1. Return to Home Page Return to Home Page April 30, 2014 GEOG 370

2. Assessing the value of the negative effects of closing the trestle bridge: Method 1-”the worth” of having the bridge. Assume steel alloy is only way of having uninterrupted service. P = $191,524 is thus minimum PV of having 50 years of uninterrupted service. P = R(USPW) P ab = $191,524 = R (USPW i=0.06, n=50) = $191,524 =R(15.762) = $191,524 =R(15.762) $191,524/15.762 =$12,150 = annual value of having a bridge, so monthly $191,524/15.762 =$12,150 = annual value of having a bridge, so monthly value of having bridge = $12,150/12 = $1013 P = $1013 (SPPW i=0.06, n=25) = $1013 (0.233) = $236 = $1013 (0.233) = $236 Hence, the negative effect of being without a bridge for one bridge for 1 month 25 years from now would have present value of at least $236

3. Assessing the value of the negative effects of closing the trestle bridge: Method 2- the “opportunity cost” of not having the bridge for 1 month 25 years from now. Assume 1000 necessary crossings per day, and about 500 unnecessary crossing per day. Without bridge the closest route requires alternative with extra driving of 30 miles/trip. Assume 1000 necessary crossings per day, and about 500 unnecessary crossing per day. Without bridge the closest route requires alternative with extra driving of 30 miles/trip. Therefore, daily cost = 1000 trips x 30 mi/trip x $0.15/mi = $4500. Therefore, daily cost = 1000 trips x 30 mi/trip x $0.15/mi = $4500. If necessary crossings are assumed to be undertaken 20 days/month, the monthly cost would be $4500 x 20 = $90,000. P = $90,000 (SPPW i=0.06, n=25) = $90,000 (0.233) = $90,000 (0.233) = $20,970 = negative effect = $20,970 = negative effect Still not enough to offset the cost difference, but the inconvenience, an intangible negative impact of not having the bridge for a month, might be more than enough to shift the preference to the steel alloy bridge. Still not enough to offset the cost difference, but the inconvenience, an intangible negative impact of not having the bridge for a month, might be more than enough to shift the preference to the steel alloy bridge.

4. Assessing Storm risk costs Assume “100-year storm” will require trestle bridge to be replaced. Such a storm would occur with a probability of 0.01 that in any year the bridge will be destroyed. Using binomial probability tables for n = 50 and p = 0.01, we find the probability of having any number of floods during the next 50 years Probability Number of “100-year storms” 0.600 0.600 0.311 0.311 0.082 0.082 0.013 0.013 If a storm occurs during next 50 years, the additional cost incurred would be an extra $80,000 (unless storm occurs happens to occur in the year in which the bridge was schedule to be replaced, and an additional negative benefit of $90,000 for each month the region is without the bridge. Costs depend on years (time) in which the storm(s) occur(s). Estimate the PV of the additional costs by averaging its time of occurrence.

5. Assessing additional costs for 3 “100-year storm” For three storms Cost = $80,000 + $80,000 (SPPW i=0.06, n=13) + $80,000 (SPPW i=0.06, n=25) + $80,000 (SPPW i=0.06, n=37) + $4000(USPW i=0.06, n=50) = $80,000 + $80,000(0.4688) + $80,000(0.233) + $80,000(0.1158)+ $4000(15.762) = $80,000 + $80,000(0.4688) + $80,000(0.233) + $80,000(0.1158)+ $4000(15.762) = $80,000 + $37,504 + $18,640 + $9,264 + $63,048 = $80,000 + $37,504 + $18,640 + $9,264 + $63,048 = $208,488 = $208,488 negative effects = $90,000(SPPW i=0.06, n=13) + $90,000(SPPW i=0.06, n=25) + $90,000(SPPW i=0.06, n=37) = $90,000(0.4688) + $90,000(0.233) + $90,000(0.1158) = $90,000(0.4688) + $90,000(0.233) + $90,000(0.1158) = $42,192 + $20,970 +$10,422 = $42,192 + $20,970 +$10,422 = $73,584 = $73,584 = $208,488 + $73,584 = $208,488 + $73,584 P tb3storm = $282,072 P tb3storm = $282,072

6. Table. Present value of estimated costs & negative effects Alternatives State of natureProbabilitySteel alloy Trestle bridge Bridge w/risk 0 storm0.60$191,524 $182,658$109,595 1 storm0.31$191,524 $222,268 $68,903 2 storms0.08$191,524 $222,268$17,781 3 storms0.01$191,524 $282,072 $2,821 Expected value (costs +negative effects $191,524 $199,100

7. Questions relating to the performance of public undertakings 5) Is the scope of the undertaking adequate? Are objectives and results commensurate with the need? (Addressed by program analysis and program evaluation.) 1)Are the program’s objectives appropriate? Are they desirable for a social welfare standpoint? (Addressed in policy analysis.) 2)Is the program economically efficient? Are the intended effects worth the costs? (Addressed in cost-benefit analysis.) effects worth the costs? (Addressed in cost-benefit analysis.) 3) Is the program effective? Are the objectives being achieved? (Addressed in program evaluation.) achieved? (Addressed in program evaluation.) 4) Is the operation technologically efficient? Are resources being used to get the maximum result? resources being used to get the maximum result? (Addressed in cost-effectiveness analysis.) (Addressed in cost-effectiveness analysis.)

8. Comparison of B/C and Cost Effectiveness Benefit-CostCost-effectiveness Geared to Economic efficiency Technological efficiency Measurement units $ dollars Various measures Variable components Benefits & Costs a) Minimize Costs, with benefits fixed b) Maximize benefits with costs fixed Main question Whether the program is justified How resources should be used in a program Scope Global, comprehensive Narrow, focused Usual application Capital projects Ongoing, operating programs Time frame Long-termShort-term

9. Ecosystem Functions and Services Ecosystem functions are the physical, chemical, and biological processes or attributes that contribute to the self-maintenance of an ecosystem; in other words, what the ecosystem does. Some examples of ecosystem functions are provision of wildlife habitat, carbon cycling, or the trapping of nutrients. Thus, ecosystems, such as wetlands, forests, or estuaries, can be characterized by the processes, or functions, that occur within them. Ecosystem functions are the physical, chemical, and biological processes or attributes that contribute to the self-maintenance of an ecosystem; in other words, what the ecosystem does. Some examples of ecosystem functions are provision of wildlife habitat, carbon cycling, or the trapping of nutrients. Thus, ecosystems, such as wetlands, forests, or estuaries, can be characterized by the processes, or functions, that occur within them. Ecosystem services are the beneficial outcomes, for the natural environment or people, that result from ecosystem functions. Some examples of ecosystem services are support of the food chain, harvesting of animals or plants, and the provision of clean water or scenic views. In order for an ecosystem to provide services to humans, some interaction with, or at least some appreciation by, humans is required. Thus, functions of ecosystems are value-neutral, while their services have value to society. BUT ecosystems have value regardless of human interaction! Introduction to Ecosystem Functions & Services

10. Difficulties with Environmental Valuation Non-Market Goods Most environmental goods, such as clean air and water, and healthy fish and wildlife populations, are not traded in markets. Their economic value - how much people would be willing to pay for them in dollars is not revealed in market prices. The only option for assigning dollar values to them is to rely on non-market valuation methods. Non-Rival Goods One person's consumption of most goods (apples or housing) reduces the amount available for everyone else. Environmental goods are different. Clean water and air, beautiful views, and to some extent outdoor recreation, can be enjoyed by everyone in the same way as radio and television. The economic value of non- rival or public goods is the sum of all people's willingness to pay. Non-exclusive Goods People cannot be excluded from enjoying most environmental goods and the cost of trying to exclude them is prohibitive. Other than increases in onsite hunting and fishing opportunities, which may be a source of economic benefit to farmers, the environmental benefits of most conservation practices are non-exclusive. The free rider problem makes it impractical for farmers to recoup the cost of on-farm conservation investments from those who benefit from off-farm environmental improvements. Inseparable Goods Conservation practices at a given site contribute in many roundabout ways to environmental goods and result in environmental and economic benefits that accrue over great distances in time and space. It may be impossible to separate the economic benefits that result from one conservation practice undertaken at one site from another undertaken at another site. Worse, it may be impossible to separate the aggregate benefits of those practices from those of other environmental investments.

11. Ecosystem Services Glossary Benefit-Cost analysis – a comparison of economic benefits and costs to society of a policy, program, or action. Benefit-Cost analysis – a comparison of economic benefits and costs to society of a policy, program, or action. Bequest Value (option demand)– the value that people place on knowing that future generations will have the option to enjoy something. Consumer surplus –the difference between the price actually paid for a good, and the maximum amount that an individual is willing to pay for it. Thus, if a person is willing to pay up to $3 for something, but the market price is $1, then the consumer surplus for that item is $2. This measure approximates, and is bounded by, the more technically precise measures of economic benefit: compensating variation or equivalent variation. Compensating variation - the amount of money that leaves a person as well off as they were before a change. Thus, it measures the amount of money required to maintain a person’s satisfaction, or economic welfare, at the level it was at before the change. Compensating variation - the amount of money that leaves a person as well off as they were before a change. Thus, it measures the amount of money required to maintain a person’s satisfaction, or economic welfare, at the level it was at before the change.

12. Glossary Complementary goods – goods that are often purchased together, such as bread and butter. Demand curve – the graphical representation of the demand function. The demand function relates price and quantity demanded. It tells how many units of a good will be purchased at different prices. In general, at higher prices, less will be purchased, so demand curves slope downward. The market demand function is calculated by adding up all of the individual consumers’ demand functions. Demand function – the mathematical function that relates price and quantity demanded for goods or services. It tells how many units of a good will be purchased at different prices. The market demand function is calculated by adding together all of the individual consumers’ demand functions. Discount rate – the rate used to reduce future benefits and costs to their present time equivalent. Economic efficiency – the allocation of goods to their highest relative economic value.

13. Glossary Ecosystem functions – the physical, chemical, and biological processes or attributes that contribute to the self-maintenance of the ecosystem; in other words, what the ecosystem does. Some examples of ecosystem functions are wildlife habitat, carbon cycling, or trapping nutrients. Ecosystem services – the beneficial outcomes, for the natural environment, or for people, that result from ecosystem functions. Some examples of ecosystem services are support of the food chain, harvesting of animals or plants, clean water, or scenic views. In order for an ecosystem to provide services to humans, some interaction with, or at least some appreciation by, humans is required. Equivalent variation - the amount of money that leaves a person as well off as they would be after a change. Thus, it measures the amount of money required to maintain a person’s satisfaction, or economic welfare, at the level it would be at after a change. Existence value – the value that people place on simply knowing that something exists, even if they will never see it or use it. Externalities - uncompensated side effects of human actions. For example, if a stream is polluted by runoff from agricultural land, the people downstream experience a negative externality.

14. Glossary Fixed costs – production costs that are not related to the level of production; also referred to as overhead costs. Geographical Information System (GIS) – a computer mapping system that links databases of geographically-based information to maps that display the information. For more information, see www.esri.com. www.esri.com Market failure – the inability of markets to reflect the full social costs or benefits of a good, service, or state of the world. Therefore, markets will not result in the most efficient or beneficial allocation of resources. Net economic benefit – the net economic benefit is the total economic benefit received from a change in the state of a good or service, measured by the sum of consumer surplus plus producer surplus, less any costs associated with the change. Net Present value – the current value of net benefits (benefits minus costs) that occur over time. A discount rate is used to reduce future benefits and costs to their present time equivalent.

15. Glossary Non-use values, also referred to as “passive use” values – values that are not associated with actual use, or even the option to use a good or service. Opportunity Cost – The value of the best alternative to a given choice, or the value of resources in their next best use. In regard to time, the opportunity cost of time spent on one activity is the value of the best alternative activity that the person might engage in at that time. Option value – the value that people place on having the option to enjoy something in the future, although they may not currently use it. Producer surplus – the difference between the total amount earned from a good (price times quantity sold) and the production costs. Public goods – goods that may be enjoyed by any number of people without affecting other peoples’ enjoyment. For example, an aesthetic view is a pure public good. No matter how many people enjoy the view, others can also enjoy it.

16. Glossary Substitute goods – goods that you might purchase instead of a particular good. For example, different types of bread are substitutes for each other. Supply Function – the mathematical function that relates price and quantity supplied for goods or services. The supply function tells how many units of a good that producers are willing to produce and sell at a given price. Supply Function – the mathematical function that relates price and quantity supplied for goods or services. The supply function tells how many units of a good that producers are willing to produce and sell at a given price. Supply Curve - the graphical representation of the supply function. Because producers would like to sell more at higher prices, the supply function slopes upward. Total economic value – the sum of all types of use and non-use values for a good or service. Use value – value derived from actual use of a good or service. Uses may include indirect uses. For example, enjoying a television show about whales provides an indirect use value for the whales. Variable costs – production costs that change when the level of production changes, so that when more is produced the costs increase; as opposed to fixed costs. Willingness to Pay – the amount—measured in goods, services, or dollars— that a person is willing to give up to get a particular good or service.

17. Why are estimates of ecosystem benefits needed? To justify and decide how to allocate public spending on conservation, preservation, or restoration initiatives.To justify and decide how to allocate public spending on conservation, preservation, or restoration initiatives. To consider the public’s values, and encourage public participation and support for environmental initiatives.To consider the public’s values, and encourage public participation and support for environmental initiatives. To compare the benefits of different projects or programs.To compare the benefits of different projects or programs. To prioritize conservation or restoration projects.To prioritize conservation or restoration projects. To maximize the environmental benefits per dollar spent.To maximize the environmental benefits per dollar spent. To assess tradeoffs and resource allocations even for decisions involving ESA, health and safety issues where economic considerations are secondary.To assess tradeoffs and resource allocations even for decisions involving ESA, health and safety issues where economic considerations are secondary.

18. Important questions that various governmental agency staff must answer: When and how should agency staff attempt to answer ecosystem benefit questions?When and how should agency staff attempt to answer ecosystem benefit questions? What criteria and methods are being used to make spending decisions, and what is the justification for these criteria and methods?What criteria and methods are being used to make spending decisions, and what is the justification for these criteria and methods? Are the benefits of a project or program greater than the cost to taxpayers?Are the benefits of a project or program greater than the cost to taxpayers? Is agency spending being managed to maximize environmental benefits?Is agency spending being managed to maximize environmental benefits? How do different projects compare to each other in terms of ecosystem benefits?How do different projects compare to each other in terms of ecosystem benefits? When should agency staff provide dollar-based estimates of ecosystem benefits?When should agency staff provide dollar-based estimates of ecosystem benefits? When should they answer questions about benefits only by demonstrating that they are using reasonable benefit-based project ranking criteria?When should they answer questions about benefits only by demonstrating that they are using reasonable benefit-based project ranking criteria?

19. Some overview comments on Ecosystem Valuation Conventional economics –> measures of economic value based on what people want (“market economies”), individuals, not government, should be the judgeConventional economics –> measures of economic value based on what people want (“market economies”), individuals, not government, should be the judge Maximum amount a person is “willing to give up to get more of something else is fair measure of relative “value” of the two things to that personMaximum amount a person is “willing to give up to get more of something else is fair measure of relative “value” of the two things to that person Measuring of values of ES in $ does not require they be bought & sold in markets – just estimates of “willingness to give up to get”Measuring of values of ES in $ does not require they be bought & sold in markets – just estimates of “willingness to give up to get” Non-$ measures include ranking or prioritizing the expected benefits of environmental benefitsNon-$ measures include ranking or prioritizing the expected benefits of environmental benefits Indicator-based valuation tools are often less expensive & require less time to applyIndicator-based valuation tools are often less expensive & require less time to apply

20. Some practical issues of Ecosystem Valuation Some practical issues of Ecosystem Valuation Easy to spend lots of $ to assign $ valuesEasy to spend lots of $ to assign $ values Easy for environmental program managers/decision makers to misuse results & undermine even their best programsEasy for environmental program managers/decision makers to misuse results & undermine even their best programs Risky for managers to ignore demands for more fiscal accountability (government especially, but also private sector)Risky for managers to ignore demands for more fiscal accountability (government especially, but also private sector) “Best professional judgment,” “best available science” and/or “objective scientific” project ranking criteria that ignore beneficial outcomes to people are prone to being extremely unpopular (CAO???)“Best professional judgment,” “best available science” and/or “objective scientific” project ranking criteria that ignore beneficial outcomes to people are prone to being extremely unpopular (CAO???)

21. Basic Concepts of Economic Value Consumer Surplus Price Market Price Quantity Demand Curve (net) economic benefit is often measured by consumer surplus

22. Supply Curve & Producer Surplus Total net economic benefit = sum of consumer surplus + producer surplus - costs

23. Typology of Ecosystem Services Complications Natural resources & environment associated with market failureNatural resources & environment associated with market failure Ecosystem services are often public goodsEcosystem services are often public goods Overuse common if property rights are not clearly definedOveruse common if property rights are not clearly defined Ecosystem services often affected by externalitiesEcosystem services often affected by externalities