FAA 102 Lecture Note Classification of Benefits PDF

**FAA 102 LECTURE NOTE** **[Classification of Benefits Which Ecosystems Offers]** **Direct Use** Direct use is most obvious value category, as the economic benefits can be calculated by making use of market information. The outputs of the resource can be directly consumed: \- a forest may yield...

**FAA 102 LECTURE NOTE** **[Classification of Benefits Which Ecosystems Offers]** **Direct Use** Direct use is most obvious value category, as the economic benefits can be calculated by making use of market information. The outputs of the resource can be directly consumed: \- a forest may yield annually a certain amount of wood that can be sold or used for heating and construction; \- pastures provide space for some livestock \- a lake provides fish to fisherman; \- enjoying nature (recreation). **Indirect use** Indirect use of natural recourses relates to functional benefits, the outputs provide a social benefit from ecosystem functioning (e.g. water purification, erosion protection or carbon sequestration). **Option use value** Option value, where individuals are willing to pay for the future use of the resource (e.g.future visits to national parks, clean surface and ground water, avoiding of erosion to enable future use of pastures). Two types of non-use value of environment can be distinguished: **Bequest values** This reflects the public's willingness to pay to ensure future generations to enjoy the same environmental benefit in the years to come. This relates to the willingness to pay for preserving existing habitats, species and ecosystems. It also includes the willingness to pay to prevent for irreversible changes (for example: extinction of species). **Existence value** This non-use value reflects the "moral" or philosophical reasons for environmental protection, unrelated to any current or future use. It is related to for example the scientific society and the value from knowledge of continued existence of species, habitats and ecosystems. **Values of watershed and its appropriate definitions** ---------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------ **Values** **Definitions** Aesthetic value I value the Watershed because I enjoy the Watershed scenery, sights, sounds, smells, etc. Biological diversity value I value the Watershed because it provides a variety of fish, wildlife, plant life, etc. Cultural value I value the Watershed because it is a place for me to continue to pass down the wisdom and knowledge, traditions, and way of life of my ancestors. Economic value I value the Watershed because it provides fisheries, minerals, or tourism opportunities such as outfitting and guiding. Future value I value the Watershed because it allows future generations to know and experience the area as it is now. Historic value I value the Watershed because it has places and things of natural and human history that matter to others, the nation and me. Intrinsic value I value the Watershed in and of itself for its existence, no matter what I or others think about the forest. Learning value I value the Watershed because we can learn about the environment through scientific observation or experimentation. Life sustaining value I value the Watershed because it helps produce, preserve, clean, and renew air, soil and water. Recreation value I value the Watershed because it provides a place for my favorite outdoor recreational activities. Spiritual value I value the Watershed because it is a sacred, religious, or spiritually special place to me or because I feel reverence and respect for nature there Subsistence value I value the Watershed because it provides necessary food and supplies to sustain my life ---------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------ **[ECONOMIC VALUATION OF ENVIRONMENTAL RESOURCES]** An economic valuation is a helpful tool for natural resource accounting and development assessment. Various valuation techniques such as stated preference and revealed preference have been devised and implemented to evaluate different kinds of natural resources and protected areas. Valuation is the system of expressing goods and services in economic terms. Economic value is one of many possible ways to define and measure the work of a good or service. Although other types of value are often important, economic values are useful to consider when making economic choices, which involve tradeoffs in allocating resources. Measures of economic value are based on what people want (their preferences). Thus, the theory of economic valuation is based on individual preferences and choices. People express their preferences through choices and tradeoffs that they make, given certain constraints, such as those on income or available time. **Importance of valuation of natural and environmental resources** Reasons to bother about monetary valuation of environmental and natural resources are: \- Environmental valuation techniques can provide useful evidence to support habitat conservation policies by quantifying the economic value associated with the protection of biological resources \- The measurement of the economic value of biodiversity is a fundamental step in conserving this resource, since "the pressures to reduce biodiversity are so large that the chances that we will introduce incentives \[for the protection of biodiversity\] without demonstrating the economic value of biodiversity are much less than if we do engage in valuation"; \- By assigning monetary values to biodiversity, the benefits associated with biodiversity can directly be compared with the economic value of alternative resource use options. It thus can and should be applied in Cost Benefit Analyses of (larger) public and private projects. There is a wide range of methods to estimate the monetary value of natural and environmental resources. Here we give a brief overview of some important methods used. Basically the methods can be subdivided into two categories: \- methods that somehow link the change in an environmental or natural resource, to a market price that can be observed in reality (so called "revealed preferences"); \- methods that determine preferences directly from consumers, by using various types of questionnaires ("Stated preference techniques") **Willingness to pay (WTP)** This is a so-called "stated preference technique". Basically this method aims at measuring the willingness of individuals to pay for environmental services, nature protection, etc. Most critical with this method is the way in which is explained what exactly has to be valued by the respondents and realistic monetary choices. A limitation is the "income restraint" (poor people will be less willing to pay, so average income levels influence outcomes of the studies). An advantage is that it can be used to valuate difficult to measure non-user values or the value of non traded goods and services. **Market prices** The most obvious way of measuring the value of nature is to see how much crop, fish, wood, livestock, etc. can be obtained by sustainable use of the natural habitat. By surveying crops, woodcutting, cattle breeding, etc, of the population, in combination with (local) market prices, the direct use value for the inhabitants can be measured. **Dose response function and valuation of morbidity, mortality, loss to crop and real estate** This method is often used in studies that aim to estimate the monetary damages of environmental degradation, for example through pollution of the air by fine particles, sulphur dioxide, nitrogen oxides and volatile organic compounds. It has been successfully applied in EU studies on air pollution (ExternE). It requires large datasets, establishment of dose-response function (for mortality, health, loss of crop and real estate). Moreover, it requires valuation of mortality, putting a monetary value on life, which is not undisputed. **Hedonic pricing** Here prices of for example houses are observed. By statistical analyses the environmental or nature valuation attributes in the price of property can be separated (for example, price of property decreases by 0.5% by an increase of the noise level with 1 dB(A)). This method is mostly applied to noise, but it can also be applied to nature by looking at values of property near natural areas. **Travel cost method** Part of economic behaviour can be measured implicitly by looking at how individuals spent their money and time. The Travel Cost method aims at measuring travel costs (for example to visit a protected natural area) and time (and value this economically) and (sometimes) the economic spin off (consumptions in the region, costs of accommodation). **Prevention costs** Applying preventive measures can be a way to mitigate negative effects of economic developments for nature. The costs thereof can be regarded as the value of the protected area or species. Examples of such measures can be longer routes of road (to prevent cutting off part of a natural area), a tunnel, passages for animals. **Compensation costs** Theoretically spoken it is possible to create a new nature area that can be compared with the old area although 100% is not possible). The costs to compensate the loss of natural area can be assumed to be the value of the nature area in question. **Opportunity Costs method** The opportunity costs of a resource, is the value of the next-highest-valued alternative use of that resource. For a natural area this may be agricultural use, use as a road, and in some cases economic development (industry, housing). The opportunity costs of nature thus will depend largely on location and (for agriculture) fertility. In the Netherlands natural area is valuated at about € 20,000 per ha (CBS), agricultural land costs € 30,000 -- 40,000, industrial € 100,000 - € 200,000 and housing € 2,000,000 - € 5,000,000 per ha. **ECONOMIC TOOLS FOR USE IN COASTAL MANAGEMENT DECISION MAKING** **[Economic Impact Analysis]** Economic impact analysis is a methodology for determining how some change in regulation, policy, or new technological breakthrough, or other action affects regional income and other economic activities including revenues, expenditures, and employment. Economic impact analysis does not account for social benefit or value. It does not account for what is being given up, nor what alternatives are foregone (i.e., opportunity costs). For example, an impact analysis of recreational fishing does not contain an analysis of what people would do with their time and money if, as the result of a fishery closure or moratorium, they couldn't go fishing. Would they go bowling instead of fishing? If so, would they generate more or less economic activity in the alternative activity? In addition, impact analysis does not take into account anything that is not traded on the market. **[Cost-Effectiveness Analysis ]** Cost-effectiveness analysis is a methodology that can be applied whenever it is unnecessary or impractical to consider the dollar value of the benefits provided by alternatives under consideration (e.g., each alternative has the same benefits expressed in monetary terms or each alternative has the same effects but dollar values have not been assigned). A project is cost-effective if it is determined to have the lowest cost of competing alternatives in present value terms for a given amount of benefits. Suppose a community determined that its current water supply was contaminated with some chemical, and that it had to switch to an alternative supply. Assume there are several possibilities: the community could drill new wells into an uncontaminated aquifer, it could build a connector to the water supply system of a neighboring town, or it could build its own surface reservoir. **A cost-effectiveness analysis** would estimate the costs of these different alternatives with the aim of showing how they compared in terms of, say, the costs per million gallons of delivered water into the town system. A cost-effectiveness modeling approach avoids the issue of evaluating benefits by setting desired objectives beforehand and searching for the lowest-cost ways of achieving these. Such an approach can facilitate the comparison among alternative policy or management plans. Cost-effectiveness analysis can help you eliminate those actions that cost more than equally, or less, effective alternatives or those actions that cost the same as more effective options. Such an approach also allows decision makers to build a "frontier" of cost-effective actions that highlights the higher marginal costs associated with different alternatives. **[Benefit-Cost Analysis]** Benefit-cost analysis is a methodology that compares the present value of all social benefits with the present value of opportunity costs in using resources. It can give valuable insights into the economic efficiency of management and regulatory actions. If the net value (benefits minus costs) of a project or action is greater than zero, then that project is considered to be economically efficient. The more the benefits exceed the costs, the better off society is in economic terms as a result of the activity. It involve four major steps i.e **specifiy the project or program and alternatives; describe quantitatively the inputs and outputs of the program; estimate the social costs and benefits of inputs and outputs; compare benefits and costs.** **[Natural Resource Damage Assessment]** Natural resource damage assessment is a methodology for determining the liability for injury to natural assets that result from release of hazardous substances. For instance, three federal statutes --- the Clean Water Act, CERCLA, and the Oil Pollution Act --- all impose liability assessments for injury to natural assets that result from oil spills or hazardous wastes and other substances. Under these acts regulations for comprehensive natural resource damage assessments have been developed by the Department of the Interior and NOAA. The process includes three steps: (1) injury determination; (2) quantification of service effects; and (3) damage determination. Environmental valuation plays a role in the latter step. Natural resource damages are the sum of: Restoration costs, Compensable value (diminution in value of foregone natural resource services prior to restoration) and Damage assessment costs. **Restoration Costs** (which also include costs of rehabilitation, replacement, and/or acquisition of equivalent resources) include both direct and indirect costs. Direct costs are costs charged directly to the conduct of the selected alternative, such as staff time, materials, equipment, and the like. Indirect costs are costs of activities or items that support the selected alternative but cannot be directly accounted for, such as overhead. **Compensable Value** is the amount of money required to compensate the public for natural resource services losses between the time of the release and the time when these services are fully restored to their baseline condition. Compensable value excludes any losses associated with secondary economic impacts resulting from the release, such as losses incurred by businesses patronized by users of the injured resources (e.g., bait and tackle shops). **Damage Assessment Costs** are the costs of performing the studies to determine the other costs mentioned above. ***MEASURING THE VALUE OF GOODS AND SERVICES TRADED IN MARKETS:*** **a) Measuring Producer Surplus without Estimating Supply** Sometimes the measurement of changes in producer surplus does not require complicated econometric modeling to estimate the supply curve. Careful measurement of all the opportunity costs of production in alternative situations can be used to estimate the change in producer surplus. **Consider the hypothetical** case in which habitat degradation results in a reduction of striped bass available to the commercial fishery in Chesapeake Bay, a reduction in catch from 8,000 to 5,000 pounds a day. The ex-vessel price, below, refers to the price paid directly to the harvesters for whole fish. Prior to the reduction in stock size the state of the fishery was estimated as follows: Catch rate per day (pounds) = 8,000, Ex-vessel price = \$0.70/pound, Variable costs per pound = \$0.40, Total days fished in season = 16 : Total revenue = 16 x 8,000 x 0.70 = \$89,600 : Total variable costs = 16 x \$0.40 x 8,000 = \$51,200 Producer surplus = Total revenue minus total variable cost = \$89,600 -- \$51,200 = \$38,400 To simplify the analysis, we assume that the harvesters will not change their fishing behavior, at least in the short run, due to the decrease in stock size. However, reduced stock size can affect harvesters by lowering their catch rate and increasing their variable costs of production. After the reduction in stock size, the state of the fishery is: Catch rate per day = 5,000 Ex-vessel price = \$0.70 (note: for simplicity we assume no price change) Variable costs per pound = \$0.50 (uses more fuel searching for fish) Total days fished in season = 16 Total revenue = 16 x 5,000 x \$0.70 = \$56,000 Total variable cost = 16 x \$0.50 x 5000 = \$40,000 Producer surplus = \$56,000 -- \$40,000 = \$16,000 The estimated change in producer surplus is \$38,400 -- \$16,000 = \$22,400 ***Advantages of This Technique:*** We have a number that can be compared against the producer surplus created by the activity that resulted in the habitat degradation. For the average fisher, the degradation of striped bass habitat has created a welfare loss of \$22,400 per year. If there are 100 fishers, the estimated welfare loss would be \$2,240,000. In practice the calculation would be more complicated. What will be the predicted response of harvesters due to the reduction in stock size? Will some harvesters drop out of fishing or go after a different species? If so, what is their producer surplus in these alternative activities? ***Disadvantage of This Technique:*** Such an analysis may be problematic because of difficulties in accurately predicting the changes in cost and earnings due to environmental change and in fisher behavior. Also, the prices and cost of inputs and outputs (true opportunity costs) may diverge from accounting costs. This is particularly a problem with fisheries because of the common property nature of the resource. The intricacies of that problem are beyond our study of environmental valuation. ***Data Needs.*** The data required for such an analysis include detailed costs and earnings for a representative fisher. Such information could be obtained from an industry survey. ***MEASURING THE VALUE OF NON-MARKET GOODS AND SERVICES*** Without the observable price and quantity data that are available when goods or services are traded in the market, Ecological Economists have devised innovative techniques for measuring changes in value for natural resources and the environment. Three of the techniques namely travel cost, random utility and hedonics pricing techniques use information to indirectly determine what a market might reveal in value if it did exist, while the contingent value technique attempts to measure the change in value directly. - **Travel cost and random utility models, which are based on expenditures and travel behavior for recreational opportunities** - **Hedonic methods of decomposing prices of market goods to extract embedded values for related environmental attributes** - ¨ **Experimental methods for eliciting preferences, either by using hypothetical settings, called contingent valuation, or by constructing a market where none existed** ***Travel Cost Model:*** The travel cost method is, in general, employed to estimate recreational values. This technique assumes that visitors to a particular site incur economic costs, in the form of outlays of time and travel expenses, to visit the site. In effect, these economic expenditures reflect the "price" (albeit implicit) of the goods and services provided by the site, and are an indirectly observable indication of the minimum amount that a visitor is willing to pay to use the site (with all its associated attributes). By observing the characteristics of individuals visiting the site--- for example, the specific attributes of their trip to and from the site as well as the total number of visits --- Ecological economists are able to estimate the "derived demand" for the site. That is, for any given or implicit price, the derived demand relationship will determine the number of visits consumers will "purchase" at that site. The travel method technique has a number of applications --- it can be used, for example, to measure the effects on a consumer's willingness-to-pay because of changes in access costs to a recreational area, or the elimination of a site, or changes in environmental quality. ***Random Utility Models:*** Though conceptually similar to travel cost models, random utility models do not focus on the number of trips recreationists make to a given site in a season; rather, they focus on the choices of recreationists among alternative recreational sites. This type of model is particularly appropriate when substitutes are available to the individual so that the economist is measuring the value of the quality characteristics of one or more site alternatives. ***Hedonic Pricing Methods:*** The hedonic pricing method is another technique to determine environmental value. In its earliest applications, these techniques were intended to capture the willingness-to-pay measures associated with variations in property values that result from the presence or absence of specific environmental attributes, for instance, air pollution, noise, or water views. By comparing the market value of two properties which differ only with respect to a specific environmental attribute, economists may assess the implicit price of that amenity (or its cost when undesirable) by observing the behavior of buyers and sellers. A variation on the approach of comparing the effects of an environmental attribute would involve comparing the price of a single piece of property over successive sales. By correcting for other factors that might influence the value of the subject property, Ecological economists are able to isolate the implicit price of some amenity or bundle of amenities which have changed over time. The price of a house may be affected by factors such as the number of bedrooms, the square footage, the existence of a pool, the proximity to local schools, shopping, highways. The price may also be affected by the proximity to, or quality of, environmental amenities. For instance, Air quality has been found to be a determinant of housing prices in Los Angeles; whether or not a property abuts a woodland may also matter. Hedonic methods can also be used to estimate the effect of certain dis-amenities on the price of a house, for instance, the impact on the price of a residential property adjacent to an area affected by a spill or some proposed unfavorable development. The process for estimating an hedonic price function that relates housing prices to the quantities of various characteristics is reasonably straightforward. However, it is much more difficult to derive value measures from these estimated functions. Only under very restrictive assumptions can values be obtained directly from these estimated functions. In most cases, a two-stage procedure that depends on information from multiple markets is necessary. ***Contingent Valuation Method (Cvm):*** The most obvious way to measure nonmarket values is through directly questioning individuals on their willingness-to-pay for a good or service. Called the contingent valuation method, it is a survey or questionnaire-based approach to the valuation of non-market goods and services. The dollar values obtained for the good or service are said to be contingent upon the nature of the constructed (hypothetical or simulated) market and the good or service described in the survey scenario. The contingent valuation technique has great flexibility, allowing valuation of a wider variety of non-market goods and services than is possible with any of the indirect techniques. It is, in fact, the only method currently available for estimating non-use values. In natural resources, contingent valuation studies generally derive values through the elicitation of respondents' willingness-to-pay to prevent injuries to natural resources or to restore injured natural resources. In contingent valuation methods, randomly selected samples or stratified samples of individuals selected from the general population are given information about a particular problem. They are then presented with a hypothetical occurrence such as a disaster and a policy action that ensures against a disaster; they are then asked how much they would be willing to pay --- for instance, in extra utility taxes, income taxes, or access fees --- either to avoid a negative occurrence or bring about a positive one. The actual format may take the form of a direct question (\"how much?\") or it may be a bidding procedure (a ranking of alternatives) or a referenda (yes/no) vote. Eco-Economists generally prefer the referenda method of eliciting values since it is one most people are familiar with. The resulting data are then analyzed statistically and extrapolated to the population that the sample represents. Contingent valuation studies are conducted as face-to-face interviews, telephone interviews, or mail surveys. The face-to-face is the most expensive survey administration format but is generally considered the best, especially if visual material needs to be presented. Non-response bias is always a concern in all sampling frames. In other words, people who do not respond have, on average, different values than people who do respond. **Pros and Cons of Contingent Valuation** +-----------------------------------+-----------------------------------+ | ***Pros*** | ***Cons*** | +===================================+===================================+ | **1. Based in economic utility | **1. Estimates of nonuse values | | theory** | are difficult** | | | | | **and can produce reliable | **to validate externally.** | | estimates.** | | | | **2. Stated intentions of | | **2. Most biases can be | willingness to** | | eliminated by** | | | | **pay may exceed true feelings.** | | **careful survey design and | | | implementation.** | **3. Results may appear | | | inconsistent** | | **3. Currently the only method | | | available** | **with tenets of rational | | | choice** | | **to measure important nonuse** | | | | **4. Respondents may be | | **values associated with natural | unfamiliar** | | resources.** | | | | **with the good or service being | | **4. Has been used successfully | valued** | | in a variety** | | | | **and not have an adequate | | **of situations.** | basis** | | | | | **5. Is being constantly improved | **for articulating their true | | to** | value** | | | | | **make the methodology more | **5. Respondents may express a | | reliable.** | value** | | | | | | **for the satisfaction (\"warm | | | glow\")** | | | | | | **of giving rather than the value | | | of** | | | | | | **the goods or service in | | | question** | | | | | | **6. Respondents may fail to take | | | questions** | | | | | | **seriously because the | | | financial** | | | | | | **implications of their responses | | | are** | | | | | | **not binding.** | +-----------------------------------+-----------------------------------+