Benefit Cost Analysis and Ohios Environment

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Benefit Cost Analysis and Ohios Environment

• Brent Sohngen
• Department of Agricultural, Environmental, and
  Development Economics
• The Ohio State University

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Presentation

• What is Benefit Cost Analysis and Why?
• What are Environmental Benefits?
• Can Environmental Benefits be Measured?
• When Should Env. Benefits be Measured?

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History

• Adam Smith (1776) -- barge canal
• Jules Dupuit (1844) -- bridge
• Flood Control Act (1936) -- water resources
  projects in US
• World Bank and similar agencies (post-war) --
  international development projects
• Widespread use in government and research
  organizations
• criterion, filter
• to inform the policy process
• to assess natural resource damages

From Alan Randall, AED Economics
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What is Benefit Cost Analysis?

• Methods for categorizing and organizing
  information, and then using that information to
  estimate, assess, and compare economic values
  arising from specific policy actions.

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• Why should a benign policy decision-maker /
  participants in a pluralistic policy process take
  benefits and costs seriously?
• To impose market-like discipline on the policy
  process limit rent-seeking
• To identify policies that would provide the
  greatest good for the greatest number increase
  the size of the pie / value of the game
• Because in any coherent ethical theory benefits
  and costs count for something

From Alan Randall, AED Economics
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Benefit-Cost AnalysisWhen may it be useful for
environmental issues?

• When new regulations are considered.
• Land use, waste management, storm-water
  management, etc.
• When environmental damages have occurred.
• Hazardous waste dumps spills
• When mitigation is considered.
• Wetlands.
• Public land policy.
• Buying new areas, management.
• Motivating public awareness.
• Local water quality initiatives

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In recent years (30), policy-makers and analysts
alike have expanded the definition of Benefits
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What are Environmental Values?Economic Values
for Hard to Value Things

• All value arises because we care!
• Environmental values depend on our willingness to
  pay to improve environmental conditions in
  specific ways.
• Willingness to pay is determined by
• Direct information from surveys
• Indirect information from how we spend money and
  time.

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Economic Impacts vs. Environmental Values/Benefits

• Economic impacts How changes in environmental
  quality affect local economic activity.
• Indirect beneficiaries of improved environmental
  conditions.
• Environmental Valuation Determines the value of
  environmental change to the individuals who use
  the resource or who directly value the resource
  in question.
• Direct beneficiaries.

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Environmental Values Method Overview
Economic Impacts
Environmental Values
Input-Output CGE GDP Local Economic Activity
Market Methods Avoidance Averting
Contingent Valuation Passive Use Non
Use Aesthetic Option Value
Travel Cost Use Recreation Opportunity Cost
Hedonic House Studies Wage Studies
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Contingent Valuation (CVM)Example Ashtabula
River Partnership

• ARP - Proposal dredge contaminated sediments
  from the lower Ashtabula River to potentially
  restore 6 of 14 IJC recognized beneficial uses,
  including
• dredging for navigation
• degraded wildlife habitat
• fish consumption advisory

Should the local community help pay to dredge
contaminated sediments?
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CVM Survey of 400voters in Ashtabula
CountyRespondents chose between four levels of
annual payments for 30 years

• Amount Percent
• 200 3
• 100 14
• 50 29
• 25 57
• Lower Bound Mean
• WTP 32.50

Blaine and Lichtkoppler, 2000
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CVM Example II Angler and Boater WTP for
Anti-degradation Rules in Ohio

Irvin, Haab, and Hitzhusen, 2002
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Pros of CVM

• Cons of CVM

• Estimates of nonuse values difficult to validate
  externally
• Stated intentions of WTP may not exactly reflect
  true feelings
• Results may appear in-consistent with rational
  choice
• Respondents may lack knowledge to give true value
• Respondents may give warm glow value
• Respondents may not take CV question seriously

• Based on economic theory can produce reliable
  estimates
• Most biases can be eliminated
• Only method available to measure non-use values
  of natural resources
• Has been used successfully in a variety of
  applications
• Is being improved to make method more reliable

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Travel Cost Methods (TCM) Used to Value
Recreational Uses

• Should this site be saved? Should similar sites
  be added?
• Use public money to expand public recreation
  sites?
• Can management be changed to increase value?
• What are the benefits of a specific policy
  proposal?
• Impose controls to improve stormwater management?
• Use public money to mitigate acid mine drainage?

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Why Recreation?

• National estimates of total recreational value in
  37 activities suggests aggregate benefits exceed
  172.4 billion annually.
• Bergstrom and Cordell (1991)
• Recreational value of point source controls for
  water quality has been estimated to be 8.5
  billion annually.
• Freeman (1993)

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How Does TCM Work?Example Data for Trips to
Headlands State Park Beach
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The Value of Beaches600 Survey Responses in
1997Travel Cost Method

• Environmental Value
• Recreational value
• Maumee 25.60/day
• Headlands 15.50/day
• Annual Value per Acre
• Maumee 386,000
• Headlands 163,000

• Economic Impacts
• Direct Expenditures
• Maumee 26/day
• Headlands 15/day
• Annual Impact per Acre
• Maumee 392,000
• Headlands 153,000

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Beach Closings along Lake Eries Shoreline

• Advisories (from potential E. Coli contamination)
  are posted an average of 2 times per beach per
  year along the Lake Erie shoreline in Ohio.
• Would controls that reduce beach advisories make
  economic sense?

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Probability of Visiting a Beach
1998 Beach Survey 1385 beach users 15 beaches
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Value of reducing 1 advisory per beach per year?

• Signs Only
• Gain 2.12 per trip
• Take 0.9 more trips/yr.
• Gain 38 per year

• Other Media
• Gain 1.73 per trip
• Take 0.6 more trips/yr
• Gain 24 per year

• Aggregate Estimates
• Environmental Value 3.4 million per year
• 227,598 per beach per year
• Economic Impact 1.1 million per year
• 75,000 per beach per year

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Boating and Fishing in the Hocking River Valley

• How valuable is boating and fishing in the
  Hocking River Valley?
• Would improvements in water quality increase
  recreational value in the Hocking River Valley?

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Economic Values and Impacts

• Boaters
• Environmental Values
• 11.69 per day
• 1.4 million per year
• Economic Impacts
• 66 per day
• 1.0 million per year

• Fishers
• Environmental Values
• 12.54 per day
• 0.4 million per year
• Economic Impacts
• 60 per day
• 3.2 million per year

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Would Boaters and Fishers visit more if Water
Quality Improves?
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How Valuable Is Improved Water Quality?Aggregate
Annual Benefits
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Travel Cost Methods

• Strengths
• Actual Market Data and Behavior
• Demand Concept Makes Sense and Fits Data
• Simpler Studies May be Relatively Cheap.

• Weaknesses
• Dont Observe Opportunity Costs.
• Difficult to Obtain Environmental Data
• Linking Environ. Data to Human Perception
• Dont Capture all Value

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Selected Recreational ActivitiesAvailable in
Pricing the Environment An Introduction.
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Other Types of Studies

• Hedonic Property Studies
• Value of Open Space Protection
• Impacts of waste disposal and hazardous waste
  sites
• Cost Avoidance/Averting
• Avoiding costly water treatment (Columbus)
• Avoiding dredging (Maumee River Basin)

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Conclusions

• Benefit Cost Analysis is widely accepted, but
  less often used.
• Ohio has strength in this area.
• Large number of studies and estimates are widely
  available.
• Can be applied to a range of additional sites
  using benefits transfer.
• Survey and study costs
• Beach survey (single site) 10,000
• Beach survey (multiple site) 85,000
• HRV survey 23,000 (direct survey costs 1500)