Valuation Tool - Production Function Approach
The production function approach is applied to estimate the indirect use value of the environment. It consists of two steps: first, establish a relationship between the environmental input/service and the output, and second, estimate the monetary value of the environmental function.
For example, soil erosion upstream causes siltation in canals, which reduces the flow of irrigation water. As a result of decrease in water supply, there is a decline in crop production downstream. In order to measure the cost of soil erosion we estimate the crop loss due to siltation and find out its value m money terms, which can be considered as an estimate of the cost of soil erosion.