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Summary: This paper discusses some of the work that has been done on cost estimation of biodiversity conservation for protected areas in the tropics. It also summarizes some conceptual and practical considerations related to compensating local residents who lose land use opportunities due to conservation activities. The main costs associated with conservation and the creation of national parks or reserves arise from land acquisition, hiring and training personnel, and the development of infrastructure. The costs associated with foregone uses of park land arise from the fact that local residents will no longer be able to use the areas for hunting, collecting forest products, or as a source of new agricultural land. The example of Mantadia National Park, a newly established area in the eastern rainforest of Madagascar, is presented as a case study. It was estimated that the mean value of losses for the local villagers who are dependent on the forests within the park for their livelihood was $91 per household per year. A survey concluded that on average a compensation of $108 per year and per household would make households as well off with the park as without. However, there are few cases in which actual compensation of residents living near protected areas was given. The conclusion is that opportunity costs to local residents must be taken into account in the establishment of protected areas and that these costs might have to be compensated for the project to be sustainable in the long run.