Substitution Methods

This chapter covers two nonmarket valuation methods founded on the concept of substitution-the replacement cost method and equivalency analysis. Both methods are widely applied but frequently misunderstood. The replacement cost method is commonly used to value ecosystem services, and equivalency analysis is typically employed to determine required compensation for natural resource losses. The chapter describes and contrasts the methods, clarifies when (and when not) to apply them, illustrates the steps of a successful application, and provides examples of past applications. The reader will gain an appreciation of when the methods can provide a valid measure of economic value, and alternatively when the methods more usefully provide only a measure of cost. Following the guidance provided here can enhance the credibility of empirical applications of substitution methods.