Valuing Changes in Production—Basic Principles with an Example from the Philippines

GEF

Session 7

Valuing Changes in Production—Basic Principles with an Example from the

Philippines

John A. [email protected]

The World Bank InstituteAshgabad, November 2005

Caspian EVE 2005/UNDP and WBI John A. Dixon, Valuing Changes in Production

GEF

Change in Productivity – more than just Ps and Qs??

• The most basic valuation technique – relies on physical measures of changes in production (the Qs) and prices, often market prices (the Ps)

• Then, P x Q = a monetary value• Key assumption – the prices are

non-distorted and reflect opportunity costs


GEF

Applications of Change in Productivity approach

• Natural resource sector – changes in crop production, forestry, fisheries, aquifers, others

• Human Health – another form of change in productivity

• Ecosystems – harder to measure but possible. E.g. watersheds, coral reefs, mangroves, others


GEF

Cautions• Cause and effect links need to be clearly

understood – percentage change in mangroves and decrease in fish catch

• Prices – make sure prices are appropriate for the commodity and the scale – e.g. Mendelsohn study on value of tropical rainforest (per ha) never considered marketing all the output! Or the Puerto Rican mangrove damage study – buying mangroves retail by the hectare!


GEF

Advantages

• Produces valuation results in monetary term and can be easily explained to Minister of Finance (and the press and public)!

• Transparent approach that can be easily re-calculated and used to provoke a discussion(e.g. if you don’t like my numbers, give me better ones!)

• Does NOT rely on CVM!!


GEF

Valuing Productivity Impacts in Palawan,

PhilippinesPalawan – An application of the

change in production approach with unidirectional externalities(or, should Mr. Coase visit Palawan?)

3 main user groups (all legal users):– Loggers– Traditional fishermen– Resort operators / scuba divers


GEF

Valuation Techniques• Changes in

Production– Crops, fisheries,

water– Health– Opportunity

cost/ecosystems

• Hedonic Approaches– Property value– Land values– Wage differential

• Survey Techniques– CVM (Contingent

Valuation Method)

• Surrogate Markets– Travel Cost


GEF

Change in Production – the study site PALAWAN


GEF

Change in Production – changes in variables/ productivity over time --

PALAWAN


GEF

Change in Production - PALAWAN

The Economic Analysis:• Examined Generation of Gross Revenues

from three industries– Logging– Fisheries– Tourism

• Assumptions– Revenue information easier to obtain than

cost data (second best solution); not a BCA!– Even imperfect information can prompt better

disclosure and increased provision of data


GEF

Gross Revenues Over 10 Years (millions $) Option 1 Option 2

Gross Revenue No logging Continued

logging Option 1 - Option 2

Tourism 47.4 8.2 39.2 Fisheries 28.1 12.8 15.3 Logging 0 12.9 -12.9

75.5 33.9 41.6

Option 1 Option 2

Present Value at 10% D.R. No logging Continued

logging Option 1 - Option 2

Tourism 25.5 6.3 19.2 Fisheries 17.2 9.1 8.1 Logging 0 9.8 -9.8

42.7 25.2 17.5

Change in Production - PALAWAN


GEF

Is a Coasian solution possible??

• Coase Theorem: irregardless of the initial resource(or property rights) allocation, with trade it will be possible to reach a pareto superior outcome– What do you suggest in the case of

Palawan?– What are the most likely obstacles to a

Coasian solution– What about equity issues?


GEF

Other alternatives include (and their pros and cons)

• Government imposed logging ban (but question of an “economic taking”)??

• Fisherman and tourism resort operators join forces to “buy out” the loggers – what are the problems with this??

• Alternative logging practices – can these solve the externality problem and allow continued logging??


GEF

Palawan revisited• Loggers stopped initially and then

returned• Reef damaged but has recovered

over the past 10 years• Tourism has expanded – but this is

a case of before/after analysis NOT with and without analysis!

• Valuable for planning land use in other sites


GEF

Change in Production – the lessons from the PALAWAN study

1. Modest research costs to produce useful results2. Value of combined ecological-economic analysis3. Broader applicability of approach4. Valuation and evaluation techniques exist that

can be used5. Useful for convincing decision makers that

these resources have value


GEF

Change in productivity can be used in many situations

• Changes in recreational values • Change in agricultural productivity

in the Iran due to changes in water quantity and quality

• Change in fish catch due to stock degradation (Caspian; worldwide)

• Change in lake water quality due to shoreline development


GEF

A Final Note – Gross vs Net Values

• Change in productivity should normally be done on a net value basis (seeking changes in economic values, not gross revenues)

• Sometimes, however, gross values are presented (as in Palawan)

• The correct measure depends on the resource and the type of change (lost production versus complete loss, and production decisions made)

Valuing Changes in Production—Basic Principles with an Example from the Philippines

Documents

caspian eve

wbi john

gef change

gef applications of

production palawan

philippines john

gef advantages

gef session