Economics and Conservation, 2

Fri. April. 29

REVIEW:Cost Benefit Analysis (CBA)

OverviewPolitical observation – CBA was mandated for all new USA policies in 1981. What philosophy did this represent (and whose administration was this)?

What is the central justification with regard to CBA, government, and the people; why was CBA made "policy" and what was supposedly being accomplished?

REVIEWCBA – 1. Project Definition

Central role of setting project boundaries.

What is meant by this?

Why are the boundaries so important to the outcome of the CBA?

How do conflicting interests figure into the setting of CBA boundaries?

REVIEWCBA – 2. Impact Classification

Are impacts only negative?

Give some examples of impacts.

What is meant by magnitude and duration of impacts? Why does this matter?

REVIEWCBA – 2. Impact Classification,

cntd.

The "tartan finch" example – left – direct impact only; impact with North African breeding grounds on right.How do we quantify the W-W/O in a CBA?

REVIEWCBA – 3. Monetization of

ImpactsA common currency is required to compare various impacts in order to make the CBA. Usually this is done by monetizing each impact.

What are the techniques used to monetize?

We will concentrate on how you value things that are not normally expressed in monetary terms – i.e., the value of biodiversity.

REVIEWUse and Non-Use Values

REVIEWOption, Existence and Bequest

ValuesWhat are these and in particular and how do existence and bequest values differ from each other?

Are these traditionally considered as impacts?

Are indirect values traditionally considered as impacts?

Are indirect, option, existence, and bequest controversial?

• Why or why not? • Who would support these?• Who would oppose these?

TEV = DV + IDV + OV + NUV

The Process of Monetization1. "Conventional" Approaches

1. Substitute or alternative cost approach – value of something that is normally not bought in a particular situation is compared to the price of similar item in a similar situation.

(e.g., clean lake vs. cost of swimming pool).2. Production function approach – a change in the value of

a particular function. (e.g., degraded soil expressed as lost crop in money terms).

3. (Lost economic) Opportunity cost approach – measures what is given up in money terms in an act of preservation – assumes this is what the preserved diversity is therefore worth. (e.g., value of game and associated economic benefits in a wilderness area).

The Process of Monetization2. Implicit Market Techniques

The behaviors of people can be related to the money they spend in certain activities or the choices they make that result in different costs to them – these are taken to equal the resource reflects the resources value to them.

a. Hedonic pricing methods: differential that people are willing to pay (or they discount they expect) for a certain suite of qualities – examples are given with land values adjacent to a reserve.

b. Travel cost method: how much is someone willing to pay to travel to a particular location (including fees, equipment, etc.)

The Process of Monetization3. Hypothetical Market

Techniques

Contingent valuation methods (CVM) and willingness to pay.Technically – "reveal indifference between some thing and money."

Our own WTP

Improved recreational parks in your local region Regional wilderness areasSaving a local endangered cricketSaving a local endangered butterflySaving polar bearsTigerTimber rattlesnakeCreating rainforest preservesSaving HIV

Typical Income for US Family of Four (2007 -- $64K)

http://www.billshrink.com/blog/consumer-income-spending, citing US Bureau of Labor Statistics

So, you have about $8,600 to spend on everyone's personal items, entertainment, gifts, etc. Think carefully.Would everyone make the same decisions that you make?

WTP for Endangered Species

Evaluation of CVMsPositive

1. Theoretically sound.2. Relatively easy to gather data – estimation is straightforward.3. Only technique that is really valuable with non-use value –

works on all goods and services.

Negative1. How can you

validate these values?2. Problems with

questionnaires.3. Differences

between expert and general public in CV.

Review: Summary of Methods Used in CBAs

CBA Step 4. Project AssessmentCosts and benefits associated with the project projected over

some time.

A simple CBA

The developer, conservationistand politician's views?