Externalities, Incomplete Property Rights and Environmental valuation techniques

1. Externalities, Incomplete Property Rights and Environmental valuation techniques January 29, 2013

2. Externalities • “An externality occurs when a market transaction between a buyer and a seller directly affects a third party (a bystander), and that third party receives no compensation for the impacts produced by the transaction.” • Ward 2006 • Can be positive or negative

3. Example • Picture of line-up at Tim Horton’s

4. Externalities in Forestry • Visual degradation • Water quality loss (pollution) • Carbon released (pollution) • Damage to soils • Habitat loss/provision

5. Effect of a Negative Externality Price Ss=MCs Sp=MCp Ps Pp D=MB Qs Volume Harvested Qp

6. Positive Externality Sp=MCp Ss=MCs Pp Ps D=MB Qp Qs Quantity

7. Insufficient or Lacking Rights • In some cases lack of ownership, or insufficient enforcement of rights, will lead to overexploitation of the resource • This could be common property where institutions aren’t in place or don’t work well to limit access • This is the “Tragedy of the Commons” Hardin (1968) • Could simply be a lack of rights-open access • World’s global fisheries as an example

8. The open access problem Total benefits and costs COWpis the profit-maximizing choice; COWTRmaximizes total revenue; And COWOAis the open access outcome (profits are completely dissipated) TC TR=TB COWTR COWP COWOA Number of cows

9. Common Pool Resources • A resource for which it is costly to exclude use • Often associated with common property arrangement where it is owned by a collective entity rather than an individual • Problem is that use (and hence overuse) can have an impact on others

10. Private Property Not Always Favoured • Common property can be an alternative to private property • Tradeoff between exclusion and coordination costs • Coordination costs are those costs associated with different resource users coordinating their resource use • Private property favoured where exclusion costs are lower and coordination costs higher • Where exclusion costs are high but coordination costs low, more efficient to have common property regime

11. Assignment of rights • Where there is no market (no rights assigned) or rights are lacking there may be the possibility of using market arrangements • Privatization • Assignment of liability • Alternatively appropriately designed common property arrangements might be an option • Elinor Ostrom and design principles (Nobel prize winner)

12. 5 . Design Principles for Effective Common Property Principle Description 1AUser boundaries: Clear boundaries between legitimate users and nonusers must be clearly defined. 1B Resource boundaries: Clear boundaries are present that define a resource system and separate it from the larger biophysical environment 2A Congruence with local conditions: Appropriation and provision rules are congruent with local social and environmental conditions. 2B Appropriation and provision: The benefits obtained by users from a common-pool resource (CPR), as determined by appropriation rules, are proportional to the amount of inputs required in the form of labor, material, or money, as determined by provision rules. 3Collective-choice arrangements: Most individuals affected by the operational rules can participate in modifying the operational rules. 4AMonitoring users: Monitors who are accountable to the users monitor the appropriation and provision levels of the users. 4B Monitoring the resource: Monitors who are accountable to the users monitor the condition of the resource.

13. Design principles cont’d • 5 Graduated sanctions: Appropriators who violate operational rules are likely to be assessed graduated sanctions (depending on the seriousness and the context of the offense) by other appropriators, by officials accountable to the appropriators, or by both. • 6 Conflict-resolution mechanisms: Appropriators and their officials have rapid access to low-cost local arenas to resolve conflicts among appropriators or between appropriators and officials. • 7 Minimal recognition of rights to organize: The rights of appropriators to devise their own institutions are not challenged by external governmental authorities. • 8 Nested enterprises: Appropriation, provision, monitoring, enforcement, conflict resolution, and governance activities are organized in multiple layers of nested enterprises • Cox, M., G. Arnold, and S. VillamayorTomás. 2010.  • Cox, M., G. Arnold, and S. VillamayorTomás. 2010A review of design principles for community-based natural resource management. Ecology and Society15(4): 38.

14. Forest Nonmarket Values

15. Overview • What are non-market values or un-priced forest outputs? • Why they exist and why they are important issues • Methods of valuing them

16. Examples of Non-market Values • Outdoor recreation • Wild game • Non-timber Forest Products (NTFP’s) • Contribution to Carbon cycle • Contribution to clean water • Aesthetic values

17. Why aren’t these marketed? • Technical • May be difficult to price because it is a public good (& market wouldn’t work anyway) • Aesthetic value • biodiversity • Transaction costs • May be too costly to utilize a market (lack of information, costs of acquiring information, monitoring, enforcement) • Certain types of NTFP’s • Carbon? • Political • Markets might work but government choose to provide them free of charge • Recreational facilities • Opportunities to hunt and fish • Note that there might be administrative charges associated with these activities but that these are not market-determined prices

18. Why Do We Want to Value these Forest outputs? • We know that by not recognizing these externalities that we are not optimizing social welfare • Furthermore we know their value is increasing • Given our goal to maximize social benefits, we then want to know how we should be managing the forest taking these outputs into account • Techniques we consider are designed to provide a common metric-values expressed in terms of money-to facilitate and clarify our analysis of these outputs • It also helps us understand tradeoffs

19. How Do We Go About Valuing the Forest? • Where we have markets (for goods like timber) we can use those prices • In the absence of markets we have to look for indirect measures • We have to pay careful attention to who benefits and how they benefit • For example, people may enjoy the forest directly through camping or fishing or they may derive enjoyment from simply knowing that the forest exists • In the next section we consider how to approach the problem of valuation where we do observe people using different unpriced outputs of the forest

20. Forest Values From page 37 of Spotted Owl Report

21. Valuation Techniques From page 39 of Spotted Owl report

22. Owls Versus Dollars The Policy Question • Should we reduce old growth logging to protect more spotted owl habitat? • Note that we could frame and answer this question in several ways, especially in regards to the prospects of seeing a species become extirpated

23. Use versus non-Use values • We distinguish between use values and non-use values • Use includes those things we may consume that might have a market value (clean water, timber, fish) • Can also be use values that don’t have market value-recreation, hiking, skiing, fishing, mountain-biking

24. Types of Non-use values • Non-use or passive use values is the enjoyment people may get from nature even if they don’t consume it directly or benefit from it directly Types are bequest and existence value, referring to the motivation Also option value-type of risk insurance policy

25. Methods used to value non-market goods • For market goods we can infer values • For non-market goods we have two main approaches

26. Method 1-Revealed Preference • This method looks at choices people make • If they’re willing to travel far to visit a pristine place • Pay more to live near a green space • This is revealed preference

27. Method 2 • The other way to determine non-market values is to ask people • This is stated preference • These can be questions about how they value the environment or an aspect of it • Or questions as to how much they would need to receive to “give something up”

28. Using Revealed Preference • Relevant question for forest managers-do you use a site for forestry or recreation? • Using the travel cost method to estimate consumer surplus

29. One Approach • We assume all travelers to a site have the same willingness to pay • Can find the person that traveled the furthest (incurred the highest travel cost) and assume that it was a marginal decision (if it had been any more expensive they wouldn’t have done it) • This provides the maximum and the value that we can use for all travelers • Most problematic assumption is that this measure relies on this one observation of the person that paid the most

30. Alternative Approach • We can observe that participation rates vary • Typically, the higher cost associated with visiting a site the less likelihood people will visit • We can use that to generate a more robust value by correlating the travel costs with the number of people visiting • This then gives us more confidence (where we are still assuming that they have the same willingness to pay) as we have more observations

31. Participation Varies by Cost Camping Site Zone 1 Zone 2 Zone 3 From Pearse

32. Estimating Visits Based on Costs of Enjoying What we observe with no access costs What we estimate would happen if we added a $5 access fee to the travel costs $35 What we estimate would happen if we added a $10 fee 7.5%

33. Estimating Visits Based on Costs of Enjoying What we observe with no costs What we estimate would happen if we added a $5 access fee to the travel costs What we estimate would happen if we added a $10 fee

34. Deriving the Demand Curve $30 Costs ($) Hypothetical price ($) $35 $20 $10 $5 24,250 29,500 7.5% 15% 20% Number of visits Participation rate (%) With no access fee, total consumer surplus would be $442,500 (29,500 * $30)/2

35. Hedonic Method • Another revealed preference approach • Alternative is to consider characteristics that make up site and estimate value placed upon those characteristics • For fishing, fishiness, scenic beauty, cleanliness of water, etc. • Use travel costs then for different sites to evaluate relative value (shadow prices) of the different characteristics

36. Other Ways to Assess Economic Values for non-market values • Sometimes we can find ways to measure the effect • For example a provincial park may generate higher land values for nearby homeowners that we can identify through statistical methods • Terroir example (appellation, soils, aspect) • We can also look at other approaches such as avoided costs-e.g. flooding or landslides associated with damage to soils if we didn’t maintain their integrity