Economic Benefits of Preserving
Healthy Ecosystems
Steve Colt
Institute of Social and Economic Research
University of Alaska Anchorage
Stampede Summit 2
1 April 2005
Preview:
• What on Earth is Value?
• Price is not a four-letter word
• The great divide….
– Between price and cost
• Public lands are the answer—
– But what was the question?
• Wild values: measuring ecosystem
services
• Sleeping with porcupines
– Using the numbers
2
What on Earth is “Value” ?
• Value is subjective
– “There is no accounting for taste”
• Value is determined partly by:
– Circumstances (water in the desert)
– Skills and interests (piano, to Beethoven)
– Income
• Markets reveal value
• Economists try to measure value
3
Price: Value in the Marketplace
• Prices are determined by the
interaction of buyers and sellers
• Buyers compare Their
Value to “the price”
Subjective
• Sellers compare their incremental
cost to “the price”
4
Juan values the good more than
Tupak (we don’t know why!)
price
quantity
Forest buys but Siggy does not…..
5
Abe has a lower production cost than
Cecil (we don’t know why!)
price
quantity
Dee produces but Efrin does not
6
“the price” is determined by the
“Twin Scissors” of buyers and
sellers
7
Price is not a four-letter word!
• When markets work:
– Price = Cost
– Value exceeds cost to everyone who
decides to buy
– That’s good for society – we produce as
much, but not more, than people want. (xmas
comparison)
– Price signals what must be given up to
get something
8
How Markets Work for
Conservation:
•
•
•
•
Prices send signals
High price encourages conservation
High price encourages substitution
High price encourages innovation
– What happened to the impending “copper
crisis”?
9
Example: Market for Carbon
Emissions
• EU Market for Carbon Dioxide
emission rights opened January 2005
• The market price of one ton of CO2
is……
– 10 Euro = $14
– This equates to 14 cents per gallon of
fuel.
– Is this really going to wreck the
economy?
10
The Great Divide – between price
and cost
• When I drove to Denali today, I
emitted 200 kg of carbon dioxide into
the atmosphere.
• Who bears this cost?
– Everyone!
• This is a negative spillover or a
“negative externality”
• The cost of driving (to society!)
exceeds the price of driving (to me!)
11
Your examples, please:
• Glitter Gulch – each new development
gets all the benefits and spreads the
cost of sprawl among all others.
• Dog poop – why pick up my dog’s when
I am headed “down the trail”?
12
When markets fail:
• Social cost (of climate change) (of
congestion) exceeds private cost to
the driver
– Market for driving generates too much
driving
– There is no market for carbon emissions!
• Private benefit of overfishing
exceeds private cost, but total
benefit is far less than total cost
13
The Tragedy of the Commons
“The pursuit of freedom in a Commons
brings ruin to all” (Garrett Hardin)
10
8
6
benefit
4
private cost
external cost
2
0
Private
Big negative
externality – like
Total depletion of a
fishery
14
Public Lands are the Answer – but
what was the question?
Why have collective ownership of
healthy ecosystems?
– (Think about this for a few moments)
15
Why Collective Ownership?
• Healthy ecosystems provide
“ecosystem services”
– Clean air, Clean water, Climate
– Recreation, hunting, fishing
– My consumption does not reduce your
consumption (within limits)
– It is hard to exclude people from
consuming, so private owners cannot
charge …(Scenic views!)
– The services are often global-scale
16
Types of Global Ecosystem Services
•
•
•
•
•
Biodiversity
Climate
Air
Open ocean fish stocks
Scientific laboratory
• These are all direct USE values for
both current and future generations
17
In addition,
Existence Value:
• I value the knowledge that Blue
Whales exist
• American households valued the
knowledge that Prince William Sound
would not suffer another spill at:
$31 per household (median)
= $2.8 billion total (for U.S.)
• You can’t sell existence value!
– Only a few will privately produce it
18
Hence,
• Ecosystem services are often not
bought and sold in private markets
• Environmental goods and services
must often be provided through
collective social processes (politics!)
• We use Politics to translate individual
preferences into collective action
19
Wild Values:
Measuring the value of ecosystem
services
• “The issue of valuation is
inseparable from the choices and
decisions we have to make about
ecological systems”
– (Costanza et al 1997)
(Remember – value is subjective)
20
What are we Measuring?
• Use Values
– Fishing, hunting, recreation
– subsistence
– ecosystem services (life support)
• Non-use Values
– Existence, passive use, Includes
aesthetics, cultural heritage
21
How do we do it?
• Actual market prices
– Replacement cost
• Market prices of related goods
– Hedonic methods
• Observation of behavior
– Travel Cost
• Ask people
– Contingent Valuation
22
Using Market Prices: Example
Replacement Cost of Subsistence
• 53.5 million lbs harvested
• 100+ % of protein needs in rural
Alaska
• Replacement cost = ?? $4 per lb
• Replacement value = 53.5 x 4 = $214
million
– Source: ADFG 1998 “Subsistence Update”
23
Example: Using Market Prices
Value of Worldwide Ecosystem
Services
•
•
•
•
•
•
Nutrient Cycling $17 trillion / yr
Waste treatment $2.3 trillion / yr
Water regulation & supply $2.9 trillion / yr
Gas regulation $1.3 trillion / yr
Recreation $0.8 trillion /yr
Cultural benefits $3.0 trillion / yr
• TOTAL = $33 trillion /yr
• Compare to gross world product of $18 trillion / yr
24
Example: Hedonics
• Land Values in Mat Su Valley
• Berman (1987) regression equation
• Value of parcels declines with
distance from Anchorage
• Value of parcels declines with number
of close neighbors
• Value of parcels increases with
proximity to public open space
25
Example: Observed Behavior
Value of Alaska Fish
• Example of TC Data:
– I live at the fishing site, TC=0, make 6
trips
– Brother lives ten miles away, TC = 10,
make 3 trips
– Cousin lives 20 miles away, TC = 20,
makes zero trips
• Draw Graph, infer value
26
Example: Observed Behavior
Value of Alaska Big Game
• ADF&G used survey data to estimate
TC models for hunting trips
• Net values estimated by species and
by resident / nonresident status
• Total net value of hunted species in
year 2000 = $23.5 million
27
Example: Observed Behavior
Value of Alaska Fish
• ISER Results (1993):
– People Actually paid: $550 million
– People were willing to pay an additional
$186 million to fish
– $186 million is the net economic value of
the sport fishery
28
Contingent Valuation: ask people
• Tentatively endorsed by NOAA Panel
• Quality depends on execution
– In-person interviews
– Yes-no choices
– Clear description of scenario
• Used by “most federal” and “many
state” agencies (Carson 1999)
• The ONLY way to measure existence
value
29
Sleeping with Porcupines: Using the
Numbers
• Problems:
– Whose values count? (Willingness to Pay
always depends on income)
– Reducing complex choices to one
dimension ($)
• A Trojan Horse? (Weeden 1987)
• However, no measurement = a value of
zero (?)
30
• Valuation is one, useful, tool
“We can find ways to use
the sharp-edged
techniques of economic
valuation without cutting
our jugulars” (Bob Weeden 1987)
31
Playing the Economic Significance
Game
• 84,000 Alaska jobs depend on healthy
ecosystems
• $2.6 billion of personal income
32
Recreation visits to AK National Parks
avg annual growth = 7.6%
2,500,000
2,000,000
1,500,000
1,000,000
500,000
Source: http://www2.nature.nps.gov/stats/
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
0
33
Case Study: Seward Economy
(ISER 2001)
• Seward wage and salary employment
grew at 3.7% per yr between 1980
and 2000, vs. 2.6% for entire State.
• Kenai Fjords Park visits:
34
Denali NP
Money Generation (2001):
• 218,085 visitor days in 2001
– $22 million total spending
– 445 direct average annual jobs
• But this is just time IN the park
Source: Michigan State U, http://www.prr.msu.edu/mgm2/
35
Why do People Visit Alaska
Why do People Live in Alaska?
36
MGM Appears Conservative:
$23
million
Source: ISER ANILCA and Seward economy
37
Don’t be Bamboozled:
• “Total dollars” or “economic activity”
numbers should be treated as
meaningless until you know what they
mean….
– New income? Tax revenue? New payroll?
• “New jobs” in one place may mean lost
jobs somewhere else.
– Ask about displacement!
38
Economic Value in the Long Run
• Ecosystem services – They
ain’t making any more of them
• Wilderness – it will grow
increasingly scarce
• Existence value – it will grow
with population, income, and
education
39
The Alaska Challenge:
• Our healthy ecosystems are
increasingly scarce from a national
and global perspective
• However, they are still viewed as
relatively abundant by most Alaskans
– “I have plenty of wilderness outside my
home in Peters Creek.”
• How to address this challenge is up to
you!
40
We’re all in this together.
~The End
Statewide National Parks Money
Generation: 2003
visits
party-days
$/party/day
total spending
direct sales
direct jobs
total sales
total jobs
Alaska
2,189,717
1,190,438
78
93
75
2,052
104
2,476
Source: Michigan State U, http://www.prr.msu.edu/mgm2/
$ million
$ million
$ million
42
Using Market Prices: Example
Replacement Cost of Subsistence
• Reality check against expenditures on
inputs:
– $3.18 million spent in 3 wildlife refuges
– 1.76 million lbs harvested
– $3.18/1.76 = $1.81 per lb actually spent
on commercial inputs
– Excludes labor by harvesters
– Source: Goldsmith 2000, Colt 2000
43
Using Market Prices: Example
Replacement Cost of Worldwide
Ecosystem Services
• Divide entire world into 16 ecosystem
types
• Look at 17 ecosystem functions
• What does it cost to replicate these
functions?
– Source: Costanza et al 1997
44
Example: Hedonics
• Idea: property values reflect a
“bundle of attributes” – safe streets,
good schools, nice neighbors,
environmental quality,
– Hence,
• Variations in property values can be
tied to variations in environmental
quality
45
Example: Observed Behavior
Value of Alaska Fish
(Based on ISER sport fishing study, 1993 data)
• Travel Cost Method (TC)
– People incur a travel cost to fish
– Those facing higher travel cost make
fewer trips to a given site
– Use this relationship between number of
trips and (travel) cost per trip to
estimate net economic value of activity
46
Example: Observed Behavior
Value of Alaska Fish
• Draw a graph:
25
cost per trip
20
15
10
5
0
-5 0
2
4
6
8
trips per person
47
Example: Observed Behavior
Value of Alaska Fish
• Assume all three people have similar
preferences
• Compute net economic value
– Me: between 30 and 60
– Brother: between 0 and 15
– Cousin: zero
– TOTAL: between 30 and 75
48
Example: Observed Behavior
Value of Alaska Fish
• ISER Methodology:
– Telephone and mail surveys of more than
5,000 residents and nonresidents
– Construction of travel costs to multiple
sites
– Nested multinomial logit models relate
fishing behavior to many variables
including travel cost
– Net economic value computed from
models
49
Net Economic Value of Alaska Big Game
(McCollum & Miller 1994, Colt 2000)
Net Economic
Value per Trip
Species
NonResident resident
Number of Trips
Resident
Nonresident
Black Bear
$181
Brown Bear
$246
Caribou
$200
Moose
$214
Wolf
NA
Sheep
$316
Goat
$149
Deer
$169
Elk
$117
Waterfowl
$118
$434
$718
$512
$465
$416
$583
$497
$263
$104
$560
2,807
1,238
15,685
44,579
248
1,073
13,456
908
7,430
1,187
1,679
4,045
3,079
486
1,419
179
377
141
192
All Species
$513
87,424
12,782
$194
Net Economic Value ($ million)
Resident
0.5
0.3
3.1
9.6
0.0
0.2
2.3
0.1
0.9
16.9
Nonresident
0.5
1.2
2.1
1.4
0.2
0.8
0.1
0.1
0.0
0.1
6.6
Total
1.0
1.5
5.2
11.0
0.2
0.8
0.2
2.4
0.1
1.0
23.5
50
Example: Ask People
Existence Value of Prince William
Sound
• State of Alaska, for EVOS trial
• 1,043 completed in-person interviews using
nationwide sample
• Asked people how much they would pay to
avoid another spill
• Used the median value of $31 per
household
• $31 x 90.3 million households = $2.8 billion
51
Example: Ask People
Existence Value of Prince William
Sound
• Construct Scenario
– There will be another spill in 10 years…
• Include possible action
– Unless we implement the following plan…
• Ask “Take-it-or-leave-it” questions
– Would you pay $15 in higher taxes to
implement the plan
52
Example: Ask People
Existence Value of Prince William
Sound
• Use different amounts ($5-$250) to
elicit range of willingness to pay
• Importance of the proposed payment
vehicle
– EVOS study used general tax after
considering gasoline tax, higher gasoline
prices
– Used lump sum one-time payment
53
Problems with Contingent Valuation
• Hypothetical market, not actual
transaction
– CV estimates understate TC for same
goods
• Information effects
• Scope effects – Does WTP increase
“correctly” with scope of proposed
action?
– Recent research suggests scope does
matter as it should
54
But,
• These are only the on-site
Expenditures….
• Total nonresident visitor spending in
AK is approaching $2 billion
– (based on $1.5 billion for 2001, summer
only, AVSP4)
• About $1,400 per person per trip
• How much of this can be attributed
to ANILCA?
55