How much is Hyde Park worth?

A short review of environmental valuation models

and frameworks, and a travel cost case study.
Martin Knutli

4920 words
Imperial College London
September 4, 2014
Abstract
This paper seeks to outline some of the major frameworks, concepts
and models in environmental/ecological economics and their specic uses.
Examples are hedonic pricing, travel cost method, market based approaches,
the contingent valuation method and choice experiments. Furthermore, a
natural capital valuation of Hyde Park will be undertaken, using a travel
cost framework. The hope is to demystify these processes, and inuence
and incentivise major players to incorporate these frameworks in their
budgeting and accounting work.
1 Introduction
The majority of scientists worldwide advise individuals, corporations and gov-
ernments to act rapidly to prevent further emission of greenhouse gases. The
world is already seeing the beginning signs of what could turn into a paradigm
shift in the way of living for the human civilisation. Ice caps melting, sea levels
and global temperatures rising, acidication of the seas, extensive logging of
rainforests and some cities so polluted that stepping outside is more cancerous
than passive smoking (IARC 2013), are only a few examples. Slowly, various
institutions and organisations have come to terms with the pressing need to
move away from fossil fuels and instead rely on renewable energy. However,
climate change is not caused solely by the release of greenhouse gases. Forests
and oceans absorb enormous amounts of these gases, making it fair to say that
these natural assets provide a tangible service to society. Consequently, the
preservation and restoration of these assets is important.
Economics, as the study of how to allocate limited resources, relies on val-
uation to provide society with information about the relative level of resource
scarcity. The value of ecosystem services and biodiversity is a reection of what

This paper only portrays the views and work of the author, and is not necessarily repre-
sentative of the views of Imperial College London. The author takes full responsibility of the
content of this paper.
1
we, as a society, are willing to trade o to conserve these natural resources.
Economic valuation of ecosystem services and biodiversity can make explicit to
society in general and policy making in particular, that biodiversity and ecosys-
tem services are scarce and that their depreciation or degradation has associated
costs to society. If these costs are not imputed, then policy would be misguided
and society would be worse o due to misallocation of resources (TEEB 2010).
Valuation of private goods and services have well-developed methods and mod-
els. The problem with valuing ecosystems and biodiversity is how much of it is
regarded as a public or common good, leading to over-consumption (tragedy of
the commons), and more importantly, how it is regarded as inherently intangi-
ble. There are few and/or imperfect markets for biodiversity goods, resulting in
uncertainty about the demand and supply of natural resources, both now and
in the future. However, biodiversity and ecosystems can be viewed as natu-
ral capital, and the services these ecosystems provide can be regarded as the
interest on that capital. In the same sense an investor chooses a portfolio of
capital assets to minimise risk, policy makers should choose a level of biodiver-
sity and ecosystems that generate a ow of services which maintain the present
and future level of environmental quality. This level should be maintained by
imposing various incentive schemes (e.g. eco-taxes, payment for ecosystem ser-
vices
1
, green public procurement
2
, CAT-bonds
3
or species swaps
4
) onto private
and public actors. Alternatively, as this paper advocates, simplifying and de-
mystifying the process of including natural capital into accounting frameworks
could also prove benecial.
2 Theories, Frameworks and Concepts
2.1 Preference-based approach and Biophysical approach
There exists a vast number of valuation models, some specically developed to
address environmental issues, and others which have been customised to produce
relevant results. In order to understand the hierarchy of conceptual approaches,
disciplinary frameworks and specic models/methods, Figure 1 has been made
to represent all major approaches.
This gure represents the two overarching value theories preference-based
valuation and biophysical valuation each broken down into several subcat-
egories, which subsequently are broken down into specic valuation methods.
When attempting to assign a monetary value to natural capital, the preference-
based approach is most convenient. Biophysical valuation aims to designate
a non-monetary value to the natural capital in question, meaning that e.g. a
preservation projects value can be measured in terms of number of species pro-
tected, square metres of trees saved from logging or litres of water kept clean
from runo. While these measurements can provide valuable data over time,
normally referred to as indicators (Reyers et al. 2010), these measurements cap-
ture the intrinsic value of nature. Assigning a monetary value is thus neither
1
See Redford and Adams, 2009
2
See European Environmental Agency, 2014
3
See article in Le Monde Diplomatique for in depth discussion on this
4
See Mandel, Donlan and Armstrong, 2009
2
Figure 1: Approaches to valuation (drafted from TEEB 2010).
the goal nor particularly useful. This paper will therefore in the following fo-
cus on preference-based approaches, which rely on models of human behaviour
and rest on the assumption that values arise from the subjective preferences
of individuals (TEEB 2010), and estimates the instrumental value of natural
capital.
2.2 Use Values and Non-Use Value
There is a range of value denitions in environmental and ecological economics,
some of which are especially relevant in the context of this paper. In particular,
use and non-use values are of interest, and can be found in Figure 1. Use values
are divided into three main categories; direct use value, indirect use value and
option value. Direct use value stems from the direct use of a natural resource,
e.g. consumption of water or food (NOAA 2014). Since most resources that
provide direct use value normally are distributed through markets, the market
value of the good is usually the relevant measurement. Indirect use values
reect the services received from natural resources, e.g. clean air because of
photosynthesis or ood prevention from mangroves (ibid.). Option values are
the potential benets obtained from using the resource in the future (ibid.),
e.g. discovering medicinal uses of a rainforest plant or knowing that you can
use a park tomorrow and into the future. Option values can be further split
into existence value (utility derived from knowing something exists), altruistic
value (benets from knowing someone else benets) and bequest value (utility
gained from future improvements in the well-being of ones descendants) (Hein,
2010). Non-use value is derived from attributes inherent to the ecosystem itself
(Kolstad, 2000). It can be anthropocentric, meaning it has a natural beauty, or
ecocentric, meaning that plants and animals have a right to exist (Hargrove,
1989, as cited in Hein, 2010, pp. 36).
3
2.3 Total Economic Value
In Figure 1, output value is the sum of use values and non-use values. This
measure is more commonly referred to as Total Economic Value (TEV). TEV
tries to capture the current benets of ecosystems (which is the output value) as
well as the discounted future benets of an ecosystem service. An ecosystems
capacity to maintain a sustained ow of benets is referred to as insurance
value, and can include ecosystem functions such as water provisioning, puri-
cation and regulation (TEEB, 2010).
Total Economic Value = Output Value + Insurance Value
What TEV tells us is that the market price (i.e. the direct use value) of e.g.
timber is not a true reection of the goods value. A living tree has additional
properties, such as air cleansing, soil erosion control or habitat services (Ku-
mar, 2010 as cited in TEEB, 2010, pp. ) properties that provide indirect
benets to humans that are not accounted for in the market price, which only
reects the supply and demand. It should be emphasized that total in total
economic value is summed across categories of values (i.e., use and non-use
values) measured under marginal changes in the socio-ecological system, and
not over ecosystem or biodiversity (resource) units in a constant state (ibid.).
Within the TEV framework, values are derived, if available, from infor-
mation of individual behaviour provided by market transactions relating directly
to the ecosystem service. In the absence of such information, price information
must be derived from parallel market transactions that are associated indirectly
with the good to be valued. If both direct and indirect price information on
ecosystem services are absent, hypothetical markets may be created in order to
elicit values. (ibid.)
These hypothetical markets are what makes the foundation for many valuation
tools in environmental economics. The three main categories direct market
valuation, revealed preference and stated preference are listed in the gure be-
low, along with valuation methods within each category. In the following, each
valuation tool will be quickly discussed, before choosing the tool to be used in
order to perform a natural capital valuation of Hyde Park. In table 1, dierent
techniques have been summarised.
Valuation category Method
Direct Market Valuation Approach Market Price-based Approach
Cost Based-approach
Production function-approach
Revealed Preference Approach Hedonic pricing method
Travel Cost method
Stated Preference Approach Contingent Valuation Method
Choice Modelling
Table 1: Valuation Techniques (TEEB, 2010)
4
2.3.1 Market price-based approach
The goal of a market price-based approach is to value a provisioning service,
e.g. food, bre, fuel, biochemical, fresh water supply etc. Looking at the market
price of a commodity which a) exists due to the provisioning service in question
and b) sold in a market, it is possible to derive preferences and marginal cost of
production. Multiplying the price of the commodity with the marginal product
of the ecosystem service, gives an indication of the value of the provisioning
service.
2.3.2 Cost based-approach
Using a cost based-approach, the aim is to estimate the cost of articially recre-
ating the benets provided by an ecosystem. The approach is split into three
subcategories: mitigation/restoration cost method (the cost of mitigation or
restoration of ecosystem services that have been lost); avoided cost method
(costs that one would have faced in the absence of ecosystem services
5
) and;
replacement cost method (cost of replacing ecosystem services by articial tech-
nologies) (ibid.).
2.3.3 Production Function-based approach
With the production function-based approach, you look at an existing service
delivered in some market, then measure how much of that service delivery is
possible due to the contribution of an existing ecosystem service.
2.3.4 Travel Cost Method
The travel cost method estimates the value of e.g. recreational sites through col-
lection and regression of visitor data. As a revealed-preference method, the cost
(and sometimes time) of travel to the site is used as a proxy for price/willingness
to pay (Carr and Mendehlson, 2003). By calculating and extrapolating the cost
of travel and cost of time for visitors, a regression can be run to estimate a
demand function of the site. Once a demand function has been identied, cal-
culating the consumer surplus gives an indication of the value of the park. The
travel cost method will be explained in more detail, and carried out in part 3.
2.3.5 Hedonic Pricing Method
The hedonic pricing model has been used to identify the eect green areas have
on the property values of surrounding estates and through this put a price
on green areas. GLA Economics (2010) have conducted an in-depth study in
London in cooperation with Transport for London and London Development
Agency, looking at the eect green areas had on housing prices.
The hedonic pricing model is a linear regression model relying on observed
data, or more particularly, data types. A regression seeks to explain a depen-
dent variable, e.g. housing prices (H
price
), through a series of independent
5
The 2013 typhoon in the Phillipines, Hayan, is often used as an example. Here, the
damages caused by the typhoon could have been mitigated if the mangroves that used to
cover the shores were still intact. Instead, these mangroves had been cut to make room for
shrimp farms. In this case, it would have been a retrospective study to calculate the avoided
cost.
5
variables, e.g. square meters of property, proximity to transport and city cen-
tre, property age, number of rooms, socio-economic attributes, facilities and
proximity to green areas (referred to as X
1
, X
2
, . . . , X
n
). As a general rule, the
more variables you include to explain a dependent variable, the higher explana-
tory power (denoted R squared) the model gets
6
. One of these independent
variables is the proximity to green areas. From the expression below, the repre-
sents the eect X has on H
price
, i.e. if X increases by 1%, is how much that
change aects H
price
.
H
price
=
0
+
1
X
1
+
2
X
2
+. . . +
n
X
n
+
In the GLA Economics study, four dierent regression models were run, with
dierent numbers of independent variables (from one variable to 17 variables).
As more independent variables were added to the model, the explanatory power
of the model also increased. Interestingly, as more variables were added, the
proximity to green areas eect on housing prices became less and less impor-
tant. With 17 independent variables and an (adjusted) R squared of .767, the
value of green area proximity was estimated to be .03, which was much lower
than in the previous models. It was stated that some of this reduction was due
to the inclusion of a variable taking into account private gardens, which lowered
the demand for other park services (GLA Economics, 2010). The best approxi-
mation from this research is that each hectare of formal green space within 1km
of housing increases house prices by approximately 0.08% to house prices with
this model, in addition to the presence of a regional park within 600 metres
adding 1.9-2.9% (ibid.). These results are backed up by other studies, from e.g.
San Fransisco, where one study (Edwards, 2007) found that parks on average
add a green premium of $125.838 to properties within 500 feet of the park.
2.3.6 Contingent Valuation Method
A contingent valuation method (CVM) seeks to directly elicit individuals pref-
erences about public goods, and through this, the willingness to pay (WTP)
for the good through surveys, questionnaires or interviews (or alternatively, the
willingness to accept compensation for cases where e.g. an environmental nui-
sance brings individuals to a lower level of utility). By creating hypothetical
markets and scenarios, respondents are presented a good and the scenario under
which this good exists, and are then asked how much they would be willing to
pay for this good. The CVM focuses on valuing a specic change in an envi-
ronment, and therefore also produces a single value for environmental quality
(NOAA, 2014). The weakness of the approach is that it is vulnerable to biases
(e.g. strategic bias) and yeah-saying from the respondents.
2.3.7 Choice Modelling Experiment
The choice experiment method (CE) is an alternative valuation method to the
CVM. It has gained traction over the last years, due to its ability to elicit pref-
erences on a variety of attributes related to a non-market/non-tradable good.
Unlike the CVM, which generates a single value, the CE provides independent
6
See University of Strathclyde source for more information
6
values for many individual attributes of an environmental program. This allows
the researcher to examine the preferences at a more rened level (ibid.).
When choosing attributes and levels, it is important that the most relevant
attributes are chosen. It is advised that during this stage, the researcher should
run focus groups and interviews to identify the best attributes (Mangham, Han-
son and McPake, 2008).
Attribute Levels
Silence No noise Voices Car noise and voices
Air quality Smell of grass No smell Smell of garbage
Density of green area Full park Some trees No trees
Visitors Alone People, not full People, completely full
Distance from home Walk distance Bike distance Tube/car distance
Table 2: Attributes and Levels of a choice experiment
The next step would be to select levels for each attribute, as illustrated in
Table 2. Ensuring that the levels are realistic and meaningful will increase the
precision of parameter estimates (Hall et al., 2004). Following this, generating
so-called choice cards would be the nal step before proceeding to carry out
surveys and interviews. A choice card is generated by creating a hypothetical
scenario, made up of a certain combination of levels. When all levels have been
selected, they would normally be assigned a number (referred to as coding). Do-
ing this for each level and attribute would create a matrix, called the information
matrix. It has been recommended that using the so-called D-optimal design
gives the most precise information. D-optimality occurs when the determinant
of the information matrix is maximised (Boon, 2007). When D-optimality is
reached, the matrix is uncoded in order to get choice cards with combinations
of levels that allows extraction of the most precise information possible. Af-
ter data has been collected, the next step is analysis. According to Mangham,
Hanson and McPake (2008) the analysis typically includes a regression with a
dichotomous or polychotomous categorical dependent variable. Simply stated,
sources of utility can be dened as a linear expression where each attribute is
weighted by a unique parameter to account for that attributes marginal utility,
with a regression equation looking something like this, where it is the dierences
in attribute levels between the choices that are analysed:
Y =
0
+
1
(X
1i
X
1j
) +
2
(X
2i
X
2j
) +. . . +
K
(X
Ki
X
Kj
) + (
i

j
)
The parameters estimated here represent the marginal utility associated with a
change in the attribute level. Furthermore, the error terms are not considered
independent, meaning panel data techniques are required (ibid.). The end re-
sult is individual preferences (willingness-to-pay) for the various attributes, and
their corresponding levels. This also allows the researcher to rank the dierent
attributes in terms of importance for the average consumer.
7
3 Study
3.1 Survey
In this simple experiment, we try to nd a monetary value of Hyde Park
through the use of the travel cost method, where travel cost acts as a proxy
for price/willingness to pay. The benets of this method is that valuation is
based on peoples actual behaviour, rather than stated behaviour. Through col-
lection of visitor data, and regression of this data, a demand function is created
for the site through the estimated regression equation, and by examining how
visitation rates varies when the price varies. If the park entrance fee is zero,
hypothetical prices are used, under the assumption that people view travel costs
and entry fees similarly. In the travel cost study, the following questions were
asked
Which zone the respondent lives in
What mode of transport was used to get there (tube/car/bike/walk)
How many times they visited the park in the past year
If the person owns an Oyster Card
The persons income or other socioeconomic characteristics to estimate
the value of their time
In the study, a total of 112 random visitors in Hyde Park were asked the same
questions. Of those, 9 chose to not give out their yearly income, and were
removed from the sample, leaving a sample of 103 respondents. People were
only asked questions if they conrmed spending time in the park - not just
walking through. The questions were asked at dierent times of the day, over
four days. Some respondents were tourists while others were London residents.
For tourists, only the travel cost they incurred by going from their hotel to the
park was included - not the cost of travelling from their home country.
In the following, these ve steps are followed:
1. Estimate travel cost of using tube, car and bike
2. Estimate cost of time spent travelling
3. Estimate a regression equation that relates visits to travel costs and other
variables
4. Use results from regression to create demand function
5. Estimate area under demand curve
3.2 Travel Costs
We calculate the travel cost as
TC = c
c
d +wh
where c
c
= marginal cost of driving per mile, d = distance, w = wage rate, h
= time spent travelling to the park. Using numbers from the Association for
8
Automobiles (2014), an average marginal cost of driving of 0,2338 per mile
was calculated. The cost of driving from each zone was calculated using the
Automobile Associations milage calculator, resulting in an average measure for
each zone. The tube cost is counted as o-peak prices, with or without Oyster
cards while bike cost is 2 for 24 hours.
The cost of time is an estimate based on Google Map estimates on travel
time from the various zones using dierent modes of transport, multiplied by
the hourly wage of the respondent
7
in order to nd the alternative cost of
travelling. A weakness in the study is that respondents were not asked how
much time they spent at the park, meaning cost of time spent while at the park
cannot be measured. The cost of actual travel time can still be estimated.
3.3 Regression and Results
The responses described income (to calculate alternative cost), zone (to calculate
travel distance and time), transport mode (to nd correct travel cost) and how
many times they had been in the park. A regression was run to see if the number
of times visited can be explained by the travel cost, using the equation below.
We expect the estimate of to be negative, which means that if travel costs
increase, the number of visits decrease.
3.3.1 Model 1
Visits
i
= +
1
Travel Cost
i
+
i
Variable Coecient Std. Error t-stat
Intercept 1.5385 0.8186 1.88
Travel Cost 0.0463 0.006 7.7
R
2
0.364
Observations 103
Table 3: Results of regression model 1
Using the results listed in table 3, the estimated regression equation, using
a standard lin-lin approach, becomes
Visits = 1.5485 + 0.0463TravelCost
Normally, one would use this regression equation to calculate a demand function.
That is done by setting a hypothetical entry price, then measure the number
of visits as the entry price increases. This would yield a demand curve which
ultimately would be used to calculate the consumer surplus by estimating the
area under the graph through the following formula
CS =

TC
choke
TC
0
V (TC, X) dTC
(Parsons, 2004) where TC
choke
is the choke price - the travel cost that would
imply zero visits. Surprisingly, the estimate for is in our case non-negative.
7
Annual wage divided by 220 working days per year, divided by 8 working hours per day
9
Since travel cost acts as a proxy for price, one would expect the demand (number
of visits) to fall as the travel cost increased. In this model, we nd the opposite
tendency. The constant term is not signicant, suggesting low visits when
price is low/zero, then increased visits when prices increase.
3.3.2 Model 2
In the second model, we include the variable Income to account for dierences
in income among the respondents.
Visits
i
= +
1
Income
i
+
2
TravelCost
i
+
i
Running this model yields the following results:
Variable Coecient Std. Error t-stat
Intercept 7.082 1.31 5.40
Income -0.000132 2.58 10
5
-5.10
Travel Cost 0.0497 0.0054 9.17
Adj.R
2
0.49
Observations 103
Table 4: Results of regression model 2
Visits = 7.082 0.000132Income + 0.0497TravelCost
In this run, the R squared of the model increases by 12.6 percentage points, and
all three variables are now signicant. While the model in itself is stronger, it
still supports the results found in the previous run.
3.4 Discussion
There are many reasons why the results of the models could be unreliable. Using
a linear regression model may not t the data properly, reected in a standard
error of regression of 4.49 and 4.02 respectively. Running a log-log-model, lin-
log-model and log-lin-model does not improve any factors. There could be other
variables that indirectly aect the results, but have been left out (because that
data was not collected in the survey), resulting in omitted variable bias, mak-
ing the estimated coecients unreliable. In the models, this means that when
creating a demand curve, the demand would be increasing with price, making
it dicult to give any reliable estimate of park access value.
The observed eect in both models resembles that of a Gien Good - a situation
where the income eect dominates the substitution eect, suggesting that Hyde
Park is an inferior good. This means that when peoples income increases, they
visit the park less. Arguably, that seems reasonable, in the sense that going to
the park is less important when you work high-paying jobs. Some may work
long hours (and thereby have a high annual income - simply because of long
hours and not due to high hourly wages), and simply have no time to visit the
park. This would not support the notion of Hyde Park being an inferior good,
but rather that the person values work more than free time. However, if the
10
respondent works fewer hours, but with very high pay, an inferior Hyde Park
may be closer to the truth. This can not be conrmed or refuted, due to no
available data on specic hours worked among the respondents.
4 Conclusions
In this paper, several methodologies and concepts within the world of environ-
mental economics have been reviewed. Direct market valuation techniques, such
as market-price approach, cost-approach and production function-approach, are
best used when valuing a good generating a direct value for consumers and when
market prices are readily available. When such prices are not available, and the
good in question rather generates indirect values, such as clean air or recreation
opportunities, revealed preference approaches, like hedonic pricing or travel cost,
are better used. Both of these approaches fall within the category of direct use.
If the goal is to value a non-market good which generates value even if you
do not directly use it, a contingent valuation method, or a choice modelling
experiment, would be the smartest approach, using peoples stated preferences
as basis for the experiment. The methodologies mentioned in this paper does
not cover all the varieties and options within each framework. Therefore, if you
want to carry out an experiment using any of the frameworks provided in this
paper, the author advocates to collaborate with statisticians or environmental
researchers to ensure rigoruos analyses.
In the study, a travel cost method was attempted. The regression results proved
unreliable, which could be traced down to a variety of factors. Because of the
low reliability of the estimated coecients, a demand function was not created,
and a monetary value therefore not reached. The results from both models
support an idea of Hyde Park being a Gien good, often translated to meaning
an inferior good. Due to time constraints and word limits, the various factors
potentially aecting the models were not investigated in more depth.
Further studies, where more care is taken in the survey design, scope, vari-
ables included and statistical rigour, should be carried out before reaching any
nal conclusions on asset value.
11
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