Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

Figure F.1 Main evaluation methodsSource: Pearce, D., Atkinson, G., Mourato, S., 2006, Cost-Benefit Analysis and the Environment, OECD, ParisWhen environmental service markets are available, the easiest way to measure economic value is to use the actualrelated market price. For example, when marine pollution reduces fish catches, market values for the lost harvest areeasily observed in the fish market. When there is no market, the price can be derived through non-market evaluationprocedures. This is the case, for example, of air pollution since no market value can be associated with clean air.When the goods to be evaluated are not traded in a real market, their value should be estimated using otherapproaches. The starting point of the evaluation, as for all costs and benefits, is looking at the individual preferences.A benefit is measured by the individual willingness-to-pay to secure it, and a cost is measured by the willingness toaccept a compensation for the loss. In particular:Negative Environmental ImpactsWTP to avoid a deteriorationWTA compensation for a deteriorationPositive Environmental ImpactsWTP for an improvementWTA compensation to forgo an improvementThree main methodologies can be applied for estimating the monetary value of changes in non-market goods:- Revealed Preference Methods- Stated Preference Methods- Benefit Transfer Method.Revealed Preference MethodsThis approach implies that the valuation of non-market impacts is based on the observation of the actual behaviourand, especially, on the purchases made in actual markets. Consequently, the focus is on real choices and impliedwillingness-to-pay.The strength of these approaches is that they are based on actual decisions made by individuals. The main weaknessis the difficulty of testing the behavioural assumptions upon which the methods rely.222