Impact analysis Goal: “To measure the impact of a public action, such as a regulation, on a designated sector of the society or economy.” (pg. 127)

1

Impact analysis Goal: “To measure the impact of a public

action, such as a regulation, on a designated sector of the society or economy.” (pg. 127)

There are different types of impact analysis.

Section IV Natural Resource Analysis

Ch8 Principles of Analysis

2

Environmental Economic Analysis Identify and elaborate the repercussions

of an action on a natural and environmental resource base.

National Environmental Policy Act of 1970 (NEPA) This law requires environmental impact

assessments by federal agencies of proposed laws and “of other major federal actions…”

3

Environmental Impact Assessment (EIS)

The end result of an Environmental Economic Analysis. It is composed of:

1. Description of environmental impact of action2. Any adverse environmental effects that are

unavoidable should action be put into action3. Alternatives4. Analyze the relationship between short term use

and long-term use and productivity5. Assessment of “irreversible and irretrievable

commitments of resources” for proposed action Objective: Get an idea of how the natural resources

will be affected

4

Sections 2&3 Economic impact analysis: when interest

centers on how particular public or actions affect certain dimensions of an economic system.

The perspective might be local, national, global. The range of economic impacts that may be of

interest is very wide, for example: 1. Employment number (or unemployment rates),

total or in certain industries 2. Household incomes 3. Rates of technical change in certain resource

extraction industries 4. Rates of inflation 5. Trade balance with other countries

5

Economic impacts of Horicon National Wildlife Refuge

Description: The primary recreational activity on the refuge is wildlife watching. Fishing, as well as deer and small-game hunting.

Regional economic analysis: The fall influx of non-resident, non-consumptive visitors generates most of the spending from Horicon visitation.

In total, refuge visitors spent $1.9 million in the region, the total effect of this spending was $1.53 million in the final demand, $616,000 in employee compensation, and 44 jobs……

6

Impact analysis can only be as good as the underlying economic data and model used to do the study.

The more one knows about how the affected economics normally function, the better one is able to estimate the impacts that can be expected from whatever public or private program is being evaluated.

Economic impact analysis may be incorporated into environmental impact studies.

7

Cost-Effectiveness Analysis

Machine 1Cost: $100,00020,000 gallons per dayCost per gallon =$5

Machine 2Cost: $150,00050,000 gallons per dayCost per gallon =$3

8

Cost-Effectiveness Analysis

Useful when objective is agreed upon but not how to achieve itCan't tell what objective is worthCan't compare the value of resources used with the value of the objective

9

Benefit-Cost Analysis

Companies judge projects on commercial feasibilityBenefit-Cost Analysis uses this approach for public sector programs→ social feasibilityBoth market and non-market inputs and outputs need to be estimatedBenefit-Cost Analyses are required of all federal regulations and programs

10

CRITICS WHIPSAW THE FOREST SERVICE

USFS(U.S. Forest Service)

Environmentalists:

Think it does the bidding of the

industries

Industry defenders:

Think it too often gives in to

“preservationists”

Budget hawks:Think it wastes

money, and gives in to lawmakers

11

Environmentalists Versus Industry defender

Industry defenders: managing national forests for timber production as well as wildlife and recreation supplies the nation with wood and paper products as well as jobs.

Environmentalists: 1) the logging-based revenues have come at the

expense of damaging the ecosystem; 2) halt logging on all federal land until the USFS

compares the economic benefits of a forest versus logs.

In this case, the USFS Chief agree that the agency must adjust to the public values which emphasizes “watershed health and integrity” over commodity production.

12

Five Steps to Benefit/Cost Analysis

1.Decide on the perspective

2.Specify the project

3.Measure inputs and outputs

4.Value inputs and outputs

5.Compare the benefits and costs

13Decide on the Perspective

• Who is the “public” to be analyzed • Examples: local community, country, global

population

Specify the project

• Location, timing, groups involved, other projects connected

• Identify assumptions realistically in the beginnings • Examples: economic, population growth

• Two types of projects: physical, regulatory

14

Distributional Issues Political conflicts arise from the fact that

the fact that groups who enjoy the benefits are not the same as those who bear the costs

Horizontal Equity: treating people in similar situations alike

Vertical Equity: how programs affect people in different circumstances

15

Distributional Issues, Cont. Proportional Impact: it affects each

consumer in the same proportion Regressive Impact: Provides higher

proportional net benefits to high-income people than to low-income people

Progressive Impact: Net Benefits represent a higher proportion of the low-income person’s income than they do of the rich person’s income

16

Scenarios weighted by its assumed probability of occurrence

Scope of the Project

• Usually predetermined by the experts– Are they appropriate? More or less? Larger or

smaller? Higher or Lower?

• Sensitivity Analysis– Recalculate benefits and costs

17

The With/Without Principle

• Compare the pursued situation with when the program would have been rejected.

• Does not guarantee higher benefits than a before/after perspective.– Before the program : $10,000– In the future without the program : $5,000– In the future with the program : $33,000

18

Effect of Discounting

--Determine Present Value

-

Future Generations

Concerns about Discounting--Effects of downgrading future damage--+$10000/yr = -$1million/yr…..?

We despite perpetual cost burden placed on future generations

Choice of the Discount Rate• The choice of the discount rate is important Because discounting aggregates a series of future net benefits into an estimate of present value, the outcome depends importantly on which particular discount rate is used.

• REVIEW:

Real Interest

• Adjusting the nominal interest rate for inflation, we will get real interest rate.

Nominal

Interest

• Nominal interest are those one actually sees on the market.

21

Which rate should be used as discount rate??

There are essentially two schools of thoughts on this question.

Time Preference Approach

• The discount rate should reflect the way people themselves think about time.

• We can take the average bank savings account rate as discount rate.

Marginal Productivity Approach

22

Distribution Issues

• Total Benefits and Total Cost

• People who benefit often do not bear the cost

• Horizontal Equity

• Vertical Equity

23

Impact• Proportional (project 1)• Regressive (project 2)• Progressive (project 3)

24

Dealing With Uncertainty

• Benefits and cost cannot be certainly known for three reasons:

1-- it includes predicting future values.• To deal with this problem we should use some

sensitivity analysis methods such as finding the range based on estimated probabilities.

25

2-- biological uncertainty.• We do not know the exact cost or benefit from

applying new law or obligation. • For example, if there is a law to prohibit fishing

during the months of November and December, we cannot really know haw many fish will survive because of this low, so we will not know the exact benefit.

• To overcome this problem we could ask the fishermen for the difference they see, and then estimate the number by doing a sensitivity analysis.

26

3-- economic uncertainty. • Benefits and cost are based on assumed

prices of inputs and outputs and these prices change over time.

• This change could be because of a change in interest rate.

• It could be because of a change in inflation rate.

27

Chapter 9

The Valuation of Natural Resources

Joseph Bigler

Yang Liu

Rebeca Pieropan

Yunlu Shi

Daniel Sullivan

Yue Zhao28

Measuring Actual Input and Output: Is It Possible?

Put each resource to the use that maximizes net social value

Conduct valuation of resources/services flows stemming from resources use

Not enough time to evaluate all situations

Principle of Valuation: a valuation process that can be adapted to specific circumstances

29

Types of Benefits

Active(Use Values) Consumptive

Extractive resources

Non-consumptive Resources utilized but not removed

Passive(Nonuse Values) Option Value: peoples WTP to preserve a resource/

increase the likelihood of its continued existence

Existence Value: WTP to maintain the existence of resource even though utilization is unlikely

Bequest and Gift Value: WTP to ensure future/current generation will enjoy that particular resource

30

Direct Market Price Analysis

Market prices and quantities can be used to reveal these values in two ways:

1. Directly--when the resource being evaluated is actually traded in its own right

2. Indirectly--when what is being traded is not the resource itself but another good or service that is closely associated with it

31

The price of $25 is the one that brings the quantity supplied into balance with the quantity demanded.

On point $25, there are no externalities competition on two sides.This price is an accurate indicator of both marginal willingness to pay and marginal cost.

So, if the new fishing area represent only a marginal addition to supply. The $25 tells us what the marginal benefits are, and we can multiply this figure by the expected number of visits to get an estimate of total benefits.

32

Market Data

Market data can provide estimations for resource values Non-extractive resource use

In many cases market prices do not provide an accurate measure of social benefits Environmental externalities MPC vs. MSC

33

Evaluating Costs

External costs accounted for by MSC

An increase in renewable energy sources evaluated at price s

Shadow prices represent true economic scarcities

34

Indirect market price analysis--Overview

In many cases direct markets simply do not take effect.

e.g. suburban wildlife Activity in related markets can be

studied to determine resource values. The value of the resource may be

established indirectly by examine quality quantity and price data of the associated goods or services in related markets.

35

Indirect market price analysis--Example

Suburban housing market: A closely related market in which open space can be expected to have an impact.

The market for new and used house is very active through out the country

Factors affecting the price of a house:

1. Characteristics of the house (lawn size, flooring)

2. Neighborhood (avg. household income)

3. Crime rate

4. Education (public, private, elementary, secondary)

36

Indirect market price analysis--Approaches

Travel cost approach: take advantage of the fact that people incur travel costs when visiting natural resource sites.

Travel cost: direct monetary cost & the value of the time that travelers require to get from home.

37

Nonmarket Techniques -- Overview

Purpose: Estimate WTP when market valuation is not possible

Contingent Valuation (CVM): attempt to measure peoples’ valuations given hypothetical situations

Natural Resource studies: endangered species, clean air, view-related amenities, biodiversity

OR

Nonenvironmental areas: real estate appraisal, senior companion programs

38

Steps in CV Analysis

1. ID & describe characteristic to be evaluated

2. ID respondents & determine respective sampling methods

3. Design and apply survey technique (s) : Personal interviewPhone inquiry Mail responseFocus group

FINAL STEP: Aggregate individual responses into group valuation estimate (avg. WTP/person*total relevant population)

39

Approaches

Review: Get individuals to reveal the max amount they would be willing to pay rather than go without the resource in question

A. Ask directly

B. Bidding process

Start low and increase until limit has been reached

OR

Start high and decrease until threshold has been reached

C. Give range of values and have them choose one

40

Exhibit 9-1Study to Estimate Certain Benefits of Better Water Quality in Connecticut River

41

1. Have you heard about the Connecticut River salmon restoration program?

2. Did you make any donations for wildlife management or presentation last year?

3. What is maximum donation for Connecticut River salmon restoration program you would like make?

4. What is your age?

5. How much do you spend on entertainment each month?

The last step is to conduct the survey, which is followed by statistical analysis and reporting of the results. The main result derived from the CVM is the average willingness to pay per person. This figure is then multiplied by the relevant population (all visitors of a beach or all residents of a country, for instance) in order to derive total economic value of a good or service.

42

Thank You For Your Time & Attention

Are there any questions?

43

Sections 24-31

Group 4Lauren Butz, Gaoping Fan, Yang Feng,

Xiaodan Su, Adrian Verduzco

44

Nonuse (Passive) Benefits

The benefits of preserving the environment without the direct observation or contact with nature

Environmental Organizations

Nature Conservancy- raise money to preserve important resource areas

Measurement issues Interpret contributions as estimate of WTP for social

benefit

Distinguish benefits of nonuse vs. direct use

Preservation of a public good

45

The Oregon Water Trust

Formed in 1993

Enhance fish, wildlife, habitat, recreation, H2O quality, and navigation

Mission

Acquire H2O rights through gift, lease, or purchase, and commit these rights to instream flows

Lease H2O rights

46

Contingent ValuationStudies have been controversial when measuring use values.

This is because some of the problems inherent in the CV method become more acute in the case of nonuse benefits

Problem 1- Use value beneficiaries may be presumed to be familiar with the resource whose valuation is being sought, through present of past contact with that resource. In the case of nonuse benefits, direct contact is not necessary, though it may have occurred in the past

Problem 2- People may experience both use and nonuse benefits form a natural resource. The difficulty then becomes how to distinguish between the two sources of value

Problem 3- It may be relatively easy to find out who the prime beneficiaries of use values

47

Nonuse Value Examples

Preservation of individual species of wild life

Preservation of sites that have ecological or historical importance

The characteristics of specific sites

• Water quality in a particular river or lake

48

49

Measuring Costs Benefit-cost analysis

Costs side of benefit-cost analysis is important but it usually difficult to determine accurately, and the results of benefit-cost analysis can be affect equally by over-or underestimating costs

Levels of cost analysis Cost to a firm of a natural resource project or regulation

New state park preservation plan

Programs or regulations that affect relatively large groups

The job of collecting complicated cost data

National cost estimates

The effects on the American economy of an international oil embargo

50

Costs Cont.. Social costs are incurred

The opportunity cost of using resources in certain ways

This is the highest-valued alternative use to which they might otherwise have been put, and the alternative value is what society forgoes in using the resources in the specified fashion

The costs of price changes

It can create costs to producers and consumers that are somewhat different in concept than costs in the form of real resource expenditures

51

Costs of Physical Facilities

Type of physical facilities Dams

Irrigation works

Parks

Relevant costs Opportunity costs of the inputs

Capital costs of initial construction

Operating and maintenance costs

52

Costs of Public Relations

A great deal of public activity on natural resource issues is related to public regulation

Cost estimation requires to the costs of the private operations

53

Timber Harvesting Example

54

What Happens to Output?

Regulations led to a reduction in output (q₁ to q₂)

Resources in an industry will be reduced (e.g. forms of energy or material used)

Inputs such as labor are more complicated; transfers from one industry to another occurring in reasonably full employment economies

55

What About Prices? Regulatory programs often drive prices up which get

passed on to the consumers.

When regulations affect an industry… Consumers experience price effects

Price effects indicate a gain or loss in welfare to consumers when prices fall or rise respectively

When regulations are enacted… Drives the marginal cost curve up to a higher price

Reducing the quantity demanded by consumers.

The reduction in quantity reduces the cost to consumers relative to what would have been the case with no quantity change

56

Cost Calculation Determine future change in cost

Determine the conditions of demand on the industry The nature of individual preferences of

consumers for a given industry

By combining these two measures, we can calculate the cost of a given regulation

57