Direct Market Valuation Methods

Methods of Direct Market Valuation
Direct market valuation methods primarily include the productivity change method, human capital method, opportunity cost method, preventive expenditure method, and replacement cost method.

1. Productivity Change Method
   This method evaluates the impact of environmental changes by analyzing variations in productivity. It treats environmental quality as a production factor; changes in environmental quality lead to shifts in productivity and production costs, subsequently affecting product prices and output levels. These changes in prices and output are observable and measurable. Thus, productivity changes can be quantified using the market prices of inputs and outputs. This allows the use of market prices to calculate the economic losses or gains resulting from changes in natural environmental resources. For example, air pollution may accelerate the corrosion and damage of machinery, reducing productivity, while reducing soil erosion can maintain or even increase crop yields.

2. Human Capital Method
   Also known as the lost income method, this approach measures environmental pollution damage by assessing its impact on human health and labor productivity. It can also estimate the benefits of pollution control by quantifying the reduction in such damage. The method evaluates the cost of premature deaths caused by pollution based on lost income, specifically designed to measure the economic losses from health and labor capacity deterioration due to environmental pollution. Based on this theory, Mishan described the value of lost labor for an individual who would have lived to a certain age but died prematurely due to pollution as follows:

3. Opportunity Cost Method
   This method estimates the cost of resource use by measuring the income sacrificed from alternative uses when market prices are unavailable. In other words, it uses the opportunity cost of environmental resources to assess the losses or gains from changes in environmental quality. For example, the value of protecting a national park by prohibiting tree logging is not measured directly by the benefits of conservation but by the value of the best alternative forgone. This method is rarely applied in practice because the opportunity cost of environmental resources is difficult to measure accurately. Incomplete estimates of opportunity costs may lead to significant errors in the final results.

4. Preventive Expenditure Method
   This method quantifies the minimum cost of environmental harm by measuring the preventive expenditures people incur to avoid such harm. For instance, if water pollution forces people to buy bottled water for drinking, the cost of purchasing bottled water can be used to estimate public expectations of water pollution damage.

5. Replacement Cost Method
   Also called the restoration cost method, this approach estimates the benefits of eliminating environmental harm by calculating the cost of replacing or restoring damaged productive assets. The restoration or renewal expenses are treated as the social cost of polluting enterprises. However, a significant portion of environmental pollution losses lacks market prices, making direct market valuation methods impractical in such cases.