in the planning and management process. The decision-making networks will also vary depending on the relative relevance of the issues vis--vis the scale and context of the judgements and decisions involved (for example priority development of offshore oil and gas over fisheries would be a decision taken at the highest level of government as it concerns strategic planning objectives).

Finally, integrated ocean planning, encompassing as it does a coastal component, cannot be conducted in isolation. Thus local planning cannot ignore broad national priorities; neither can overall ocean planning ignore the impact of ocean issues and policies on coastal communities. Truly integrated ocean planning should embrace this multiplicity of interdependent activities.

The implementation level

Implementation should fall, as much as possible, within the sphere of existing governmental organizations. However, when the structure does not cover the required decision-making functions and competences, the mandates of existing institutions should be extended, as required by programmes and projects. The arrangements should provide not only for the delegation of authority and responsibility to specialized bodies but also operational links for joint decision-making among the operational bodies, so the unity and consistency intended at the planning stage is maintained throughout the implementation process. (Machado Rego 1984) In this regard, the establishment of technical forums or executive committees to discuss technical issues have been a success in various projects (Organisation of American States 1984). Finally, monitoring of the execution of programmes and projects is an integral part of the continuous cyclic function of policymaking, planning, and implementation. Follow-up and evaluation of plans and programmes are required in order to be able to translate the implementation experience into new policy criteria, if necessary.

Whatever institutional arrangement is devised, no planning and implementation will be effective without qualified staff, without managerial capabilities, or without funding, and a reasonable scientific and technological basis. As to human resources, high priority should be given to the development of expertise, particularly in the field of interdisciplinary approaches to policy formulation and implementation. A key priority is to build the necessary policy analysis and decision-making competence to deal with the complex problems and issues involved in the development of ocean/coastal areas. Likewise, in order to develop the necessary integrated planning expertise, national planning offices should consider the creation of special staff training programmes for the purpose of preparing their personnel (as well as personnel in other governmental and non-governmental organizations) for the tasks ahead. Some courses of this nature, especially designed for training of national planners, are available through the assistance of international organizations. (Vallejo 1991)

The establishment of the necessary conditions to enable countries to fulfil their managerial responsibilities involves primarily the provision of information systems as well as enforcement capabilities. There is a need to improve the information available to decision-makers. This includes, inter alia, the establishment of appropriate databases, resource inventories, statistics, geographic information systems, as well as a permanent system for the exchange of managerial and technical information. Likewise, there is a need to develop enforcement capabilities for monitoring, control, and surveillance.

The mobilization of financial resources is a key issue in the process of institution building. Developing countries, in particular, have been hampered by the lack of internal finance, and have therefore depended entirely on external assistance, which often is insufficient to pursue the goals originally stated. Thus countries should not rely on external funds to support an extended commitment to ocean and/or coastal area management. Given the political will, an effort should be made to mobilize domestic resources proportionate to the dimensions of the undertaking. While this approach by no means precludes a continuing effort to obtain external funding, particularly for specific projects, it does suggest the need to devise means to generate domestic funds, for example, by increasing the regular budget of marine-oriented agencies, or the creation of a fund for the purpose of financing a new office at the national planning agency, and for marine development projects, in which the participating agencies may provide some funding, plus new funds from general government sources. (Vallejo 1991) Investment from the private sector should also be considered.

Conclusions

The problems, experiences and challenges confronted by nations in developing policy and institutions for managing coastal, nearshore and ocean environments illustrate the complexity of this endeavour. The review of national experiences shows that there are no fixed institutional models that can be adopted by any country. Rather, there are alternative institutional options that should be tailored to the particular circumstances, institutional modalities, and traditions of each country.

Moreover, despite the limitations of traditional institutional arrangements, the growing number of institution building initiatives inspire confidence for the future. There is, however, still a long way to go. As governments go about building their ocean development programmes, there is still a need to strengthen existing institutions for the effective implementation of marine policies, for firmly integrating the marine dimension into national development planning, and for harnessing and maximizing the participation of all levels of government and other organizations dealing with ocean planning and management.

The challenge involves not only the development of new governmental capacity to address the complex issues and functions involved in ocean development, but also conducting in-depth research on governance arrangements for integrated ocean planning and management. This is a relatively new field of knowledge that requires our full attention in order to acquire more knowledge, to develop experience, and to provide innovative ideas.

References

Arriaga, L. "Integrated planning and management of Ecuadorian coastal zone." In: Sea-use planning and coastal area management in Latin America and the Caribbean: Report of the Expert Group Meeting. Economic Commission for Latin America and the Caribbean (ECLAC). Santiago, Chile, 28 November - 1 December 1989.

Ch'ng Kim Looi. "Integrated coastal resource management plan: a first for Malaysia." In: Sixth Symposium on Coastal and Ocean Management (Charleston, South Carolina, 1989) Coastal Zone '89. New York: American Society of Civil Engineers, pp. 2177-2191.

Chua, Thia-Eng. "Developing coastal area management plans in the Southeast Asia region." In: Sixth Symposium on Coastal and Ocean Management (Charleston, South Carolina, 1989) Coastal Zone '89. New York: American Society of Civil Engineers, pp. 2192-2201.

d'Almeida Pires-Filho, I., and D.E. Cycon. "Planning and managing Brazil's coastal resources." Coastal Management 15 (1987) 61-74.

Ecuador. "Structure and objectives of a coastal resources management programme for Ecuador and a Manifesto of support for the programme." International Coastal Resources Management Project: Technical Report Series TR-D-2. Published jointly by: Ministerio de Energia y Minas (Ecuador), the University of Rhode Island Coastal Resources Management Center, and the US Agency for International Development. June 1988. p. 32.

Herz, R. "The Brazilian coastal management programme." In: Sea-use planning and coastal area management in Latin America and the Caribbean: Report of the Expert Group Meeting. Economic Commission for Latin America and the Caribbean (ECLAC). Santiago, Chile: 28 November - 1 December 1989.

Hout, E. "Ocean policy development in the State of Oregon." Coastal Management 18 (1990), 255-266.

Knecht, R.W. et al. The management of ocean and coastal resources in Colombia: an assessment. Technical Report WHOI-84-21. Woods Hole, Mass.: Woods Hole Oceanographic Institution, 1984, p. 198.

MacDonald, C.D., A.M. Clark, and S. Shannon. "The Hawaiian ocean resources management programme: policy planning and inter-agency coordination." In: Seventh Symposium on Coastal and Ocean Management (Long Beach, Calif, 1991) Coastal Zone '91. New York: American Society of Civil Engineers, pp. 2633-2644.

Machado, Rego, P. "Institutional arrangements for marine resource development." In: Institutional arrangements for marine resource development. Report of the Expert Group Meeting on Institutional Arrangements for Marine Resource Development, United Nations Headquarters, 10-14 January 1983. Document No. ST/ ESA/144. New York: United Nations Department of International Economic and Social Affairs, 1984, pp. 66-87.

Marriot, A. "Third World Fisheries Departments." Marine Policy 14 (1990) no. 5: 453-454.

Organisation of American States. Integrated regional development planning: guidelines and case studies from OAS experience. Washington, D.C. 1984, p. 230.

Sorensen, D., and M. Hershman. "Ocean policy development in the State of Washington." Coastal Management 18 (1990), 297-310.

United Nations. Law of the Sea. Realisation of benefits under the United Nations Convention on the Law of the Sea: Needs of States in regard to development and management of ocean resources. Report of the Secretary-General. Document No. A/45/712. New York: United Nations, 1990, pp. 16-18.

Vallejo, S.M. "Development and management of coastal and marine areas: An international perspective." Ocean Yearbook, vol. 7 (1988), pp. 205-222.

Vallejo, S.M. "Human resources development: an outline for a training course in ocean management." In: Sea-use planning and coastal area management in Latin America and the Caribbean: Report of the Expert Group Meeting. Economic Commission for Latin America and the Caribbean (ECLAC). Santiago, Chile, 28 November - 1 December 1989.

Vallejo, S.M. "Institutional requirements for ocean development and environmental protection." In: The ocean change: management patterns and the environment. Presented at the Meeting of the International Geographical Union (IOU) Commission on Marine Geography, La Rabida, Spain, 22-25 May 1991.

van Hoorn, H. "Marine policies in the North Sea region: the experience of The Netherlands." In: Sea-use planning and coastal area management in Latin America and the Caribbean: Report of the Expert Group Meeting. Economic Commission for Latin America and the Caribbean (ECLAC). Santiago, Chile, 28 November 1 December 1989.

White, A.T. "Comparison of coastal resources planning and management in the ASEAN countries." In: Sixth Symposium on Coastal and Ocean Management (Charleston, South Carolina, 1989) Coastal Zone '89. New York: American Society of Civil Engineers, pp. 2123-2133.

White, A.T., and N. Lopez. "Coastal resources management planning and implementation for the fishery sector programme of the Philippines." In: Seventh Symposium on Coastal and Ocean management (Long Beach, Calif. 1991) Coastal Zone '91. New York: American Society of Civil Engineers, pp. 762-775.

Environmental accounting and valuation in the marine sector


I. Introduction and need for improved environmental valuation
II. Classification of economic values and description of valuation techniques
III. Practical application of techniques for valuing marine resources
IV. Conclusions and recommendations
Notes
Select bibliography


Ernst Lutz and Mohan Munasinghe

I. Introduction and need for improved environmental valuation

The efficient use of natural resources (both mineral and biological), as well as man-made capital and human resources, are a vital prerequisite for sustainable development. The recent worldwide concerns about the environment have emphasized the importance of incorporating the effects of environmental degradation into conventional decision-making, including those affecting the crucial area of marine resources. One key role of environmental economics is to help value environmental and natural resources more precisely, and internalize the costs and benefits of using such resources into the conventional calculus of economic decision-making. However, the pervasive influence of the environment and the broad range of environmental impacts raise formidable problems of analysis and practical implementation.

At the local or project (micro) level, environmental impact analysis (EIA) provides the means of redesigning development schemes and policies to minimize adverse environmental effects. On the intermediate level, sectoral and regional studies serve the same purpose. At the national level, environmental macroeconomic analysis and environmental accounting help us to develop better economy-wide policies for sound natural resource management. Finally, on the global scale, transnational and planetary models are being developed to deal with issues such as global warming, ozone layer depletion, protection of international waters, and preservation of biodiversity.

To achieve this spectrum of desirable activities, the development of better techniques for economic valuation of environmental impacts and assets is an important prerequisite. In particular, such valuation is the first step towards improving environmental accounting techniques, which in turn will facilitate more effective national and international decision-making to manage aquatic and other environmental resources. The reason is that current national accounting systems do not capture the value of natural resources and environmental degradation adequately, and therefore development strategies that rely on standard income accounting techniques may not result in sustainable development.

There are three specific shortcomings:

a. Natural and environmental resources are not included in balance sheets. Therefore, national accounts represent limited indicators of national wellbeing since they measure inadequately - or even "perversely" - changes in environmental and resource conditions.

b. Conventional national accounts fail to record the depreciation of natural capital, such as a nation's stock of water, soil, air, nonrenewable resources, and wild lands which are essential for human existence.

c. Clean-up costs (such as expenditure incurred to restore environmental assets) are often included in national income, while environmental damages are not considered.

The above shortcomings apply to resources and environmental assets that are national in character. In the case of marine resources that fall outside the 200-mile zones of national boundaries, various additional problems arise as these are considered common property by all countries.

With regard to marine resources some specific shortcomings are:

1. Currently the flow of fisheries output enters the national income accounts in terms of commercial value of the fish catch minus production costs. The stock of fish resources does not enter the system of national accounts (SNA). However, in the future such information could be shown in environmental satellite accounts linked to SNA.

2. If proper accounting of drift-net fishing had been done, it is likely that such accounting would have shown that this is not a profitable activity, since natural capital was being destroyed in significant amounts while only a few commercially valuable species were being used.

3. Oil spills reduce the natural capital, but rather than recording this fact, the present system records only clean-up expenditures which are included in the GDP as true value added (and which therefore cause GDP to increase when a clean-up is undertaken after an oil spill.)

The deficiencies in current national income accounting point to the need for an accounting framework that addresses the preceding concerns and permits the computation of measures such as an environmentally adjusted net domestic product (EDP) and an environmentally adjusted net income (ENI). Such measures would attempt to account better for the depreciation of both man-made and natural capital, exclude relevant categories of defensive environmental expenditures, and estimate damages to the environment as a result of economic activities. Taking into account depreciation of natural capital and calculating an EDP would likely result in a lower level of measured income and perhaps also a lower growth rate.

Improving the quality of decision-making to achieve a more sustainable development path requires:

1. Good understanding of the physical, biological, and social impacts of environmental degradation.

2. Better estimates of the economic value of damage to the environment, to improve the design of policies and projects, and arrive at environmentally sound investment decisions; and

3. Development of policy tools and strengthening of human resources and institutions to implement viable strategies and manage natural resources on a sustainable basis.

With regard to the first step of determining impacts, we have to rely on the skills of multi-disciplinary teams of engineers, ecologists, agronomists, social scientists, and other experts. The second step in considering environmental effects involves valuing the physical impacts and relationships. An environmental impact can result in a measurable change in production and/or change in environmental quality. A number of techniques have been developed to trace the welfare impacts of these changes, as described in the next section. The third step involving policy application, particularly in the marine sector is explored in section III.

II. Classification of economic values and description of valuation techniques

Conceptually, the total economic value of a resource consists of its (i) use, and (ii) non-use values. Use values may be broken down further into the direct use value, the indirect use value, and the potential use value (option value). One needs to be careful not to double-count both the value of indirect supporting functions and the value of the resulting direct use.1 The categories of non-use values are existence and bequest values. Figure 1 shows the application of these concepts to the valuation of wetlands. There is a link between option and existence values, but they are distinct concepts. Option value is today's willingness-to-pay (WTP) of individuals, who wish to conserve the asset for future use. Existence value, on the other hand, is the perceived value of the environmental asset unrelated either to current or optional use, i.e. simply because it exists.2

Fig. 1 Conceptual framework for valuing wetland benefits

A variety of valuation techniques may be used to quantify the above concepts of value. As shown in table 1, valuation methods can be categorized on the one hand, according to which type of market they make use of and, on the other hand, considering how they make use of actual or potential behaviour.

From a more practical point of view the following organization of the same valuation techniques (according to analytical method) might be useful.

A. Direct effects valued on conventional markets

The primary feature of the methods considered in this section is that they are directly based on market prices or productivity. This is possible where a change in environmental quality affects actual production or productive capability.

Table 1 Taxonomy of relevant valuation techniques

  Conventional market Implicit market Constructed market
Based on actual behaviour • Change of productivity • Travel cost • Artificial market
  • Loss of earnings • Wage differences  
  • Defensive expenditure • Property values  
Based on potential behaviour • Replacement cost   • Contingent valuation
  • Shadow project    

Change in productivity

Development projects can affect production and productivity either positively or negatively. The incremental output can be valued by using standard economic prices. Barbier et al. (1991) have applied the change-in-productivity approach to a flood plain in Nigeria; Hodgson and Dixon (1988) applied it to sedimentation effects on coral diversity and, thus, fish production.

Loss of earnings

Changes in environmental quality can have significant effects on human health. Ideally, the monetary value of health impacts should be determined by the willingness of individuals to pay for improved health. In practice, one may have to resort to "second best" techniques such as using foregone earnings through premature death, sickness, or absenteeism (and increased medical expenditures, which can be considered a type of replacement cost). This approach may be relevant, for example, when considering road and industrial plant safety, and projects that affect air pollution in major cities of developing countries.

The "value-of-health" approach is often questioned on ethical grounds. It is argued that it dehumanizes life, which is considered to have infinite value. In practice, however, society implicitly places finite values on human life and health in policy and projects decisions that affect the environmental quality, workers' safety, or health. If this was not so, we would be justified in spending all of GDP on health improvements.

Actual defensive or preventive expenditures

Individuals, firms, and governments undertake a variety of "defensive expenditures" in order to avoid or reduce unwanted environmental effects. Environmental damages are often difficult to assess, but information on defensive expenditures may be available or can be obtained at lesser cost than direct valuations of the environmental goods in question. Such actual expenditures indicate that individuals, firms, or governments judge the resultant benefits to be greater than the costs. The defensive expenditures can then be interpreted as a minimum valuation of benefits.3 However, caution is advisable with this approach, especially in cases where defensive expenditures are arbitrarily mandated by governments, having little or no relationship to market forces or free choices by informed economic agents.

B. Potential expenditure valued on conventional markets

Replacement cost

Under this approach, the costs that would have to be incurred in order to replace a damaged asset, are estimated. The estimate is not a measure of benefit of avoiding the damage in the first place, since the damage costs may be higher or dower than the replacement cost. However, it is an appropriate technique if there is some compelling reason as to why the damage should be restored, or certainty that this will occur.

The replacement cost approach could be applied in a variety of cases. One example would be to use the cost of an artificial fish nursery to estimate the value of coastal wetlands that might be impaired by a project.

Shadow project

When evaluating projects that have negative environmental impacts, this approach involves the design and costing of one or more "shadow projects" that provide or substitute environmental services to compensate for the loss of environmental assets under the ongoing projects. This approach is essentially the same as the replacement cost approach and is increasingly being mentioned as a possible way of operationalizing the concept of sustainability at the project level. It assumes that there is a constraint to maintain environmental capital intact, and therefore could be most relevant when "critical" environmental assets are at risk.

C. Valuation using implicit markets

The methods and techniques described in this section use market information indirectly. The approaches discussed are the travel cost method, the property value approach, the wage differential approach, and uses of marketed goods as surrogates for non-marketed goods. Each technique has its own particular advantages and disadvantages, as well as requirements for data and resources. The task of the analysis is to determine which of the techniques might be applicable to a particular situation.

Travel cost

This approach is most often connected with recreational analysis in industrial countries, where it can serve to measure the benefits produced by recreation sites (ocean resorts, parks, lakes, forests, wilderness). Essentially the same approach can also be used to value "travel time" in projects dealing with fuel, wood, and water collection.4

The surrounding area of a site is divided into concentric zones of increasing distance. (Visiting the various zones involves different travel costs.) A survey of users, conducted at the site, determines the zone of origin, visitation rates, travel costs, and various socioeconomic characteristics. Users close to the site would be expected to make more use of it, because its implicit price, as measured by travel costs, is lower than for the more distant users. Based on the analysis of the questionnaires, a demand curve can be constructed and the associated consumers' surplus determined. This surplus represents an estimate of the value of the environmental product in question.

Property value

This approach is also referred to as a hedonic price technique, and it is a subset of the more general land value approach. The objective here is to determine the implicit prices of certain characteristics of properties. In the environmental area, the aim of the method is to place a value on the benefits of environmental quality improvements or to estimate the costs of a deterioration.

The property value approach has been used to analyse the effects of air pollution in certain areas. Where pollution is localized, the method compares prices of houses in affected areas with houses of equal size and similar neighbourhood characteristics elsewhere in the same metropolitan area. The approach is based on the assumption of a competitive real estate market, and its demands on information and statistical analysis are significant; therefore, applicability to developing countries is limited.

Wage differential

This approach is based on the theory that in a competitive market the demand for labour equals the value of the marginal product, and that the supply of labour varies with working and living conditions in an area. A higher wage is therefore necessary to attract workers to locate in polluted areas or to undertake more risky occupations. Again, as in the case of the property value approach, the wage differential approach can only be followed if the labour market is very competitive. Also, the approach only reflects private valuation of health risks, not social ones.

Marketed goods as substitutes for non-marketed goods

There are situations where environmental goods have close substitutes which are marketed, and therefore the value of the environmental product in question can be approximated by the observed market price. For example, the value of a non-marketed fish variety can be valued at the price of the most similar fish being sold in local markets.

D. Valuation using a constructed market

Contingent valuation

In the absence of people's preferences as revealed in markets, the contingent valuation method tries to obtain information on consumers' preferences by posing direct questions about willingness to pay. Basically it asks people what they are willing to pay for a benefit, and/or what they are willing to accept by way of compensation to tolerate a cost. This process of "asking" may be either through a direct questionnaire/survey, or by experimental techniques in which subjects respond to various stimuli in "laboratory" conditions. What is sought are personal valuations of the respondent for increases or decreases in the quantity of some product, contingent upon a hypothetical market. Willingness to pay is constrained by the income level of the respondent, whereas willingness to accept payment for a loss is not constrained. Estimates of willingness to accept tend to be several times willingness-to-pay estimates.

Pearce and Markandya (1989) compared the contingent valuation method with others, more market-based methods, and found that in seven studies done in industrial countries the overlap of estimates is complete, if accuracy is expressed as plus or minus 60 per cent of the estimates computed. This result provides some reassurance that a rigorously applied contingent valuation method, while not being very precise, nevertheless can produce valuations that are of the right order of magnitude. This may be sufficient to rule out certain alternative projects or favour others, which can be valuable in decision-making.

The contingent valuation method has certain shortcomings, including problems of designing, implementing and interpreting questionnaires.5 While its applicability may be limited, there is now considerable experience in applying this survey-based approach in developing countries, for example, to evaluate the quality of supply of potable water and electricity services.6

In certain circumstances, the contingent valuation method may be the only available technique for benefit estimation, which can and has been applied to common property resources, amenity resources with scenic, ecological or other characteristics, or to other situations where market information is not available.

Artificial market

Such markets could be constructed for experimental purposes, to determine consumer willingness-to-pay (WTP) for a product or service. For example, access to a marine park could be offered to different visitors at various price levels, to determine the value placed on the recreation facility. This approach is not used frequently.


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