Impact analysis

1. Section IV Natural Resource Analysis Ch8 Principles of Analysis 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.

2. 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…”

3. Environmental Impact Assessment (EIS) • The end result of an Environmental Economic Analysis. It is composed of: • Description of environmental impact of action • Any adverse environmental effects that are unavoidable should action be put into action • Alternatives • Analyze the relationship between short term use and long-term use and productivity • Assessment of “irreversible andirretrievable commitments of resources” for proposed action • Objective: Get an idea of how the natural resources will be affected

4. 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

5. 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……

6. 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.

7. Cost-Effectiveness Analysis • Machine 1 • Cost: $100,000 • 20,000 gallons per day • Cost per gallon =$5 • Machine 2 • Cost: $150,000 • 50,000 gallons per day • Cost per gallon =$3

8. Cost-Effectiveness Analysis • Useful when objective is agreed upon but not • how to achieve it • Can't tell what objective is worth • Can't compare the value of resources used with • the value of the objective

9. Benefit-Cost Analysis • Companies judge projects on commercial feasibility • Benefit-Cost Analysis uses this approach for • public sector programs→ social feasibility • Both market and non-market inputs and outputs • need to be estimated • Benefit-Cost Analyses are required of all federal • regulations and programs

10. CRITICS WHIPSAW THE FOREST SERVICE

11. 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.

12. Five Steps to Benefit/Cost Analysis Decide on the perspective Specify the project Measure inputs and outputs Value inputs and outputs Compare the benefits and costs

13. Decide 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

14. 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

15. 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

16. Scenarios weighted by its assumed probability of occurrence

17. 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

18. 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

19. Effect of Discounting --Determine Present Value -

20. Future Generations Concerns about Discounting --Effects of downgrading future damage --+$10000/yr = -$1million/yr…..? We despite perpetual cost burden placed on future generations

21. 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:

22. Which rate should be used as discount rate?? There are essentially two schools of thoughts on this question.

23. Distribution Issues • Total Benefits and Total Cost • People who benefit often do not bear the cost • Horizontal Equity • Vertical Equity

24. Impact • Proportional (project 1) • Regressive (project 2) • Progressive (project 3)

25. 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.

26. 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.

27. 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.

28. Chapter 9 The Valuation of Natural Resources Joseph Bigler Yang Liu Rebeca Pieropan Yunlu Shi Daniel Sullivan Yue Zhao

29. 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

30. 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

31. 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

32. 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.

33. 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

34. Evaluating Costs • External costs accounted for by MSC • An increase in renewable energy sources evaluated at price s • Shadow prices represent true economic scarcities

35. 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.

36. 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: • Characteristics of the house (lawn size, flooring) • Neighborhood (avg. household income) • Crime rate • Education (public, private, elementary, secondary)

37. 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.

38. 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 programs

39. Steps in CV Analysis 1. ID & describe characteristic to be evaluated 2. ID respondents & determine respective sampling methods 3. Design and apply survey technique (s) : • Personal interview • Phone inquiry • Mail response • Focus group FINAL STEP: Aggregate individual responses into group valuation estimate (avg. WTP/person*total relevant population)

40. Approaches Review: Get individuals to reveal the max amount they would be willing to pay rather than go without the resource in question A. Ask directly B. Bidding process Start low and increase until limit has been reached OR Start high and decrease until threshold has been reached C. Give range of values and have them choose one

41. Exhibit 9-1 Study to Estimate Certain Benefits of Better Water Quality in Connecticut River

42. Have you heard about the Connecticut River salmon restoration program? • Did you make any donations for wildlife management or presentation last year? • What is maximum donation for Connecticut River salmon restoration program you would like make? • What is your age? • 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.

43. Thank You For Your Time & Attention • Are there any questions?

44. Sections 24-31 Group 4 Lauren Butz, Gaoping Fan, Yang Feng, Xiaodan Su, Adrian Verduzco

45. 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

46. 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

47. Contingent Valuation Studies 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

48. 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

50. 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