Cost Benefit Analysis (Cba)

There are two traditional methods that fall into this category: travel cost and hedonic value.

Travel Cost Method (TCM)

Travel cost is a method designed and applied to assess the recreational value of the environment and ecosystems. The basic assumption of TCM is very simple, that is, the cost of visiting a recreational tourist destination partly reflects the recreational value of that place. Although we cannot directly observe the purchase and sale of environmental goods by tourists, we can obtain information about the behavior and choices of tourists to enjoy environmental resources. Through estimating the individual tourism demand curve or the market demand curve, economists will calculate the individual or social welfare gained when participating in the tourism market at the considered destination [63].

There are two common approaches to tourism cost: individual tourism cost and regional tourism cost. In both cases, the tourism demand curve is estimated by using a series of data on the relationship between the number of visits per individual/or the rate of visitation to a region (which is considered an approximation of the quantity of recreation) and the individual/or the average tourism cost of the region (which is considered an approximation of the price of recreation). The total economic benefit of the destination to tourists is calculated by the consumer surplus or the area under the demand curve [62].

Desvousges (1998) pointed out some advantages and disadvantages when applying TCM. In terms of advantages, this is a method that is easily accepted in theory as well as in practice because it is based on the traditional demand curve model and the relationship between the quality of environmental goods and the actual willingness to pay to enjoy the value of the goods of tourists.

However, there are also some obstacles when applying TCM. First, the problem of multiple purpose trips can arise when tourists visit many places in the same trip and therefore the total travel cost does not reflect the tourism value at a particular place. In addition, when a tourist destination has the presence of tourists,

Internationally, the zoning and cost calculation of each region is quite complicated due to both

Multi-purpose tourism problem and tourism rate estimation [63].

Hedonic Pricing Method (HPM)

The hedonic value method is used to estimate the value of the environment hidden in the market price of some common goods and services. For example, the value of environmental landscape is hidden in the selling or renting price of real estate. This method is developed from the theory of value attributes of Lancaster (1966) in which the benefit of each individual when consuming a type of goods depends on the attributes of the goods (attributes). If environmental quality is an attribute of goods, then through modeling the relationship between individuals' willingness to pay for goods and the attributes of the goods, we can separate the impact and value of environmental attributes in personal benefits [67].

Although it is widely used, the HPM method has certain disadvantages. Firstly, to ensure reliability, HPM requires a very large amount of data to run the model. For example, research on the real estate market requires data panels on real estate prices in many areas, real estate attributes, and actual market transactions over a sufficiently large period of time. Usually, the environmental attributes of real estate are rarely recorded when transactions are conducted, so it is necessary to combine conventional attribute data with geographic information data (GIS) to complete the data set. Usually, HPM is only applied in developed countries with a complete database system. Secondly, a statistical problem that can arise when processing data is multicollinearity when two or more independent variables in the model have a large correlation or are correlated with environmental attributes. This makes it difficult to interpret the individual impact of each attribute on commodity prices [64].

1.2.3. Methods based on hypothetical markets

For goods and services in the wetlands that have no market and no price, researchers must construct hypothetical markets and observe the behavior of individuals.

multipliers in these markets to calculate the welfare of participating in the market, thereby estimating the value of environmental goods and services. This group of methods is often used to determine the non-use values of wetlands.

Contingent Valuation Method (CVM)

The contingent valuation method was developed by Davis (1963) in the field of marketing analysis, and then transferred to environmental assessment. By constructing scenarios of assumed environmental quality and collecting information on individual behavior and consumption choices for this assumed scenario, we can estimate the change in individual welfare when environmental quality changes. From there, we can calculate the individual's consumer surplus when participating in the assumed market; this benefit measures the value of the environment to that individual. This method is often used to assess non-use values of the environment because these values often do not have a trading market.

Although CVM has many different variations and is being increasingly improved, there is still a general process consisting of some basic steps: (i) Identifying the target group and scope of the assessment. (ii) Developing a draft questionnaire and conducting a pilot survey to adjust the questionnaire and data collection approach. (iii) Developing a detailed questionnaire including information on the hypothetical market, hypothetical situations, means of payment and questions on willingness to pay. (iv) Collecting field data and processing the data. (v) Calculating welfare based on the empirical model and extrapolating the calculation results [67][69].

In terms of advantages, CVM allows determining the values of resources and the environment that are difficult to quantify. The assessment approach is built on the theory of utility and individual demand functions, so it is theoretically valid. In addition, the estimated information, if conducted with a standard process, has high reliability and can be used in planning policies and resource management tools [58].

However, as mentioned, this method has so far received a lot of criticism.

due to its hypothetical nature. Therefore, the biggest drawback of the method is that people

Respondents do not participate in a real situation but only in a hypothetical one. Therefore, the motivation to pay and the level of payment may be very different from when they are faced with a real situation. Carson (1993) identified four main types of bias when applying the method: hypothetical bias , strategic bias , designing bias , and starting bias . These biases can be minimized through techniques in design and investigation. Another disadvantage of applying the method is the time and cost involved because it requires the participation of many experts, consulting group meetings, field testing, question adjustment, and a large sample size [60][78].

Choice Modeling (CM)

Choice modeling is a preference-based valuation method used to estimate the non-use value of a resource by constructing two or more hypothetical scenarios, each with different attributes. Through individual choices in each scenario, researchers can estimate individual welfare when participating in the scenario and the trade-offs in value between the attributes in the scenarios.

The CM method is based on the random utility theory of Manski (1977) and the attribute theory of value of Lancaster (1966). These two theories allow the valuation of environmental goods in terms of their attributes by applying a probabilistic choice model to select combinations of those attributes. By assigning a price or cost to each attribute, estimates of marginal benefits are converted into monetary estimates for each change in the levels of the attribute [77].

The CM process also includes some steps similar to CVM. In terms of advantages, CM allows for the assessment of the value of many different alternative scenarios as well as the trade-offs in the attributes of each scenario, thereby allowing managers many ideas to choose the direction of environmental management when the research results are available. However, CM is still an analytical method based on hypothetical scenarios, from which the problem of assumption bias still arises for the interviewee when answering. In addition

In addition, CM requires a complex survey construction process because each scenario has many attributes. Determining the scale of each attribute must be based on scientific evidence and in-depth predictions from highly qualified experts with a lot of practical experience [77][89].

1.2.4. Cost benefit analysis (CBA)

Cost-benefit analysis is a commonly used method to evaluate and compare the economic efficiency of different options for using wetlands in order to select the option that brings the greatest benefits to individuals or society.

Cost-benefit analysis has two main groups: financial analysis and economic analysis . Financial analysis evaluates the use of resources from an individual's perspective, in which the analyst is usually only interested in the direct benefits and costs of the project (usually easy to estimate through market prices)[6].

Economic analysis looks at resource use options from a social perspective. In economic analysis, in addition to direct benefit and cost flows, analysts are also interested in indirect benefit and cost flows such as environmental and social impacts. In addition, adjustments are also applied to eliminate distortions that may be caused by factors such as government intervention policies (taxes, subsidies, exchange rate intervention, labor price regulations), non -traded goods , and public goods [ 81].

In addition, there is another variation of cost-benefit analysis that is often used in research called extended cost -benefit analysis , in which in addition to the direct benefits and costs of resource use options, the analyst also incorporates negative and positive environmental externalities arising from resource use options [12].

1. Identify interest groups

2. Identify options

use DNN

3. Determine the scale of costs

and the benefits of each option

4. Convert benefit cost flows to monetary measures

5. Calculate profitability indexes

6. Sensitivity analysis

7. Communicate information to managers

Figure 1.6: Cost-benefit analysis process of options for using renewable energy

Source: Author suggested from [6] and [81]

The seven-step cost-benefit analysis of wetland use options is illustrated in Figure 1.6. One of the most critical steps in the analysis is the calculation of profitability indices. These indices indicate the absolute scale and

the relative contribution of each alternative to individual benefits (in financial analysis) and to social benefits (in economic analysis or extended cost-benefit analysis).

In addition, when conducting a cost-benefit analysis, it is also important to note that the benefit and cost streams will arise at different points in time throughout the life of the project. Specifically, a unit of currency at different points in time has different values due to factors such as inflation, expectations, investment opportunities or risks. Therefore, to calculate the value over time in a consistent way, the value of the cash flows must be converted to the same point in time.

To convert the value of money over time, analysts use an economic quantity called the discount rate . The discount rate is simply a number chosen to convert the value of money at different points in time. This rate is not fixed but can be different for each individual, project, resource use plan or between individual and social perspectives. Usually the discount rate reflects two factors: the social opportunity cost of capital and risk premium . A high discount rate means that “less” future value is recognized and vice versa [81].

Basic indicators when evaluating profitability include:

Net present value (NPV)

Net present value is a measure of the absolute difference between the total benefits

The discounted present value of the benefits and total costs of a DNN use option.

n Bt

Ct Et

NPV



t  0

(1  r ) t

In which: B t is the benefit obtained from using the water resource in year t; C t is the cost related to using the water resource in year t; Et is the benefit or cost of environmental externalities in year t (positive if it is a positive externality and negative if it is a negative externality); r is the discount rate; n is the number of years to implement the plan.

Benefit Cost Ratio (BCR)

The benefit-cost ratio is a quantity that indicates the relative size of the difference between the total

benefits and discounted total costs of a DNN use option.

Bt

BCR 

t  0 (1  r ) t

Ct

t  0 (1  r ) t

Internal Rate of Return (BCR)

The internal rate of return is a discount rate that makes the NPV equal to 0. In other words, it is the discount rate that equates the discounted stream of benefits and costs of a project to the present. The IRR is the upper limit of the discount rate that makes a project not lose money.

Bt Ct 0

t  0 (1  IRR ) t

The relationship between NPV, BCR, IRR and the profitability of a project

The use of DNN is shown in Table 1.4.

Table 1.4: Indicators and profitability of using DNN

NPV	BCR	IRR
Interest	> 0	> 1	> r
Hole	< 0	< 1	< r
Break even	= 0	= 1	= r

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Source: [6]

Basically, a project using the NNN with both positive personal NPV and social NPV should be implemented from both personal and social perspectives. Conversely, if both personal and social NPV are negative, the project should not be implemented. In the case of negative personal NPV and positive social NPV, managers can consider and implement support solutions for individuals to encourage the project implementation.

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