Wild Values: Putting a Price on Nature

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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

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Economic Valuation of Nature

• Context
• What is it?
• How do we do it?
• Should we do it?
• Must we do it?

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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

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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

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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

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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)

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Economic Valuation of Nature What is it?

• An attempt to measure peoples preferences for
  human actions likely to affect natural systems.

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Economic Valuation of NatureWhat is it?

• An attempt
• Imperfect
• New and evolving techniques

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Economic Valuation of NatureWhat 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)

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Economic Valuation of NatureWhat is it?

• An attempt to measure peoples preferences
• People make decisions and take action
• Social scientists measure what people already
  feel

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Economic Valuation of NatureWhat is it?

• An attempt to measure peoples preferences for
  human actions likely to affect natural systems
• Development, management, preservation and
  protection are all actions
• Natural systems often require collective
  management

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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

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How do we do it?

• Actual market prices
• Market prices of related goods
• Hedonic methods
• Observation of behavior
• Travel Cost
• Ask people
• Contingent Valuation

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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

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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

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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

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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

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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

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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

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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

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Example Observed BehaviorValue of Alaska Fish

• Example of TC Data
• I live at the fishing site, TC0, make 6 trips
• Brother lives ten miles away, TC 10, make 3
  trips
• Cousin lives 20 miles away, TC 20, makes zero
  trips

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Example Observed BehaviorValue of Alaska Fish

• Draw a graph

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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

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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

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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

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Example Observed BehaviorValue of Alaska Big
Game

• ADFG 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

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

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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

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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

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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

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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

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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

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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)