12.4. Different Approaches to the Evaluation of the Demand: Market-Nonmarket Valuation

Some distinctive economic features make the demand of water different and more complex than that of most other goods. Water gives numerous intangible benefits due to features and difficult to measure unless understanding the reasons why individuals value water. Consumers have different consumption patterns determinated by different factors. They may be consumptive, such as use of water for irrigation or the harvesting of fish, or they may be non-consumptive such as recreational swimming, or the aesthetic value of enjoying a view. Also different sources may be selected for different domestic uses (e.g. drinking, cooking, bathing, and clothes washing), and they may vary seasonally. Although the extent to which this is

This is the case in many areas water related economic analysis. According to Young and Loomis (2014) water’s unique characteristics are described under four headings: hydrological and physical attributes, water demand, social attitudes, and legal–political considerations.

attributable to a specific site (Turner et al., 2004). The distinction is important for the way in which benefits are valued. Therefore understanding the true value of water is important aspect to the water treatment projects. In this respect, Total Economic Value (TEV) offers a good approach is described below.

12.4.1 Total economic value concept of water

The total economic value (TEV) uses to resource base in order to determine the value of the environment. Accordingly, identification and quantification of all types of values, called Total Economic Value (TEV). The quantification of the economic value of water resources and the identification of those instrumental values is important to the management of water resources. Comparison of water's value in various uses and locations assists public water agencies in making decisions about management and allocation of publicly supplied water, and can contribute to better evaluation of the benefits and costs of water related projects and policies (Colby, 1989). In addition, estimating value water attributed by individuals in different ways can help to identify the potential demand curve, which reflects perceived benefits.

Figure 12.2. Components Total Economic Value of Water

As seen as Figure 12.2, Total Economic Value (TEV) of water is divided into two main values those are use and non-use values. Use values includes direct and indirect use. On the other hand, non-values splits into existence and bequest value. The calculation for total economic value can be expressed as follows:

Use Total Economic Value = Use Value + Option Value + Non-use Value Value:

Related to values derived from using water. Refers to the benefit an individual receiver from the direct or indirect use of water. Direct use value: arise from direct interaction with water resources. For instance, drinking water, domestic and industrial water supply includes direct use values. Indirect use value: is value of functions of the water. Indirect of water receives is characterized by its less tangible benefits thus rather difficult to quantify the value as nonmarketed services, such as waterfall’s aesthetic values or enjoying such as sightseeing and boating, also water purification is taken into account indirect use value. Non-use value: unrelated to the value of current or planned use of the water. It is not based on the actual use of water. Rather, it is predicated on the notion that people appreciate water even if they are not actually using it (Winsconsin 1999). Non-use water can have subdivided into Existence value and Bequest value Existence value: of knowing that the environmental good exists even if no one in this generation or in the future generations will ever use it. Existence value can be reflected benefits from improvement of domestic water supply services that can play an important role to avoid health dangers and impacts. Also many households are willing to pay for protection from such health impacts of water services, even those located remove (Hejazi, 2014). Bequest value: is value of knowing that future generation will benefit from the water. For example, a waterfall includes bequest value. Household might be willing to pay to restore water quality for the time being and in future. But from knowledge that their heirs and future generations will have good water quality (Hejazi, 2014). Option Value: Values of conserving of option of making use of the water in the future even though no current use is made of it. The option value for water resources therefore represents their potential to provide economic benefits to human society in the future (Birol et al. 2006). Exemplified by a groundwater resource, a hydropower potential. The preservation of sensitive lakeshore provides other example of a situation in which future option value is taken into account. Total Economic Value (TEV) can be estimated using “environmental valuation methods”. According to Lange (2004) water valuation methods provides critical information for decisions about;

• Efficient and equitable allocation of water among competing users, both within the present generation between present and future generation
• Efficient and equitable infrastructure investment in the water sector (how much, where, when)
• Efficient degree of treatment of water
• Design of economic instruments: water pricing, property rights, tradable water rights’ markets, taxes on water depletion and pollution, etc.

12.4.2 Valuation methods the water sector

Generally, economic value is represented by the maximum amount a consumer is willing to pay for a commodity thus the worth of a good or service determined by people’s preferences. In addition, the economic value of water is defined as the amount that a rational user of a publicly or privately supplied water resource is willing to pay for it (Ward and Michelsen, 2002). Willingness to pay (WTP) is a set of valuation methods (Table 12.4) that relate the value of a water or improved domestic water supply services to what people are willing to pay for it.

Table 12.4. WTP Based Valuation Methods

Valuation methods uses two different ways. Firstly, observes people's actual behavior (or revealed preferences'). Secondly, asks people about what they are willing to pay for some resource (or their stated preferences). In this framework, valuation methods are broken down into two main methods those are: Revealed Preference Method and Stated Preference Method as shown Table 12.4. Revealed Preference Method also known as indirect valuation methods look for related or surrogate markets in which the environmental good is implicitly traded. Information derived from observed behavior in the surrogate markets is used to estimate WTP, which represents individual's valuation of, or the benefits derived from, the environmental resource. Revealed Preference Method includes Hedonic Pricing Method and Travel Cost Method. These methods are suitable for valuing those water resources that are marketed indirectly and are thus only able to estimate their use (direct and indirect) values (Birol et al. 2006). Hedonic Pricing Method (HPM) is used to estimate the economic values of an environmental good that directly affect prices of marketed goods. It is most commonly applied to variations in property prices to estimate the value of local environmental goods. It can be used to estimate economic benefits or costs associated with: environmental quality, including air pollution, water pollution, noise, soil quality, water quality, erosion, drainage, proximity to waste sites; environmental amenities, such as aesthetic views (sea, lake, forest) or proximity to recreational sites (e.g. coast, open space) (Birol et al, 2006). On the other hand, Travel Cost Method (TCM) is a technique is associated with estimating the value of the use of non-market goods for recreational purposes. The focus of this method is the number and frequency of recreational trips made by individuals to and from some natural area and the cost of realizing these trips (Koundori et al., 2016). The cost of performing a trip captures the cost of direct monetary cost of traveling, such as petrol expenses, depreciation of vehicle, fares and so on. Stated Preference Method: Stated preference methods (SPM) is also called as hypothetical method or direct valuation methods, performed by asking people about what they are willing to pay for improved domestic supply services with their 'stated preferences'. Stated preference methods (SPM), have been developed to solve the problem of valuing those environmental resources that are not traded in any market, including surrogate ones. In addition to their ability to estimate use values of any environmental good, the most important feature of these survey-based methods is that they can estimate the nonuse values, enabling estimation of each component of TEV. Since many of the outputs, functions and services that water resources generate are not traded in the markets, SPM can be used to determine the value of their economic benefits (Birol et al. 2006). Stated-Preference Methoddivided into two main areas as the Contingent Valuation Method (CVM) and Choice Experiment Method (CEM). The most common form of questioning on hypothetical futures is the contingent valuation method involves directly asking people, in a survey, how much they would be willing to pay for specific environmental for example water treatment services. Water treatment and sanitation are often taken for granted as essential services, if wanted to be known about how much consumers are willing to pay for these service, the method will exhibit an appropriate approach. In some cases, people are asked for the amount of compensation they would be willing to accept to give up specific environmental services. It is called “contingent” valuation, because people are asked to state their willingness to pay,contingenton a specific hypothetical scenario and description of the environmental service (URL 5). The most WTP studies used CVM in order to identify to potential demand curve for improved water supply and quality (Awad & Hollander 2010). Choice Experiment (CE) as a willingness to pay (WTP) techniques can be used to show that cultural resources do generate significant positive externalities or non-market benefits.