ABSTRACT
Introduction Economists evaluate changes in land use by comparing the net return to society from the land before and after the change in use. Employing this perspective, the desirability of a land-use change rests on the extent to which the benefits of the change exceed its costs. In practice, land policy and management decisions depend on the best available measurements of the benefits and costs of alternative uses of lands. As is the case in other areas of environmental economics, the measurement of benefits and costs exhibits tremendous variation in terms of feasibility and difficulty. In many instances, certain benefits and costs are straightforward to measure. Other benefits and costs are less well understood. For example, the private return to a parcel of land in residential use is easier to characterize than the social return to a parcel in an undeveloped use that provides wildlife habitat and aesthetic amenities. This chapter presents an introductory discussion of how economic valuation methods can be used to measure the benefits and costs of alternative uses of land resources. Throughout the chapter, emphasis is given to the role of valuation in elucidating the demand for services provided by rural lands and in conceptualizing the benefits of rural lands. The demand for services provided by land resources essentially reduces to the demand for different land attributes. Both the study of the demand for land attributes and the management of land resources are complicated by the manner in which the services provided by land resources are produced and consumed. In short, many of these services are public goods. Hence, they are non-rival and nonexcludable in consumption and are under-provided by markets. Because of market failure, governments commonly intervene and regulate the management of land resources. Zoning ordinances are a classic example of such interventions. In many cases, these ordinances are written to prevent the overprovision of an undesirable service, such as noise, to encourage the provision of a desirable service, such as wildlife habitat, or to limit the external effects of one land use on another, such as the effects of an industrial plant on nearby residences. Curiously and perhaps surprisingly, economic valuation has played a limited role in the design of these interventions. Although the economics literature is replete with studies of land transactions and land-use patterns, there are few studies that comprehensively value the services provided by land resources (Santos 1999). As more attention is devoted to land-use change and land-use policy, the urgency
to complete such studies increases. There are also administrative reasons to expect further inquiries into the demand for different land services or attributes. Executive Order 12866 (1996), which supersedes Executive Order 12291 (1981), requires federal agencies to undertake benefit-cost analyses of major regulations. Regulations designed to protect and enhance services provided by rural lands fall under the purview of this order. Secondly, because economic values are often used in litigation involving damages to land resources, natural resource damage assessment is also a strong catalyst for valuation. Economic valuation methods strive to understand the preferences of society for goods and services. When goods and services are bought and sold in markets, price and quantity-demanded information may be used to gauge preferences and to assess the relative values held for different goods and services. However, when goods and services are not traded in formal markets, non-market valuation approaches apply instead of market-based valuation methods. For extensive reviews of market-based and non-market valuation methods, refer to Braden and Kolstad (1991), Champ, Boyle, and Brown (2003), or Freeman (2003). Land resources provide a myriad of services, including views, wildlife habitat, recreation opportunities, and flood prevention. Because there are not formal markets for a significant number of land services, non-market valuation approaches are of great relevance to the study of rural land-use change. This chapter offers an introduction to five non-market valuation approaches and discusses the general applicability of these approaches to the study of the economics of rural land-use change. Our objective here is to raise awareness of how economic methods may be used to value the services provided by lands. After reading this chapter, readers may better understand what goes into the design of an economic valuation study of land-use change and how to interpret the results of such a study. Designing a credible valuation study requires knowledge and careful implementation procedures. Readers who choose to use the methods identified in this chapter should carefully review the current literature before proceeding with an original study. Our introduction to these methods features empirical applications selected from articles published in Land Economics from 1991 through 2000. Land Economics is the major outlet for journal articles on the economics of rural land-use issues. Because our review of applications is not comprehensive, readers interested in the full range of applications are advised to conduct a broader search of the literature, including articles from additional journals. Economic valuation methods are commonly grouped under the headings of ‘revealed preference’ and ‘stated preference’ methods. Revealed preference methods gauge preferences based on decisions individuals make in market situations. In contrast, stated preference methods characterize preferences based on decisions stated by individuals. Our discussion of economic valuation methods features approaches falling under both of these headings. This chapter begins with a comparison of hedonic property value, travel cost, and averting behavior approaches, which are revealed preference methods, and concludes with a summary of contingent valuation and conjoint analysis approaches, which are stated preference methods.
