Transcript 1. What is natural resource economics & why is it important?

5.
WHAT ARE THE KEY BENEFIT/COST
MEASUREMENT METHODS FOR NATURAL
RESOURCE & ENVIRONMENTAL ISSUES?
SPRING 2002
Larry D. Sanders
Dept. of Ag Economics
Oklahoma State University
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INTRODUCTION
 Purpose:
to understand alternative ways to
measure value of natural resource/environmental
management options
 Learning Objectives:
1. To understand how Benefit Cost Analysis (BCA) operationalizes
utilitarian concepts of ethical social policy making with money as a
common measure.
2. BCA includes time & future generations by searching for present
value of net benefits.
3. There are several methods to apply BCA to nonmarket goods,
although ethical values & cultural considerations are not likely to be
quantified.
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Overview of Benefit/Cost Analysis (BCA)
 BCA provides
a method to compare an array of
alternative public policy choices
 If B>C for a given policy, it says that for every $1
of project expense, more than a $1 of benefits
would be generated by the project
 If there are several alternative projects to resolve a
problem, the project with the greatest net benefits
would be preferred, assuming to ethical/cultural
reasons to the contrary
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Overview of BCA (continued)
 For
BCA to work:
– “apples & oranges” measured by money
– nonmarket goods/services measured by money
– proxy measures are sought if no market exists
 Alternatives
to BCA:
– public vote (democracy)
– those in power decide
– use a noneconomic decision rule (social,
cultural, religious, etc.)
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BCA (continued)
 Mix
BCA w/others
– BCA used to guide/educate public/decision
makers
– Integrated environmental assessment
» economics plus ecological/social/political/ethical
factors
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BCA compared to others
 BCA
–
–
–
–
–
may be scientific, objective, & equitably applied
requires time/resources to conduct/evaluate
ethical questions
nonmarket goods problematic
interdependencies problematic
 Noneconomic
– may be “easy” to do
– ethical questions (majority rule; future generations, etc)
– subject to manipulation
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Efficiency is central to economic
assessment...
 Minimize
waste (of resource, profits, time)
 Ecosystem must be valued in monetary terms to be
included in efficient solution
 “Efficient policy option” selects alternative which
generates most social utility relative to status quo
 Kaldor-Hicks: PDV = or > status quo
 Pareto Criterion: no other policy can make some
better off without making anyone worse off
 B/C ratio: policy w/greatest benefit per $ of cost &
B/C > 1
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Cost-Benefit Analysis & Economic
Measures
 Project
evaluation, typically over time
 Choice of Discount Rate Key
– Higher rate lowers future value of b, c
– Risk-free real market rate of interest may be preferred
social discount rate (sdr)
– Choice for sdr < individual r suggests society values
future > individuals value future
 Potential
for Abuse
– Assumptions & who decides are critical
– May run counter to Native American Ethic, “Deep
Ecology”, Leopold land ethic, etc.
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Dynamic Efficiency
 Rapid
development of resource drives price down
 Future price rapidly increases
 Hi future P suggests incentive to reduce current
production, thus raising current P & potentially
reducing future P
 Dynamic Efficiency: maximum present
discounted value (PDV)
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“Optimal” Environmental Quality
Level
 Opportunity
Costs to reduce externality
increase as pollution levels approach zero
– Marginal Abatement Cost Function (MAC)
 Damage
(real & perceived) to physical/natural
environment
– Marginal Damage Function (MD)
 Optimal
Level: MD = MAC
 Economics provides analytical tools; society
provides the goals (sometimes thru market,
sometimes thru public action)
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Marginal Damage/Marginal Abatement
Marginal
Damage
Function=MD
Damages &
Costs ($)
Marginal
Abatement Cost
Function = MAC
Pollution Level
Total Damage
Total Abatement Cost
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Economic Incentives to Improve Natural
Resource/Environmental Quality
 Marketable Pollution Permits
– Trade permits in market to equate MC across
polluters
– Initial distribution
» history, auction, lottery
» equity & geographic concerns
 Bonding
Systems
 Liability Systems
 Pollution Subsidies
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Natural Resource/Environmental
Valuation
 Determined
by people & willingness to make
trade-offs
 Producer & Consumer Surplus
 Nonmarket valuation--use & non-use value
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Non-market Valuation Techniques
 Direct--hypothetical
questions on willingness to
pay/sell (wtp/wts)
– Contingent Valuation Method (CVM)
» open/closed-ended w/specific mechanism
– Conjoint Analysis
» preferences among bundles of characteristics
 Indirect
(revealed preference)--people’s
decisions reveal preferences & value
– Hedonic Pricing/Wages
– Travel Cost Method (TCM)
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Economic Returns
--Rent Applications (cont.)
 Land
Values: In theory, current market value =
present value of expected future land rents =
worth of current investment held at acceptable
interest rate
– Discounting determines present worth of expected
rental returns; negative premium on waiting
t
– Present Value = Future Value / (1+rate)
– Future Value = Present Value x (1+ rate) t
– “rate”: appropriate discount rate
» social discount rate?
» Risk-free real market rate of interest?
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