Wild Values: Putting a Price on Nature

1. Wild Values: Putting a Price on Nature Steve Colt, Institute of Social and Economic Research Science and Society Lecture Series University of Alaska Anchorage 16 October 2000

2. Economic Valuation of Nature • Context • What is it? • How do we do it? • Should we do it? • Must we do it?

3. Economic Valuation of Nature:Context • Like other goods, environmental goods and services are scarce • Society must (and does!) make tradeoffs • Trade-offs are best made by comparing benefits to costs

4. Economic Valuation of Nature:Context • Many environmental goods and services are “public goods” • They are available to all • My consumption does not affect your consumption • Clean air, Clean water, Climate • Others are provided by government • Hunting and fishing opportunities • Recreation

5. Economic Valuation of Nature: Context • Hence, • Environmental goods and services are often not bought and sold in markets • Environmental goods and services must often be provided through collective social processes (politics!) • Politics translates individual preferences into collective action

6. Economic Valuation of Nature: Context • Hence, • “The issue of valuation is inseparable from the choices and decisions we have to make about ecological systems” • (Costanza et al 1997)

7. Economic Valuation of Nature: What is it? • An attempt to measure people’s preferences for human actions likely to affect natural systems.

8. Economic Valuation of Nature:What is it? • An attempt • Imperfect • New and evolving techniques

9. Economic Valuation of Nature:What is it? • An attempt to measure • Quantitative • Uses money as the measuring rod, for comparability with other values • Willingness to pay (WTP) or to accept payment (WTA)

10. Economic Valuation of Nature:What is it? • An attempt to measure people’s preferences • People make decisions and take action • Social scientists measure what people already feel

11. Economic Valuation of Nature:What is it? • An attempt to measurepeople’s preferences for human actions likely to affect natural systems • Development, management, preservation and protection are all actions • Natural systems often require collective management

12. What are we Valuing? • Use Values • Fishing, hunting, recreation • subsistence • ecosystem services (life support) • Non-use Values • Called existence, passive use, intrinsic • Includes aesthetics, cultural heritage

13. How do we do it? • Actual market prices • Market prices of related goods • Hedonic methods • Observation of behavior • Travel Cost • Ask people • Contingent Valuation

14. Using Market Prices: ExampleReplacement Cost of Subsistence • 53.5 million lbs harvested • 100+ % of protein needs in rural Alaska • Replacement cost = ?? $4 per lb • Replacement value = 53.5 x 4 = $214 million • Source: ADFG 1998 “Subsistence Update”

15. Using Market Prices: ExampleReplacement Cost of Subsistence • Reality check against expenditures on inputs: • $3.18 million spent in 3 wildlife refuges • 1.76 million lbs harvested • $3.18/1.76 = $1.81 per lb actually spent on commercial inputs • Excludes labor by harvesters • Source: Goldsmith 2000, Colt 2000

16. Using Market Prices: ExampleReplacement Cost of Worldwide Ecosystem Services • Divide entire world into 16 ecosystem types • Look at 17 ecosystem functions • What does it cost to replicate these functions? • Source: Costanza et al 1997

17. Example: Using Market PricesValue of Worldwide Ecosystem Services • Nutrient Cycling $17 trillion / yr • Waste treatment $2.3 trillion / yr • Water regulation & supply $2.9 trillion / yr • Gas regulation $1.3 trillion / yr • Recreation $0.8 trillion /yr • Cultural benefits $3.0 trillion / yr • TOTAL = $33 trillion /yr • Compare to gross world product of $18 trillion / yr

18. Example: Hedonics • Idea: property values reflect a “bundle of attributes” – safe streets, good schools, nice neighbors, environmental quality, • Hence, • Variations in property values can be tied to variations in environmental quality

19. Example: Hedonics • Land Values in Mat Su Valley • Berman (1987) regression equation • Value of parcels declines with distance from Anchorage • Value of parcels declines with number of close neighbors • Value of parcels increases with proximity to public open space

20. Example: Observed BehaviorValue of Alaska Fish (Based on ISER sport fishing study, 1993 data) • Travel Cost Method (TC) • People incur a travel cost to fish • Those facing higher travel cost make fewer trips to a given site • Use this relationship between number of trips and (travel) cost per trip to estimate net economic value of activity

21. Example: Observed BehaviorValue of Alaska Fish • Example of TC Data: • I live at the fishing site, TC=0, make 6 trips • Brother lives ten miles away, TC = 10, make 3 trips • Cousin lives 20 miles away, TC = 20, makes zero trips

22. Example: Observed BehaviorValue of Alaska Fish • Draw a graph:

23. Example: Observed BehaviorValue of Alaska Fish • Assume all three people have similar preferences • Compute net economic value • Me: between 30 and 60 • Brother: between 0 and 15 • Cousin: zero • TOTAL: between 30 and 75

24. Example: Observed BehaviorValue of Alaska Fish • ISER Methodology: • Telephone and mail surveys of more than 5,000 residents and nonresidents • Construction of travel costs to multiple sites • Nested multinomial logit models relate fishing behavior to many variables including travel cost • Net economic value computed from models

25. Example: Observed BehaviorValue of Alaska Fish • ISER Results (1993): • People Actually paid: $550 million • People were willing to pay an additional $186 million to fish • $186 million is the net economic value of the sport fishery

26. Example: Observed BehaviorValue of Alaska Big Game • ADF&G used survey data to estimate TC models for hunting trips • Net values estimated by species and by resident / nonresident status • Total net value of hunted species in year 2000 = $23.5 million

27. Net Economic Value of Alaska Big Game(McCollum & Miller 1994, Colt 2000)

28. Example: Ask PeopleExistence Value of Prince William Sound • State of Alaska, for EVOS trial • 1,043 completed in-person interviews using nationwide sample • Asked people how much they would pay to avoid another spill • Used the median value of $31 per household • $31 x 90.3 million households = $2.8 billion

29. Example: Ask PeopleExistence Value of Prince William Sound • Construct Scenario • There will be another spill in 10 years… • Include possible action • Unless we implement the following plan… • Ask “Take-it-or-leave-it” questions • Would you pay $15 in higher taxes to implement the plan

30. Example: Ask PeopleExistence Value of Prince William Sound • Use different amounts ($5-$250) to elicit range of willingness to pay • Importance of the proposed payment vehicle • EVOS study used general tax after considering gasoline tax, higher gasoline prices • Used lump sum one-time payment

31. Problems with Contingent Valuation • Hypothetical market, not actual transaction • CV estimates understate TC for same goods • Information effects • Scope effects – Does WTP increase “correctly” with scope of proposed action? • Recent research suggests scope does matter as it should

32. Contingent Valuation in Practice • Tentatively endorsed by NOAA Panel • Quality depends on execution • In-person interviews • Discrete choice question • Clear description of scenario • Used by “most federal” and “many state” agencies (Carson 1999) • Dominant methodology today

33. Economic Valuation: Should we Do it? • Problems: • Whose values count? (WTP always depends on income) • Reducing complex choices to one dimension ($) • A Trojan Horse? (Weeden 1987) • Cash as the “great homogenizer”

34. Economic Valuation: Must we Do it? • Yes – we do it everyday, implicitly • Yes – we know how to do it • Yes – The alternative to conscious valuation is a zero valuation • Yes – valuation is one, useful, tool • “We can find ways to use the sharp-edged techniques of economic valuation without cutting our jugulars” (Weeden 1987)