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.

Stated preference methods

Stated preference techniques are a family of market research tools that allow researcher to uncover how consumers value different products and service attributes. They are based on intended behavior and involve questioning of people in a survey setting (Dofonsou et. al., 2008). Stated preferences methods are very flexible and relies on respondent’s statement of value in a non-market based environment. They include contingent valuation method (CVM) and contingent choice method (CM) (Bennett, 1996). The CVM is useful in estimating use and non-use economic values for a wide range of non-market goods and services, including ecosystem and environmental (Boyle, 2003b).

CVM is conducted through survey and the term “contingent” is based on a respondent’s willingness to pay (WTP) or willingness to accept (WTA) for a good or services subject to the posed hypothetical scenario (Freeman, 1993). Willingness to pay is the maximum amount an individual is willing to pay in order to avoid undesired outcome. Willingness to Accept is the minimum amount an individual is willing to receive to accept undesirable outcome. Survey questions in CVM can be either open or close ended. In the open-ended survey, the respondents are presented with a hypothetical but plausible situation and are asked the maximum amount of money they would be WTP for amelioration from the status quo (thing as they are) or the minimum amount of compensation they would be WTA for deterioration from the status quo. Close-ended method involves asking a respondent whether they would be WTP a specified amount for a specific good or service. Although, CVM uses hypothetical rather than actual markets thereby offering the respondent an opportunity to behave in a strategic manner, it assumes that the expressed WTP in a hypothetical situation is a measure of the value in actual situation (Philcox, 2007). The use of CVM to elicit WTP, has in the past been used in a variety of situations such as: water quality; health care services; biodiversity conservation and in estimating competitiveness of cattle production systems (Buzby et. al., 1995; Echessah et. al., 1997; Klose, 1999; Ouma et. al., 2003; Kimenju et. al., 2005; Mogas et. al., 2006).

The advantages of CVM includes: it has sound basis in welfare theory of economics since it has potential for tracing the WTP distribution among a population of economic agents for a proposed change in a good or service (Carson et. al., 2000); it is flexible, and can be used to value almost any ecosystem or environmental good or service; it is the most prevalent method for estimating total economic values of an ecosystem; its results are relatively easy to analyze and describe (as a average value per capita per household, or as an aggregated value for the affected population); it is widely applied and ongoing research continues to offer new applications and improvements to the CVM methods.

The disadvantages of CVM are: its ability to accurately measure respondents WTP is controversial, due to the fundamental difference of decision made in hypothetical scenario versus real/actual market, it assumes that the respondent has a clear understanding of what is being valued and they make rational decisions about their choices in a hypothetical scenario as they would in the actual market, the difference between WTP and WTA for non-marketed goods and services can be significant (Horowitz and McConnell, 2002), and respondents may react to the scenario posed for example the method of payment and description of the environmental good or services.

In addition, policymakers and the legal system do not always accept CVM results; it can be expensive and time-consuming; it is difficult to validate estimates of non-use values because it uses hypothetical scenarios rather than real choices; it is susceptible to a number of response biases. The response biases include: hypothetical market bias, where responses are affected by the market being hypothetical rather than real; Strategic bias, where a respondent tries to influence the outcome for personal reasons; Design bias, where the information presented to respondents influence their responses; Information bias, where respondents have limited knowledge of the good or service in question and part-whole bias, where individual offers the same WTP for one component of asset, as they would for the entire system.

The contingent choice method is closely related to CVM. However, unlike CVM which is widely recognized as a standalone method for estimating value that directly asks respondents to state their WTP, Contingent choice methods are not well established, and are differentiated from CVM through their indirect reference to WTP in hypothetical choice scenarios that contain more than one attribute. Contingent choice methods (CM) also referred to as conjoint analysis or attribute-based methods, are used in estimating economic values for a wide range of non-market environmental goods and services, by asking respondents to make choices based on hypothetical scenarios (Holmes and Adamowicz, 2003). The WTP is then inferred from the choices made with respect to the posed scenarios. Therefore, CM focuses on tradeoffs among scenarios with different attributes, and is particularly suited to policy decisions where a set of possible actions might result in different impacts on natural resources or environmental services (Adamowicz et al., 1994). For example it could be used for valuing improvements in water, given improvement in its quality may affect several services along the beach such as swimming, fishing, and biodiversity.

The advantages of CM includes: it can be used to value outcomes of an action as a whole, as well as the various attributes, it allows respondents to think in terms of tradeoffs which may be easier than directly expressing dollar values and make it easier to check for consistency of responses, the respondents are more comfortable providing qualitative ranking of attribute bundles that include prices rather than expressing dollar value directly, it is useful in valuing impact of large-scale change, it is better in estimating relative rather than absolute values of a good or service, it minimizes many of the biases that can arise in an open-ended CVM studies where respondents are presented with a task of putting prices on non-marketed good and services (Alpizar, Carlson and Martinsson, 2001).

The disadvantages of CM includes: respondents may find it difficult to evaluate certain trade-offs particularly if they are unfamiliar with the process thereby introducing bias, if the number or levels of attribute are increased the sample size must also be increased, the respondents when presented with many choice sets may end up losing interest in the exercise, by only providing limited number of options it may force the respondents into making choices they otherwise would not have made, it may extract preferences in the form of attitudes instead of behavior intentions, it requires sophisticated statistical techniques to estimate WTP, translating the answers into dollar values may lead to greater uncertainty in the actual value that is placed on the good or service of interest.

Stated preference methods are commonly criticized because the behavior they depict is not observed as they depend on hypothetical scenarios rather than real market (Cumming et al., 1996; Mitchell and Carson, 1989; Louviere et al., 2000). Consequently, it has been argued that they pose a problem in that the validity of the value estimates obtained cannot be assessed (Adamowicz et. al., 1998). Among stated preference methods, CVM in particular has received extensive attention from economists seeking to either establish its validity to deliver reliable and accurate WTP estimates or discredit it. However, Mogas et. al., (2006) study which compared the welfare measures estimated from CM and CVM from alternative afforestation programmes in the Northeast of Spain found that the two methods yield welfare estimates that were not statistically different for a change in afforestation programmes. Moreover, CM and CVM provide the only means for estimating the value of goods and services that have no related markets (IFPRI, 2006).

In the present study, CVM will be used to assess the contribution of socio-economic benefits of cattle to households’ livelihood in Mabalane district of Mozambique. This is because CVM has sound basis in the theory of welfare economics. Welfare economics, seeks to reveal whether the utility resulting from a change in an economic variable such as a commodity’s price is positive. It takes individual preferences as given and stipulates an improvement in Pareto efficiency (a change to a different allocation that makes at least one individual better off without making any other individual worse off) terms from for example from a social state level to another (Just et. al., 1982). The change in welfare are often expressed in terms of change in an index, usually the monetary amount which would need to be taken from or given to the agent to keep the agent’s overall level of utility constant (Freeman, 1993). At the level of an individual economic agent, these monetary measures take a particular form: for a desired increase in the good, the maximum amount the agent would be WTP to obtain the improvement, and for a decrease, the minimum amount the agent would be voluntarily WTA in compensation in exchange for accepting the decrease (Carson et al., 2000). In this study, CVM will offer the opportunity to trace the willingness to pay for the socioeconomic benefit derived from cattle among for a proposed change. The expressed willingness to pay for the socioeconomic benefits when the scenario is posed will be assumed to be the value derived from cattle.

Ex-ante assessment technique

The final set of valuation methods for valuing non-marketed good and services, is the cost benefit analysis (CBA). Cost benefit analysis refer to the application of neo-classical economic calculus to the fields of public decision-making. It is therefore based on micro-economic analysis theory and on the general principle of expressing costs and benefits in monetary terms. It therefore implies the inclusion not only of all the financial factors but also the monetary equivalents of all the other features of the project being evaluated (Dupuis, 1985). The CBA method is considered an ex-ante assessment technique because it considers what will happen in the future. For example if a community projects (a non marketed good) are established, it totals up the equivalent money value of the benefits and cost of the project to the community and establish whether they are worthwhile. By so doing CBA assesses the cost of a variety of measures that would ensure maintenance of the benefit provided by the non-marketed good being valued. These costs are then used as proxies for the benefits such as those which would be derived from the community dam.

The main principle behind a CBA is to find, quantify and adds all the positive benefits. Then it identifies, quantifies and subtracts all the negatives, the cost. The difference between the two indicates whether the planned action is advisable. The main limitation of CBA is that, since it is based on the assumption that the cost of maintaining a non-marketed good or service is a reasonable estimate of its value. Thus, it is generally easier to measure the costs involved when they comprise traded good and services. However, it is very difficult to estimate the benefits themselves since they are non-tradable (Campbell et. al., 2003). The main application of the CBA is ranking of project to choose the most appropriate option, based on the expected economic costs and benefits. Areas where CBA has been applied include: education, health, housing, natural resources, transport and recreation.

2.1 Review of empirical studies

In an attempt to quantify the benefits derived by the households from goat keeping in Southwestern Nigeria. Bosman et al., (1997), used a cost benefit analysis; their main goal was to measure benefits of goat keeping in a tropical farming system. The values of marketed benefits were estimated by assessing both input and output resources that had been used in the goat farming. The outputs were assessed through biological production indices for flock such as reproduction (number of birth in a year) productivity (weaning weight per individual doe or ewe) relating total inflow and outflow to the flock weighted average. The ability to use part or all the flock of goat as and when required also add benefits to the goat-keeping households which are not captured in the productivity in the productivity indices, namely the non-marketed benefits of insurance, financing and savings. To measure the non-marketed benefits (saving, financing and insurance), outflows were used, because the role of goat in providing non-marketed benefits occur both through inflow and outflow. The inflow means investing capital (or saving), while outflow means spending capital invested. In their study only outflow, was used to avoid the problem of double counting also because it represented the part of the flock that had left the flock after being sold to meet household expenditure.

Thus Bosman et. al., (1997) study, demonstrated that in a farming system context biological production indices covering a whole flock had the ability to measure animal production in terms of economic value. The ability to measure performance of a farming system in economic terms is useful for determining the relative performance in different farming systems for the livestock producers. However, Bosman et. al., (1997) pointed out that an exclusive focus on production and income derived from livestock farming system tend to leave out other non-marketed benefits that household derive from livestock keeping. Their study concluded that policies aimed at improving livestock production and productivity should also consider even non-marketed benefits derives from livestock, since they influence decision-making in a household. Therefore, research and improvement programs should also incorporate non-marketed benefits of livestock in their objectives.

Although, Bosman et. al., (1997) study is similar to the present study in that it recognizes the important contribution of non-marketed benefits of livestock to farming systems; their study did not attempt to quantify the contribution of non-marketed benefits to household livelihoods. Nonetheless, the inclusion of the foregone cost by Bosman et al., (1997) as perceived benefit that could be added to the production value has since gained support. For example, Slingerlands (2000) argues that, since farmers consider foregone costs during the decision-making process, they are real even though they do not entail attainable income. Therefore, the present study aim at assessing the value attached to socio-economic benefits of cattle by taking the perception of livestock keepers into consideration, by determining their willingness to pay for the socio-economic benefits and to determine the factors that influence the reliance them.

In an attempt to incorporate perception of livestock keepers while considering the socio-economic benefits of cattle, Ouma et al., (2003) used CVM to estimate and compare the competitiveness of three livestock production systems. CVM was implemented in two steps, in the first step the farmers were asked how much they were willing to pay for the cattle. Secondly, a hypothetical scenario supposing that a new government policy restricting movement and sale of the cattle was posed to farmers, such that the ability to dispose cattle and by inference the ability to derive benefits such as insurance, finance and payment of dowry were lost.

To pose the scenario original perceived value was used as the base and the respondents were asked to state their ‘new’ perceived value after the loss of socio-economic benefits associated with cattle. The difference between the original and the new perceived value was taken as the value attached to the socio-economic benefits. Their study concluded that socio-economic benefits indeed comprised approximately 20 percent of animal total economic value in intensive, semi intensive and extensive systems. However, socio-economic benefits of cattle were found to be influenced by institution, household and animal related variables. Nevertheless, this study focused mainly on the socio-economic importance of cattle but not on the contribution of socio-economic benefits of cattle to household livelihoods.

Unlike the previous studied by Bosman et. al., (1997) and Ouma et. al., 2003, this study explicitly identifies the socio-economic benefits of cattle, assesses their contribution to the household livelihoods and attempt to identify the main factors that influence household to depend on socio-economic benefits of cattle. The present study aim to contribute to the socio-economic benefits of livestock literature as well as providing some key recommendation which could help enhance the livelihood of the households in Mabalane district of Mozambique and other areas within SSA Africa where agro-pastoral production is the main system of cattle keeping. It is also expected that the current empirical effort will contribute to improved understanding of the benefits derived from cattle not only among agro-pastoral household in Mozambique but also in Sub-Saharan Africa

Methodology

In posing a hypothetical scenario to respondent to elicit WTP, closed ended approach was utilized. Closed ended approach ensures that strategic biases are minimized. By posing a hypothetical scenario respondent preferences are kept certain throughout the survey since they answer “Yes” or “No” to a WTP question (Kimenju et. al., 2006). This certainty exhibited by respondent makes it is easier to use and design the study using CVM. Consequently, the resulting data that can be directly analyzed using conceptual methods (Ã- zdemiroglu et. al., 2002).