Hedonic pricing and travel cost methods of pricing

The overall objective of socio-economic assessment is to maximize the benefits of future investment in an enterprise in a sound and sustainable way. This chapter provides a review of various techniques that have been developed overtime for evaluating socio-economic benefits of non tradable good and services and ends with a discussion on how one of the techniques was utilized in evaluating the socio-economic benefits of cattle in the present study. The chapter comprises of three sections. The first section highlights various techniques for evaluating socio-economic benefits, situations under which each of the techniques are utilized, their advantages and disadvantages. The second section of the chapter provides a review of past studies that have attempted to evaluate non-marketed benefits of livestock. It also explains the method each of the study utilized, the findings and conclusion. The third and final section of this chapter concludes with how the present study differs from past studies and its likely contribution to literature.

2.1 Socio-economic valuation techniques

Overtime economists have developed techniques to determine the value of goods and services that are not tradable. These techniques have been categorized broadly into revealed preference techniques, stated preference techniques and ex ante assessment (Dofonsou et. al., 2008). Revealed preference techniques rely on values being inferred from people’s behavior in markets that are in some way connected to the socio-economic value. Revealed-preference methods exploit the relationship between some forms of individual behavior and associated environmental attributes to estimate value. Their main example includes hedonic pricing (HPM) and travel cost method (TCM). Ex-ante assessment measure the trade-offs resulting from a change to an existing management of a resource (Campbell et. al., 2003). An example of ex-ante assessment technique is the cost benefit analysis (CBA).

Revealed preference methods

The HPM is used in estimating economic values of an ecosystem or environmental services that directly affect market prices. It is often applied to estimate variations in housing prices that reflect the value of local environmental attributes (Taylor, 2003). HPM can be used to estimate economic benefits and costs associated with environmental quality (air pollution, water pollution, noise), or environmental amenities (aesthetic views, proximity to recreational sites). The basis of HPM is that the price of a marketed good is a function of its characteristics. To apply HPM, the following information must be collected: a measure or index of the environmental amenity of interest; data on property values and household characteristics for a well-defined market area for example distance to an environmental amenity, such as a view of the ocean.

HPM has several advantages which includes; it is useful in estimating values based on revealed preferences, property markets can be good indicators of value because they respond reasonably well to information, property records are reliable, and data on property sales and characteristics are easily available and the method is versatile and can be adapted to consider possible interactions between market goods and environmental quality. The disadvantages of HPM includes: the scope of environmental benefits that can be valued are limited to attributes related to housing prices, it only captures people’s WTP for perceived differences in environmental attributes and their direct consequences, data requirement are substantial, requires a high degree of statistical expertise and its results depend on model specification.

The travel cost method (TCM) is used to estimate the value of recreational benefits derived from ecosystems (Parsons, 2003). It assumes the value of the site, or its recreational services, is a function of peoples’ WTP to get to the site. It uses actual behavior (revealed choices) to infer values. The travel cost method is useful in estimating economic benefits or costs generated by changes in access costs for recreational sites, elimination of existing recreational sites, addition of new recreational sites, or changes in environmental quality at recreational sites. The basis of the travel cost method is that time and travel expenses incurred by visitors is the “price” of accessing the site. The WTP to visit the site is then estimated from the number of trips made at different travel costs (analogous to estimating their WTP for marketed goods based on the quantity demanded at different prices).

However, to apply the TCM information must be collected about: number of visits from each origin area; demographic information about people from each area; round-trip distance from each area; travel costs per kilometer; the value of time spent travelling or the opportunity cost of travel time. Using various survey methods, additional information can be collected in terms of other sites visited or substitute sites; other possible reasons for making a trip to the site; characteristics of the site, and quality of experience at the site. The most challenging elements of applying the TCM relate to accounting for the opportunity cost of travel time for a trip made to achieve more than just a purposes of visiting the recreation site for example a trip made by a person to meet a business partner at the recreation site, and the fact that travel time might not be a cost to some people, but might be a part of recreational experience.

The advantages of TCM includes: it is based on actual rather-what people actually do-rather than stated willingness to pay-what people say they would do in a hypothetical situation; it is relatively cheap to apply since people are usually willing to participate in on-site surveys as opposed to telephone or mail interviews, and this provide opportunities for large sample sizes, as visitor tend to be interested in participating; it closely mimics the more conventional empirical techniques used by economist to estimate economic values based on market prices and it is relatively inexpensive to apply for example when compared to hedonic pricing method.

The disadvantages of TCM includes: it assumes people respond to changes associated with travel costs in the same way they respond to changes in admission price to the recreation site; The most simple models of TCM assumes that individuals take a trip for single purpose-to visit a specific site. Thus is a trip had more than one purpose, the value of the site may be overestimated; defining and measuring the opportunity cost of time spent travelling can be problematic, because the time spent travelling could have been used in other ways, it has an “opportunity cost”. This should be added to the travel cost, or the value of the site will be underestimated; interviewing visitor on the site can introduce sampling biases to the analysis; measuring recreational quality, and relating recreational quality to environmental quality can be difficult.