2281AES Economics and Natural Resources

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2281AESEconomics and Natural Resources

• Theories and Case Studies
• Market Pricing
• Lisa Alder

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Techniques Based on Existing Market Data

• Market data reflects what the market for that
  resource is willing to pay or willingness to
  accept compensation for a loss of goods or
  services .
• It is assumed the buyer values the resource fully
  and will pay the full cost (total value)
• Remember the total value of a resource
• Use value option value vicarious value
  existence value

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Direct Market Price Analysis

• Using the stated market price for a resource
  (assuming there is one), willingness to pay for
  that resource can be graphed
• Market Demand (consumer willingness to pay or
  marginal benefit MB)
• Market Supply (producer willingness to supply or
  marginal cost MC)

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Market Price
Price
S
Pe
0
Quantity
Qe

When Q demanded is equal to Q supplied, market
price is established
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Price
S society MSC
Spillover costs
S market MPC
Under- priced
P society
P market
D market MB
Over-allocation
Quantity
Q1 society Q2 market
Social Price Determination (externalities)
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Some Market Valuation Techniques

• Using OBSERVED Market Prices
• Changes in Productivity
• Loss of Earnings
• Opportunity Cost

7
Other Market Valuation Techniques

• Using Market Prices based on
• ACTUAL EXPENDITURES
• Preventative Expenditures
• Cost Effectiveness Analysis

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And More

• Using Market Data to Estimate
• POTENTIAL EXPENDITURES to Mitigate Environmental
  Impacts
• Replacement/Repair Costs (week 10)
• Shadow Projects
• Relocation Costs

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Choosing Valuation Techniques

• Goods and services valued mostly for current use
  are best suited to market valuation techniques
• Environmental effects and natural resources often
  have vast existence, option and/or vicarious
  value that are not completely captured using
  market techniques

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Capturing Total Value

• Environmental and natural resources are better
  suited to non-market techniques (eg. surrogate or
  simulated market or hypothetical approaches) of
  valuation
• Eg. State forest valued highly for its existence
  would be better valued using contingent valuation
  (based on surveys of what people would like to
  have rather than what is)

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Combining Market and Non-Market Techniques

• These limitations aside, every natural resource
  has some market characteristics that can be
  usefully measured using market valuation
  techniques.
• These can then be supplemented with non-market
  techniques (covered weeks 11 13)

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Externalities

• Indirect economic effects (externalities) can
  result from projects (or not doing projects)
• Externalities are not paid for by the users
• Externalities, as they are known, can be positive
  (public goods) or negative

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• Positive externalities provide unpaid for good
  effects even to those not involved (eg. water and
  sewerage services are available to all city
  council residents regardless of whether they pay
  via rates or with usage)
• Negative externalities provide unpaid for bad
  effects even to those not involved (eg. more
  noise pollution from highways affects all nearby
  households)

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Changes in Productivity

• Productivity is total output/hours worked
• Output can be valued using prices for inputs and
  outputs

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change-in-productivity technique

• Market prices can often be used to value the
  output from a productive process and
  environmental conditions often affect such
  processes.
• values for a change in the environment can be
  derived from changes in productivity.
• An increase in output due to the change is a
  measure of an increase in benefit, and a decrease
  in output is a measure of an increase in cost.

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When to use it

• Does the minimum benefit of noise control cover
  the cost?
• What are the economic effects of reducing
  emissions of greenhouse gases?
• the monetary values are estimated for the
  benefits of land conservation, shelter belts on
  farms and the preservation of forests.
• The monetary values for the costs of land
  degradation would also be required.

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Extended Usage

• The technique is widely used in land
  conservation, forest management, watershed
  management, tourism and grazing
• Later expanded the concept of lost production to
  include the cost of unemployment

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Strengths and weaknesses

• The strengths of the technique include
• it is direct and straightforward
• it relies an observed market prices
• it relies on observed output levels.
• The difficulties include
• defining the physical flows of output over time
• ensuring change in flow relates to change in
  environment.

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The Change-in-income Technique

• Income can be lost due to loss of work from ill
  health, premature illness or death.
• Each can be caused by environmental effects
  -pollution.
• Income can be gained due to improvements in
  health, postponed illness and fewer deaths.
• When the relationships between the environmental
  effect, health and income is established, the
  effect can be valued as a change in income.

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When to use it

• The change-in-income method focuses on changes in
  labour inputs and on wages and income (alternate
  name is human-capital approach).
• Do pollution control regulations increase
  incomes?
• Do the benefits of pollution control regulations
  exceed the costs?
• Do the benefits of more stringent regulations
  exceed the costs?

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Use of the Technique

• The technique has not yet been widely applied in
  Australia.
• Has been used to estimate the benefits to health
  from sulphur oxide control in Europe (OECD 1989a,
  1989b).
• The benefits of pollution control above were
  identified as the increase in wages (increase in
  working days)
• or changes in expenditure on inputs can measure
  gains as cost savings and losses as cost increases

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Strengths and weaknesses

• Weakness
• the link between pollution and health (the
  dose-response relationship) and between health
  and income must be identified for each
  application.
• Strengths
• straightforward to apply
• rests on established procedures and actual data
• values actual damage.
• frequently applied overseas to value health
  benefits from pollution control.

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Case Studies Market Pricing

• Wetlands of Moreton Bay (Brisbane)
• Sources Australian Government, Department of
  Environment and Heritage (1996) Techniques to
  Value Environmental Resources, Environmental
  Economics Research Paper No.2
• Clouston, Elizabeth (2003) Linking the Ecological
  and Economic Values of Wetlands A Case Study of
  the Wetlands of Moreton, Thesis, Griffith
  University

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Dilemmas in Valuation

• In Australia natural attractions such as wetlands
  are mainly, publicly owned (by States).
• Most have reserve status (many potential uses are
  proscribed and specific permissible uses can
  vary).
• These areas are important repositories of flora
  and fauna and for preservation of genetic
  diversity.
• However, control of access to and monitoring of
  direct (visitor) use impacts varies widely.

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• Recovery of management costs and costs of
  repairing damage caused by direct users.
• Rationing of resource use to limit damage to the
  area (higher access charge lowers access demand).
• Earning a rate of return on publicly owned
  resources (difficult to apply to natural areas
  due to substantial but uncertain values of
  indirect use benefits).
• Costs of excluding direct users (costs that can
  be very high in some areas).

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Selecting a Market Valuation Technique

• List all possible values (use and non-use)
• Attempt to prioritise or weight according to
  community environmental impact statements
• Separate use and non-use values
• Attach market valuation techniques to use values
• Attach non-market valuation techniques to non-use
  values

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Ecosystem Features

• Structure (soils, flora and fauna)
• Processes changes or reactions naturally
  occurring in the system (physical, chemical,
  biological)
• Function interaction of structure and processes
  (flood and water control, nutrient retention and
  food web support)

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Attributes

• Are services from which humans benefit
• Eg. productivity

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Wetlands of Moreton Bay Values

• Indirect-Use Values
• Storm buffering
• Flood reduction
• Ground water recharge
• Water quality improvements
• Biochemical cycling
• Organisation of biodiversity
• Option and quasi option (benefit from option of
  preserving for future use)
• supporting or protecting economic values

• Use Values
• Fishing resources (fish, prawn and oyster)
• Forestry resources
• Flood and water control
• Storm protection
• Recreation (bushwalking, fishing, boating)
• Tourism
• Education
• Aesthetic benefits
• direct benefits to humans

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Links to Off-Site Resources

• Adjacent waterways (flora and fauna) and land
• global biogeochemical cycling

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Attach Valuation Techniques to Use Values

• Use Values
• Fishing

• Possible Techniques
• (see slides 3, 4 5)
• Changes in fishing productivity
• Market analysis
• Hedonic pricing
• Opportunity cost
• Replacement expend

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Indirect-Use Values

• Indirect-Use Values
• Storm buffering
• Flood reduction
• Ground water recharge
• Water quality improvements

• Possible Techniques
• Damage costs avoided
• Preventative expend
• Relocation expend
• Replacement expend (sewerage treatment)

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Attach Valuation Techniques to Non-Use Values

• Non-Use Values
• Bequest (indigenous value)
• Existence (turtles, dugong,
• Vicarious

• Possible Techniques
• (lectures weeks 10 13)
• Contingent valuation
• Choice modeling

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Wetlands of Moreton Bay Values

• Use Values
• fishing

• Non-Use Values
• Bequest
• Existence
• vicarious

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Market Techniques

• Apply observable revenues and costs and all
  interpret observable behaviour and so the test of
  market validity is met.
• This advantage is sometimes gained only at the
  expense of statistical requirements to establish
  causal relationships.
• Statistical estimation needs special skills, much
  data and the ability to separate the effects of
  multiple characteristics and random factors from
  the cause.

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Main Attributes

• Productivity
• Dependency (breeding, nursery of resting)
• Biological diversity and organisation

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Moreton Wetlands Attributes

• Swamps, lakes, mud flats and mangrove forests,
  seagrass
• Includes only saline or coastal wetlands and not
  the freshwater wetlands of the nearby Islands
• Various landforms reef, tidal flat, supratidal
  flat, beach and tidal creek, estuary, drainage
  depression, stream channel, swamp and lake.
• Catchments of nearby large rivers and small
  creeks drain into the wetlands (and some effluent

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Marine Plant Valuation

• Microalgae
• Seagrass
• Mangroves
• macroalgae

• Biomass Productivity
• (tC) tCyr-1
• 1800 520 000
• 23 000000 59 000
• 11000 36 000
• 820 20 000

Source Dennison and Abal 1999
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Issues in Wetlands Case Studies

• Value of wetlands will vary with stakeholder and
  spatial scale of analysis
• E.g. is the valuation based on one species of
  fish or all products of the wetlands at local or
  regional scale
• For some studies, scale and complexity and
  difficulty in measuring non-market variables will
  mean valuation is a minimum (mentioning their
  non-zero value but not measuring bequest,
  existence and vicarious values)

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Issues continued

• Problems with double counting, overlapping
  functions or components of one reducing the
  benefit of others
• E.g nutrient retention function may also affect
  fishery supplies and qualities, thus causing
  double counting of nutrient retention benefits in
  water quality analysis
• E.g.mangrove swamps valued for forestry
  resources, reduces wetland benefits of system

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Estimates of Value of Coastal Wetlands

• Driml and McBride (1982) Economic Analysis of
  Recreational Boating in Southern Moreton Bay 1
  705 000 per annum (in A 1982)
• Morton (1990) Catch of Marketable Fish from
  Mangroves in Moreton Bay 8380/ha (A 1988)

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Comparative Studies

• In a pilot study of the Baramah Wetland in
  Australia (Stone 1992) estimated 71 of the mean
  willingness to pay (A30.01) was related to
  bequest and existence value alone

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Use and Non-Use Valuation

• Fishing resources (fish, prawn and oyster)
• 22.175mn wholesale (Clouston 2002)
• 200mn recreational fishing (BR MBWMS 1998)
• Flood and water control
• 402mn replacement cost of sewerage treatment
  function of wetlands (BR MBWMS 1998)
• Source Brisbane River Moreton Bay Wastewater
  Management Study 1998

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Plus values not estimated for

• Forestry resources
• Storm protection
• Recreation (bushwalking, fishing, boating)
• Tourism
• Education
• Aesthetic benefits

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Willingness To Pay Estimates

• 55 of respondents willing to pay for use (total
  economic value) of wetlands
• On average 23 per annum
• Average WTP of 25 for users and 12.91 non-users
• (contingent valuation by Clouston 2002)