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Impact analysis Goal: “To measure the impact of a public
action, such as a regulation, on a designated sector of the society or economy.” (pg. 127)
There are different types of impact analysis.
Section IV Natural Resource AnalysisCh8 Principles of Analysis
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Environmental Economic Analysis Identify and elaborate the repercussions
of an action on a natural and environmental resource base.
National Environmental Policy Act of 1970 (NEPA) This law requires environmental impact
assessments by federal agencies of proposed laws and “of other major federal actions…”
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Environmental Impact Assessment (EIS)
The end result of an Environmental Economic Analysis. It is composed of:
1. Description of environmental impact of action2. Any adverse environmental effects that are
unavoidable should action be put into action3. Alternatives4. Analyze the relationship between short term use and
long-term use and productivity5. Assessment of “irreversible and irretrievable
commitments of resources” for proposed action Objective: Get an idea of how the natural resources
will be affected
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Sections 2&3 Economic impact analysis: when interest
centers on how particular public or actions affect certain dimensions of an economic system.
The perspective might be local, national, global. The range of economic impacts that may be of
interest is very wide, for example: 1. Employment number (or unemployment rates),
total or in certain industries 2. Household incomes 3. Rates of technical change in certain resource
extraction industries 4. Rates of inflation 5. Trade balance with other countries
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Economic impacts of Horicon National Wildlife Refuge
Description: The primary recreational activity on the refuge is wildlife watching. Fishing, as well as deer and small-game hunting.
Regional economic analysis: The fall influx of non-resident, non-consumptive visitors generates most of the spending from Horicon visitation.
In total, refuge visitors spent $1.9 million in the region, the total effect of this spending was $1.53 million in the final demand, $616,000 in employee compensation, and 44 jobs……
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Impact analysis can only be as good as the underlying economic data and model used to do the study.
The more one knows about how the affected economics normally function, the better one is able to estimate the impacts that can be expected from whatever public or private program is being evaluated.
Economic impact analysis may be incorporated into environmental impact studies.
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Cost-Effectiveness Analysis
Machine 1Cost: $100,00020,000 gallons per dayCost per gallon =$5
Machine 2Cost: $150,00050,000 gallons per dayCost per gallon =$3
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Cost-Effectiveness Analysis
Useful when objective is agreed upon but not how to achieve itCan't tell what objective is worthCan't compare the value of resources used with the value of the objective
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Benefit-Cost Analysis
Companies judge projects on commercial feasibilityBenefit-Cost Analysis uses this approach for public sector programs→ social feasibilityBoth market and non-market inputs and outputs need to be estimatedBenefit-Cost Analyses are required of all federal regulations and programs
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CRITICS WHIPSAW THE FOREST SERVICE
USFS(U.S. Forest Service)
Environmentalists:
Think it does the bidding of the
industries
Industry defenders:
Think it too often gives in to
“preservationists”
Budget hawks:Think it wastes
money, and gives in to lawmakers
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Environmentalists Versus Industry defender
Industry defenders: managing national forests for timber production as well as wildlife and recreation supplies the nation with wood and paper products as well as jobs.
Environmentalists: 1) the logging-based revenues have come at the expense
of damaging the ecosystem; 2) halt logging on all federal land until the USFS
compares the economic benefits of a forest versus logs.
In this case, the USFS Chief agree that the agency must adjust to the public values which emphasizes “watershed health and integrity” over commodity production.
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Five Steps to Benefit/Cost Analysis
1.Decide on the perspective
2.Specify the project
3.Measure inputs and outputs
4.Value inputs and outputs
5.Compare the benefits and costs
13Decide on the Perspective
• Who is the “public” to be analyzed • Examples: local community, country, global
population
Specify the project
• Location, timing, groups involved, other projects connected
• Identify assumptions realistically in the beginnings • Examples: economic, population growth
• Two types of projects: physical, regulatory
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Distributional Issues Political conflicts arise from the fact that
the fact that groups who enjoy the benefits are not the same as those who bear the costs
Horizontal Equity: treating people in similar situations alike
Vertical Equity: how programs affect people in different circumstances
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Distributional Issues, Cont. Proportional Impact: it affects each
consumer in the same proportion Regressive Impact: Provides higher
proportional net benefits to high-income people than to low-income people
Progressive Impact: Net Benefits represent a higher proportion of the low-income person’s income than they do of the rich person’s income
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Scenarios weighted by its assumed probability of occurrence
Scope of the Project
• Usually predetermined by the experts– Are they appropriate? More or less? Larger or
smaller? Higher or Lower?
• Sensitivity Analysis– Recalculate benefits and costs
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The With/Without Principle
• Compare the pursued situation with when the program would have been rejected.
• Does not guarantee higher benefits than a before/after perspective.– Before the program : $10,000– In the future without the program : $5,000– In the future with the program : $33,000
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Effect of Discounting
--Determine Present Value
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Future Generations
Concerns about Discounting--Effects of downgrading future damage--+$10000/yr = -$1million/yr…..?
We despite perpetual cost burden placed on future generations
Choice of the Discount Rate• The choice of the discount rate is important Because discounting aggregates a series of future net benefits into an estimate of present value, the outcome depends importantly on which particular discount rate is used.
• REVIEW:
Real Interest
• Adjusting the nominal interest rate for inflation, we will get real interest rate.
Nominal Interest
• Nominal interest are those one actually sees on the market.
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Which rate should be used as discount rate??
There are essentially two schools of thoughts on this question.
Time Preference Approach
• The discount rate should reflect the way people themselves think about time.
• We can take the average bank savings account rate as discount rate.
Marginal Productivity Approach
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Distribution Issues
• Total Benefits and Total Cost
• People who benefit often do not bear the cost
• Horizontal Equity
• Vertical Equity
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Impact• Proportional (project 1)• Regressive (project 2)• Progressive (project 3)
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Dealing With Uncertainty
• Benefits and cost cannot be certainly known for three reasons:
1-- it includes predicting future values.• To deal with this problem we should use some
sensitivity analysis methods such as finding the range based on estimated probabilities.
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2-- biological uncertainty.• We do not know the exact cost or benefit from
applying new law or obligation. • For example, if there is a law to prohibit fishing
during the months of November and December, we cannot really know haw many fish will survive because of this low, so we will not know the exact benefit.
• To overcome this problem we could ask the fishermen for the difference they see, and then estimate the number by doing a sensitivity analysis.
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3-- economic uncertainty. • Benefits and cost are based on assumed
prices of inputs and outputs and these prices change over time.
• This change could be because of a change in interest rate.
• It could be because of a change in inflation rate.
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Chapter 9
The Valuation of Natural Resources
Joseph Bigler
Yang Liu
Rebeca Pieropan
Yunlu Shi
Daniel Sullivan
Yue Zhao 28
Measuring Actual Input and Output: Is It Possible?
Put each resource to the use that maximizes net social value Conduct valuation of resources/services flows
stemming from resources use Not enough time to evaluate all situations Principle of Valuation: a valuation process that can
be adapted to specific circumstances
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Types of Benefits Active(Use Values)
Consumptive Extractive resources
Non-consumptive Resources utilized but not removed
Passive(Nonuse Values) Option Value: peoples WTP to preserve a resource/
increase the likelihood of its continued existence Existence Value: WTP to maintain the existence of
resource even though utilization is unlikely Bequest and Gift Value: WTP to ensure
future/current generation will enjoy that particular resource
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Direct Market Price Analysis
Market prices and quantities can be used to reveal these values in two ways:
1. Directly--when the resource being evaluated is actually traded in its own right
2. Indirectly--when what is being traded is not the resource itself but another good or service that is closely associated with it
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The price of $25 is the one that brings the quantity supplied into balance with the quantity demanded.
On point $25, there are no externalities competition on two sides.This price is an accurate indicator of both marginal willingness to pay and marginal cost.
So, if the new fishing area represent only a marginal addition to supply. The $25 tells us what the marginal benefits are, and we can multiply this figure by the expected number of visits to get an estimate of total benefits.
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Market Data Market data can provide
estimations for resource values Non-extractive resource use
In many cases market prices do not provide an accurate measure of social benefits Environmental externalities MPC vs. MSC
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Evaluating Costs External costs accounted for by
MSC An increase in renewable energy
sources evaluated at price s Shadow prices represent true
economic scarcities
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Indirect market price analysis--Overview
In many cases direct markets simply do not take effect.
e.g. suburban wildlife Activity in related markets can be
studied to determine resource values. The value of the resource may be
established indirectly by examine quality quantity and price data of the associated goods or services in related markets.
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Indirect market price analysis--Example
Suburban housing market: A closely related market in which open space can be expected to have an impact.
The market for new and used house is very active through out the country
Factors affecting the price of a house: 1. Characteristics of the house (lawn size, flooring)2. Neighborhood (avg. household income)3. Crime rate4. Education (public, private, elementary, secondary)
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Indirect market price analysis--Approaches
Travel cost approach: take advantage of the fact that people incur travel costs when visiting natural resource sites.
Travel cost: direct monetary cost & the value of the time that travelers require to get from home.
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Nonmarket Techniques -- Overview Purpose: Estimate WTP when market
valuation is not possible Contingent Valuation (CVM): attempt to
measure peoples’ valuations given hypothetical situations Natural Resource studies: endangered
species, clean air, view-related amenities, biodiversity
OR Nonenvironmental areas: real estate
appraisal, senior companion programs38
Steps in CV Analysis1. ID & describe characteristic to be evaluated2. ID respondents & determine respective sampling methods3. Design and apply survey technique (s) :
Personal interviewPhone inquiry Mail responseFocus group
FINAL STEP: Aggregate individual responses into group valuation estimate (avg. WTP/person*total relevant population)
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ApproachesReview: Get individuals to reveal the max amount they would be willing to pay rather than go without the resource in questionA. Ask directlyB. Bidding process
Start low and increase until limit has been reachedORStart high and decrease until threshold has been reached
C. Give range of values and have them choose one
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Exhibit 9-1Study to Estimate Certain Benefits of Better Water Quality in Connecticut River
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1. Have you heard about the Connecticut River salmon restoration program?
2. Did you make any donations for wildlife management or presentation last year?
3. What is maximum donation for Connecticut River salmon restoration program you would like make?
4. What is your age?5. How much do you spend on entertainment each
month? The last step is to conduct the survey, which is followed by statistical analysis and reporting of the results. The main result derived from the CVM is the average willingness to pay per person. This figure is then multiplied by the relevant population (all visitors of a beach or all residents of a country, for instance) in order to derive total economic value of a good or service. 42
Thank You For Your Time & Attention Are there any questions?
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Sections 24-31
Group 4Lauren Butz, Gaoping Fan, Yang Feng,
Xiaodan Su, Adrian Verduzco
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Nonuse (Passive) Benefits
The benefits of preserving the environment without the direct observation or contact with nature
Environmental Organizations Nature Conservancy- raise money to preserve important
resource areas
Measurement issues Interpret contributions as estimate of WTP for social
benefit Distinguish benefits of nonuse vs. direct use Preservation of a public good
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The Oregon Water Trust
Formed in 1993 Enhance fish, wildlife, habitat, recreation,
H2O quality, and navigation Mission
Acquire H2O rights through gift, lease, or purchase, and commit these rights to instream flows
Lease H2O rights
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Contingent ValuationStudies have been controversial when measuring use values.
This is because some of the problems inherent in the CV method become more acute in the case of nonuse benefits
Problem 1- Use value beneficiaries may be presumed to be familiar with the resource whose valuation is being sought, through present of past contact with that resource. In the case of nonuse benefits, direct contact is not necessary, though it may have occurred in the past
Problem 2- People may experience both use and nonuse benefits form a natural resource. The difficulty then becomes how to distinguish between the two sources of value
Problem 3- It may be relatively easy to find out who the prime beneficiaries of use values
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Nonuse Value Examples
Preservation of individual species of wild life
Preservation of sites that have ecological or historical importance
The characteristics of specific sites• Water quality in a particular river or lake
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Measuring Costs Benefit-cost analysis
Costs side of benefit-cost analysis is important but it usually difficult to determine accurately, and the results of benefit-cost analysis can be affect equally by over-or underestimating costs
Levels of cost analysis Cost to a firm of a natural resource project or regulation
New state park preservation plan Programs or regulations that affect relatively large groups
The job of collecting complicated cost data National cost estimates
The effects on the American economy of an international oil embargo
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Costs Cont.. Social costs are incurred
The opportunity cost of using resources in certain ways This is the highest-valued alternative use to which
they might otherwise have been put, and the alternative value is what society forgoes in using the resources in the specified fashion
The costs of price changes It can create costs to producers and consumers
that are somewhat different in concept than costs in the form of real resource expenditures
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Costs of Physical Facilities
Type of physical facilities Dams Irrigation works Parks
Relevant costs Opportunity costs of the inputs Capital costs of initial construction Operating and maintenance costs
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Costs of Public Relations
A great deal of public activity on natural resource issues is related to public regulation
Cost estimation requires to the costs of the private operations
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Timber Harvesting Example
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What Happens to Output?
Regulations led to a reduction in output (q₁ to q₂)
Resources in an industry will be reduced (e.g. forms of energy or material used)
Inputs such as labor are more complicated; transfers from one industry to another occurring in reasonably full employment economies
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What About Prices? Regulatory programs often drive prices up which get
passed on to the consumers. When regulations affect an industry…
Consumers experience price effects Price effects indicate a gain or loss in welfare to consumers
when prices fall or rise respectively
When regulations are enacted… Drives the marginal cost curve up to a higher price Reducing the quantity demanded by consumers.
The reduction in quantity reduces the cost to consumers relative to what would have been the case with no quantity change
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Cost Calculation Determine future change in cost Determine the conditions of demand on
the industry The nature of individual preferences of
consumers for a given industry
By combining these two measures, we can calculate the cost of a given regulation
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