Transcript Slide 1

ECO 424
Chapter 8, Sections 1 - 6
Team #1
Presented by:
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Jeremy Buckinghorse
Kun Deng
Oscar Fernandez
Colin Towne
Lulan Zhu
Impact Analysis
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An Environmental Impact Analysis(EIA) is essentially an identification
and elaboration of all repercussions of a designated activity on all or
part of the natural and environmental resource base
Many countries have laws requiring environmental impact analysis to
be conducted before any developments
National Environment Policy of 1970 mandates all developments
within the United States
Product of the EIA, is the Environmental Impact Assessment, which
basically identifies the implications of said developments, adverse
environmental effects, alternatives, short-term maintenance, longterm productivity and irreversible consumption of resources that
would be involved in the development
EIR are conducted by biologist, hydrologist, and ecologists
Economic Impact Analysis
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When interest centers on how particular or
private actions affect certain dimensions of an
economic system
The perspective might be local, global, and
national
The range is wide: employment numbers,
household income, rates of inflation……
Exhibit 8-1: Economic Impacts of Horicon
National Wildlife Refuge
Description:
 Horicon NWR is a 32,000-acre wetland in Wisconsin
 Main activity includes wildlife watching, hunting, and fishing
 Studied by the U.S. Fish and Wildlife Service to estimate the
impact of such a refuge on employment and incomes of
people living within
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Analysis:
Do to close proximity to the cities of Milwaukee
and Madison, visitor spending attributed to
$1.53 million in final demand, $616,000 in
employee compensation, and 44 jobs
Cost-Effectiveness Analysis
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What is cost-effectiveness analysis?
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Cost-effectiveness analysis’ particular use
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A cost-effectiveness analysis takes as given the
objective of the project and then costs out the
different ways of reaching this objective
Cost-effectiveness is particularly useful in cases where
there is wide agreement on the objective but not on
how to reach it
Benefit-Cost Analysis
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Social Feasibility
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Commercial feasibility?
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Societal benefits vs. costs
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Estimates market and
nonmarket inputs/outputs
Can we balance?
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Benefit-Cost Analysis
Hoover Dam, circa 1942
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Origin
– United States, 1930s
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Purpose
– Natural resource decisions
in public sector
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Applications
– Flood Control Act, 1936
– Green Book, 1950
– Executive Order 12291,
1980
Exhibit 8-2, Critics Whipsaw the Forest Service
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Dilemma
– Biased in favor of businesses
– Biased in favor of environmentalists
Solution
– Place burden on the Forest Service
Politics
– Illegal lobbying
– Suit filed to prevent land swapping
 Department of Agriculture investigation
Argument
– Timber production
– Wildlife
– Recreation
“I get no respect at all!” –Rodney Dangerfield
– Employment
Team #2
7. The Basic Framework
• Five steps in a benefit-cost analysis
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Decide the overall perspective of the analysis
Specify clearly the project
Describe quantitatively the inputs and outputs
Estimate the social values of inputs and outputs
Compare these benefits and costs
• Step 1. Decide on the perspective
• Step 2. Specify the project
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8. Inputs and Outputs
Step 3: Measure Inputs and Outputs
Output is difficult to measure
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eg. How many visitors can be expected?
Challenging of Measurement
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It takes long time
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It requires making predictions
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It has lots of uncertainties
The best way to measure
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Benefit-Cost Analyses
 It is costly in terms of time and expense
 It takes money and efforts
 It is pursued with limited budget
Step 4: Value inputs and outputs
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Measure benefit and cost in monetary term
Single metric is needed
Certain impacts may be irreducible
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9. Compare Benefit and Cost
This is Step 5!
Two ways to compare
• Net benefit
• Benefit-cost ratio
Analysis of the new wildlife refuge example
• Cost
 Cost of acquiring the land
 Cost of constructing the refuge
 Cost of annual operation
• Benefit
 Nonconsumptive benefit
 Consumptive benefit
 Species preservation benefit
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10. Scope of the project
• Predetermined size: the size of the project or program will
have been established already (perhaps by engineers,
biologists, or ecologists). In these cases, the size of the
project has been established on physical grounds
• To judge whether the scope of the project is an optimal size
which is desirable from a benefit-cost perspective, sensitivity
analysis works
--Sensitivity analysis: the practice of recalculating benefits
and costs for several alternative programs; tool: computer,
which makes it relatively easy to recalculate benefit-cost
results with different data or underlying analytical
assumptions
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The With/Without Principle
• The With/Without Principle: We must compare the situation that
would result if the program or project were pursued with what it
would have been had the program been rejected. What is
sometimes done instead is to compare results with the program with
the situation before the program
Estimated benefits:
before the program
in the future without the program
in the future with the program
$10,000
$5,000
$33,000
The program benefit should be $28,000 ($33,000-$5,000) instead of
$23,000 ($33,000-$10,000). This is because it has been predicted that
there will be some attrition of the stock in the absence of the
restoration program.
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11. Discounting
• Discounting is a way to determine the value
today of future benefits and costs
• It is essential that the present values be
discounted, so they can be compared
• A time profile is the way that the benefits are
disbursed
• The way of weighing the net benefits in
different periods depends on how far away
the net benefits are
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12. The Effects of Discounting
• Discounting is a critical decision-making tool,
and aids in weighing alternatives
• Discounting is imperative for future
generations, as it shows the impact that our
current decisions will have on the future
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Team #3
Sections 13-18
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Choice of the Discount Rate
 Discounting: Total of future net benefits in to an
estimate of present value. i.e., how much is the value of
$1,000, promised next year, worth today?
 Low discount rate: A dollar in one year is very similar in
value to a dollar in any other year
 High discount rate: A dollar in a near term is more
valuable than later on
 Nominal interest rate is what one sees on the market
 Real interest rate is a nominal interest rate adjusted for
inflation, i.e.,
real interest rate = nominal interest rate – inflation rate
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Choice of Discount Rate
 Time preference approach
 Positive time preference: discount rate should reflect
the way people themselves think about time, a dollar
today rather than 10 years from now
 Marginal productivity approach
 when investments are made in enterprises, people
anticipate that future returns will offset today’s
investment costs
 Example: Natural resources used today should yield
rates of return to society tomorrow
 We should use a discount rate reflecting the interest
rates that private firms pay when they borrow money
for investments
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Distributional Issues
• Issue: how benefits and costs are distributed among
groups affected by the project or program
• Controversy of equity/fairness: groups who enjoy the
benefits are not the same as those who bear the costs
• Environmental justice
• Major issue = distributional fairness: how benefits
and costs impact people with different income levels
• Two dimensions of equity: Horizontal vs. Vertical
1. Horizontal: treating people in similar situations alike
 Example: wildlife restoration program: benefit-and-cost
profile
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Wildlife restoration program: benefit-cost profile
Urban resident
Benefits
Costs
Net benefits
Rural resident
$80
$120
($40)
($80)
$40
$40
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Distributional Issues
2. Vertical: how programs impinge on people who are in
different circumstances, in particular, people at different income
levels
 Proportional impact: affects each consumer in the same proportion
(Project 1)
 Regressive impact: provides higher proportional net benefits to highincome people than to low-income people (Project 2)
 Progressive impact: net benefits represent a higher proportion of the lowincome person’s income than they do of the rich person’s income (Project 3)
Natural resource project is classified as
proportional, regressive, or progressive
according to the net effect.
Real world application is hard to figure out; must
know who the people are that are impacted
and what their income levels are
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Dealing with Uncertainty
 Previously, benefits and costs are known with certainty
 This is not realistic
 Future values have lots of variables
 Point estimates of uncertain situations are considered
“most likely outcomes”
 Which discount rate to use
 Economic uncertainty
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Dealing with Uncertainty
 Better method: finding a range
 E.g., “We are highly confident that net benefits
will fall between a range of $a and $b”.
 Expected benefits—technique for estimating
uncertainties
 Most likely outcome
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Chapter 9
The Valuation of Natural Resources
 How do we measure the actual values of input and
output flows in any given situation involving natural
resource use?
 Logical answer:
--“Put each resource to the use that maximizes net
social value.”
 Further question:
--What would these values be in concrete situations?
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 What social benefits will arise from these
scenarios?
--A river that needs to be managed in order to
provide a better habitat for several species of
fish downstream from a large impoundment
--Thoughts about the establishment of a new
national park. Benefits for people visiting and
benefits for people that will never visit?
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Measuring Benefits
 Active/Use Values:
when individuals come into direct contact with
the “resource”
 Consumptive—comes from “extractive”
resources (timber, minerals, hunting &
fishing, etc.)
 Nonconsumptive—Resources that are
utilized but not consumed or decreased in
any way (boating, hiking, etc..)
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Measuring Benefits (con’t)
 Passive/Nonuse Values:
When people attempt to place a value on a
resource independent of their actual use of that
particular resource
 Option value—willingness to pay to preserve a
resource with the possibility of a future visit
 Existence value—willingness to pay to keep a
resource around even though it won’t be used
 Bequest and gift value—willingness to pay for
preservation for future generations
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Active/Use Benefits
 These benefits are achieved when actually using the
resource available
 Outdoor activities
 Direct Market Price Analysis: to measure benefits directly
 Proposed removal of an old dam may restore a trout
fishery
 Possible benefits:
 Use a private market elsewhere (since the trout
fishery does not yet exist): willingness to pay is $25
per day; we can use this number to estimate the total
benefits by multiplying it by the number of visits to
the fishery
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Team #4
Sections 19-25
Direct Market Price
Analysis
• Uses market price to assess willingness to pay
• Assumes that there are no externalities
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Flaws:
• By assuming that there are no externalities, the model
is in effect saying that MPC = MSC
• This is incorrect due to the existence of externalities
• Result: Direct Market Price Analysis does not capture
the true social value of a natural resource-related
good or service
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Indirect Market Price Analysis
• In many cases, direct markets simply do not exist, or
they exist in such rudimentary form that they do not
provide good price data
• In some cases the nature of resources is such that
direct markets are difficult to organize. In other cases,
government regulations have made it difficult or
impossible for market to form
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• In some cases activity in related markets can be studied
to determine resource values. In such cases the value of
the resource may be estimated indirectly by examining
price, quantity, and quality data of the associated good
or service in the related market
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1. Suburban Housing Market
• A closely related market in which open space can be
expected to have an impact
• It’s a market for new and used houses
• The price of a house is affected by some
characteristics. If they indeed are valued by the
average buyer, they will be capitalized into the market
prices of houses
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2. Travel-Cost Approach
• Another type of indirect market-price analysis
• It includes direct monetary costs such as fuel and en
route lodging, and the value of the time that
travelers require to get from home, or some other
point of origin, to the recreational site
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Nonmarket Techniques
• Contingent valuation is a survey technique based on
the straightforward idea that people’s willingness to
pay can be determined by asking them directly
• CV studies have been done for a long list of natural
and environmental resources: endangered species,
wilderness congestion, fishing experiences, clean air,
view-related natural amenities, the recreational
quality of beaches, and others
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Steps in a CV analysis:
• 1. identification and description of the environmental
quality characteristics to be evaluated
• 2. identification of respondents to be approached,
including sampling procedures used to select
respondents
• 3. design and application of a survey questionnaire
through personal, phone, or mail interviews
• 4. analysis of results and aggregation of individual
responses to estimate values for the group affected by
the environmental change
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Examples of questions in Contingent Valuation
Studies:
Study to estimate certain benefits of better
water quality in the Connecticut River
(1) Have you heard about the Connecticut River
salmon restoration program?
(2) Did you make any donations for wildlife
management or preservation last year?
(3) Suppose that a private foundation is formed to take
private donations and use them to support salmon
restoration. What is the maximum donation you would
make to this foundation?
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(4) What is your age?
(5) How much money do you spend on entertainment each
month?
Study to estimate the benefits of outdoor
recreation in Northern New England
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Nonuse (Passive) Benefits
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As previously discussed, there are many benefits
derived from natural resources, some of which do not
require ever using or even observing the resource
Such benefits are called nonuse benefits, and are
important to factor into valuation methods
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Nonuse (Passive) Benefits
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The two schools of thoughts regarding the valuation
of nonuse benefits are that such benefits either
contribute significantly to the total value of natural
resources, or that they are largely insignificant when
compared to use benefits
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Nonuse (Passive) Benefits
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An evaluation method involving measuring the levels
of donations to groups such as the Nature
Conservancy and the Oregon Water Trust has been
suggested as a possibility
Such groups seek to purchase resources for
preservation, giving an insight into how much society
values preservation
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Nonuse (Passive) Benefits
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One issue with this method, however, is that some of
the donations may come from recreation enthusiasts,
who gain direct use value from the preservation
A bigger issue with the method is the free-rider issue.
That is, there is no way from excluding people from
gaining nonuse benefits, even if they did not
contribute to the preservation of the resource,
meaning that the level of donations is understating the
real nonuse value
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Oregon Water Trust
(OWT)
Laws were enacted to protect
stream wildlife
The trust seeks to acquire all
rights to the stream
OWT works with landowners to
lease rights to the water and
protect the water
Leased mainly to
- Farmers
- Ranchers
More water trusts: Montana,
Colorado, Washington
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ECO 424 Chapter 9 Presentation
Sections 26-31
Team #5
Douglas Bast
Jeff Gardner
Kevin Hoffman
Adam Steinert
Bingquan Zhao
Wenkai Zheng
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Contingent Valuation
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Contingent valuation is controversial;
especially in regard to nonuse benefits
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CV may be obtaining evidence of a general
attitude rather than the valuation of a specific
resource
Distinguishing between use and nonuse
benefits
Scope of nonuse benefits (town, state, region,
country?)
Resource:
Results:
Protection of land through wilderness designation
Respondents (expected nonusers) were willing to pay between $14 and $19 just
to preserve areas in wilderness states.
Humpback whales
Respondents' (nonusers') mean willingness to pay to preserve whales was
between $35 and $60.
Bald eagles and stripped shinners
Respondents (expected nonusers) were willing to pay between $4 and $6 for
shiner preservation and between $10 and $75 for eagle preservation programs.
Whooping cranes
nonusers expressed willingness to pay between $21 and $70 for preservation
programs.
Salmon fishery in there Fraser River Basin of British Columbia and fishing
Nonuse values approximately half of user values.
Resource:
Results:
Salmon fishery in there Fraser River Basin of British Columbia and fishing
Nonuse values approximately half of user values.
Resource:
Results:
Bald eagles, wild turkeys, Atlantic salmon, coyote
Ninety-three percent of total willingness to pay was identified as nonuse value,
only seven percent was use value.
Resource:
Results:
Resource:
Results:
Resource:
Results:
Resource:
Results:
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Measuring Costs
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Single Community
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Regional
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Sampling is necessary
Complicated by the heterogeneity of groups
National
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Limited and well defined
E.g., Effects of international oil embargo on the
American economy
Social Costs
(private costs + external costs)
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Opportunity costs
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Costs of price changes
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The highest-valued alternative use for a resource
How a regulation could change the price of timber
Need market data on supply and demand
Costs of Physical Facilities
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2.
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Types: dams, irrigation works, parks with trail
system
The costs include the capital costs of initial
construction, and the annual operating and
maintenance costs (relate to the opportunity
costs)
Costs of Public Regulation
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It is usually more difficult to estimate cost because it
requires knowing something about the costs of the
private operations that are affected by the
regulations
For example, Figure 9-3, page 161
Methods to Derive Costs of Public
Regulation
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Cost surveys issued to firms
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Based on questionnaires sent to firms asking for
information on number of employees, processes, cost
of energy and materials
Firms can manipulate answers to try and make
regulation less invasive to the firm
Past data are not always useful in predicting future
trends
Effects of Regulation on Consumers
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High and challenging adjustment costs
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Increased prices of goods
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Increased price of regulation passed to the consumer
by firms
Fluctuations in demand
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Labor switches
Demand in an industry can change with changes in
regulation