Chapter 11 Recreation1 CHAPTER 11 Recreation and the rural economy.

Chapter 11 Recreation 1

CHAPTER 11

Recreation and the rural economy

Chapter 11 Recreation

Typical questions

• Tourism and recreation: public or private good/service?

• Which factors determine recreational behavior

• How to value recreation?• Who can best supply recreation

goods/services?• What is special about tourism and

recreation in rural areas?2


Overview

• Two basic theories of recreation• Demand side for recreational activities• Total economic valuation (recreation)• Demand factors and demand analysis• Pricing• Supply side• Multiple land use (basic principles)• How to derive land values of recreational

activities?

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Demand side: Why recreation?

(1) Compensation theory• recreation behavior is seen as a

counterbalance/compensation for– living and working conditions of every day– central: contrast between living/working conditions and

outdoor recreation • limited empirical support(2) Complement theory • works less in terms of contradictions and more in terms of

limited changes • humans explore their environment • recreational provisions within and outside living place have

more a complementary function • more empirical support

4


Total Economic Value (recreation)Total value

Value measurable by the price mechanism

Value not measurable by the price mechanism

Primary benefits Secondary benefits

Use value

Current use value:Primary benefits

Future use value:Option value

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Demand factors for recreation in rural areas

• Spatial factors - people are influenced by:– their outdoor environment and their living

circumstances– location of their house– transport possibilities (routes, public transport,

own car) – location of recreation facilities

6Chapter 11 Recreation


Demand factors for areas recreation

Non-spatial factors

• technological, demographic, social-cultural, socio-economic, policy factors

• ageing/graying of population => might lead to structural changes

• generational differences

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Demand function for recreation

• If it would be a normal market good, then it fits within general demand theory and modeling

• Often part of the provision of recreational services consists of non-market provision– Gives special difficulties in deriving the

demand for recreation

• Here along the line of a simple (partly hypothetical) demand function

8


Demand function Qi= f(Pi,Ps,Y; other)

• Quantity of demand Qi

– Dimension could be• Participation / Standardized units of participation• Frequency of participation

• Price of recreational activity Pi

– price is not easy to obtain!

– price (based on costs) is often an composite variable• average costs of participation (equipment, entrance fee, travel

cost, etc.)• marginal cost of participation (entrance fee, travel cost)

– participation decision depends on ATC– frequency of participation depends on MC

– Epd = elasticity: ‘quantity change’ in relation to ‘price change’ 9


Demand function Qi= f(Pi,Ps,Y; other)

• Price of other goods and services Ps

• substitutes / complements / independent

• Income Y– Qi= f(Y|Pi,Ps; other)

– Eyd = income elasticity of demand

1 luxury goods• 0 - 1 normal goods (for recreational goods circa 0.8?) 0 inferior goods

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Demand function Qi= f(Pi,Ps,Y,D,E,C,T)• Income distribution D

– can be measured via e.g. Lorenz curve– a change can influence the quantity of demand

• Population grow and structure E– increase of population proportional change in quantity of

demand– a change in population structure (e.g. ageing) will change

the demanded amount

• Taste en preferences C– most variable factor– key factors are age and gender

• Technology changes T 11

Travel cost method – an example

• Starts from actual observations on behaviour

• We take an example of a valuation of an ecosystem (see relation to Chapter 10)

[available online: http://www.ecosystemvaluation.org/travel_costs.htm]


Travel cost method – example

• Situation: recreational fishing site is threatened by development nearby. Pollution from the development may destroy fish population and decrease the opportunity for recreational fishing on the site.

• Question: what is the value of programs / actions to protect the fishing site? This is the same question as: what is the valuation of the fishing site (as a recreational area)



• Travel cost method:– Information is collected on number of visits to

the site from different locations (distances)– Travel and time costs will increase with

distance so this allows researcher to calculate number of visits ‘purchased at different prices’

– Demand functions are derived, and economic benefits (consumer surplus) of the recreational site are calculated







• Use regression analysis to relate visits per capita to travel costs (and other variables):– Visits/1000 = 330 – 7,755*travel cost

• And derive demand functions (point 1 = current visits without entrance fee; point 2: assume 10 $ entrance fee)





• Different points on the demand curve are calculated by assuming different entrance fees

• Derive total economic benefits of the recreation site, i.e. Area under demand curve

• Conclusion: actions to save the site are worthwhile if they cost less than total economic benefits


Revealed preference techniques

• Travel cost method– Calculated from number of visits and travel costs– Travelling is a disutility– Does not consider substitution possibilities– Only the use value is estimated– How to valuate time?


Revealed preference techniques• Hedonic pricing

– Based on price differences due to specific characteristics (e.g. the environment)

– Often based on differences in house prices (transactions of a property which has both individual characteristics and an implicit valuation of the ‘environment’)

– Data and level of detail can be a problem

• Example

),...,,( 21 nzzzfP

P = ‘transaction’ price ; z’s are attributes


In practice

• Method depends a lot on:– Type of question– Available data

• There will always be discussion about non-market valuation methods; but here you find one of the examples how to operate



Supply side

Scale effects and fixed cost problems• recreation en nature areas must have a

certain dimension– indivisibility (lumpiness) on the production

side– surroundings might be important– huge investments – large part fixed cost application of marginal cost

rule is difficult

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Supply sideScale effects and fixed cost problems

• High costs and large part fixed cost– private sector will not provide such goods– are a result of indivisibility on the production side

• indivisibility leads to non-rivalry in consumption• i.e. the marginal cost of the use is equal to zero (or low)

• Welfare theory– price should be equal to MC (marginal cost rule)– applying this rule does not cover all the costs (see

figure)



Large fixed cost and solutionsSupply side:

• High costs and large part fixed cost– private sector will not provide such goods– are a result of indivisibility on the production side

• indivisibility leads to non-rivalry in consumption• i.e. the marginal cost of the use is equal to zero or low

• Welfare theory– price should be equal to MC (marginal cost rule)– applying this rule does not cover all the costs (see

figure)

25


Large fixed cost and solutions

26


Solutions

(1) set the price equal to the MC– solution is efficient– however, there is a loss (available capacity is not

used) – Subsidizing? => government intervention

(2) two-part pricing – consumers pay

• a price based on the MC ( e.g. depending on their use) and • a fixed charge that cover the difference between revenues

and total costs – this system can be applied in a club

27


Focus of the analysis of recreation and tourism

• Many studies focus on the demand side

• The supply is already available: recreation areas; nature parks; forest; etc.

• Demand analysis is easier?

• Supply side is often mainly done along the lines of public good provision– Proper Cost Benefit Analysis?– Often only budgetting

28


Basic framework for the supply of non-marketed goods and services

Assume that a decision unit produces bothmarketed goods (Y); price p; Non-marketed goods and services (H)Using variable inputs (X), price w; Quasi-fixed inputs (Z) by production technology T (all variables can be vectors!)

),,,,(

),,,,(

),,,,(

),,,,(

),,,,(

0),,,,(

THZwpsH

s

THZwpsZ

s

THZwpXw

X

THZwpYp

Y

THZwp

THZXYF

HH

ZZ

Production set

Profit function

Marketed output supply

Input demand

Shadow price of quasi fixed

Shadow costs of non-marketed goods and services 29


Non-marketed goods and services; no reward!

Assume that a decision unit produces bothmarketed goods (Y); price p; Non-marketed goods and services (H)Using variable inputs (X), price w; Quasi-fixed inputs (Z) by production technology T (all variables can be vectors!)

0),,,,(

),,,,(

),,,,(

),,,,(

),,,,(

0),,,,(

THZwpsH

s

THZwpsZ

s

THZwpXw

X

THZwpYp

Y

THZwp

THZXYF

HH

ZZ

Production set

Profit function


Input demand

Shadow price of quasi fixed input

Shadow costs of non-marketed goods and services =0

30


Non-marketed goods and services; reward v per unit H! (Let’s focus)

0),,,,(

),,,,(

),,,,(

),,,,(

),,,,(

vTHZwpsH

s

THZwpsZ

s

THZwpXw

X

THZwpYp

Y

vHTHZwp

HH

ZZ

Profit function


Input demand

Shadow price of quasi fixed input

Shadow costs of non-marketed goods and services =v

This implies: H is adjusted;Y, X and sz are changingIt might be attractive to switch to a new technology

31


What happens if the decision unit produces H as (partly subsidized) a marketed good?

• Might be relevant for (1) recreational production; (2) dual/multi purpose production

• Y and H end up in the same category

We may observe (depends on technology):• Dual/multi purpose units• Specialized units

32


Two different examples (technologies)

Y1

H1

Easy substitution

Concave ppc

Difficult substitution

Convex ppc

Y1

H1

p1/v1

p1/v1

33


Some typical situations: Increased supply of a non-marketed good/service

00

H

Yor

H

Y

No measurable or negative regular output effect:

Increase / decrease of shadow price of a quasi-fixed input (e.g. land)

0H

sZ

34


How to measure the consequences of a change in non-market goods/services?

on vH onon wwXX ;

onon ppYY ;

Effect primary producer

Induced input effect

Induced production effect

Government budget vH

Depends on specific conditions, available data / models, how to further elaborate this question; see also the consumption side and the additional non-market valuation

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Effects of recreation and tourism on the rural economy

• Direct effects– Output size (recreation tourism)– Input size – Price changes (input and output)– Profit; subsidies;– Positive and negative external effects

• Indirect effects– Related industries

• Cost Benefit Analysis (see Chapter 7)– Valuation external effects

• Model of the rural economy?

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Spatial elements

• Via the ‘well known’ gravity equation; often for research puposes

– Definition of variables is crucial!

• Searching optimal locations: Reilly Index?

ijjiij DMMgF lnlnlnlnln

K

k ki

ki d

PopR

12,

37


Conclusions

• The demand side of recreation and tourism in studied most

• In rural areas there is often a strong link between recreation, nature/wildlife, landscape, etc.

• It is possible to analyze supply of non-market goods in relation to market goods in a consistent framework

• Distance plays a role in particular for recreation

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